E154: How a First-Generation Immigrant Became a Top CIO: Paul Chai's Story

Paul Chai’s journey from first-generation immigrant to Chief Investment Officer of a $1 billion endowment is anything but conventional. In this episode, we unpack how he transitioned from aerospace engineering to managing capital, his approach to investing in “outsiders,” and the delicate balance of taking risk in hedge funds, GP stakes, and tactical trades like TALF 2.0. Paul shares how Kansas State University's endowment supports the school’s mission, why they invest in lower middle market buyouts and small hedge funds, and how they find and evaluate emerging managers.

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

• 0:00Speaker 00

  I've always felt that I've been an outsider for the most of my life. Being new to this country, being somebody who had transitioned from career to career positions throughout my life. I've been an engineer, I've been a consultant, and then coming into the family office and somebody who came into the endowment foundation space without a whole lot of pedigree.

• 0:21David Weisburd?

  You're going after a manager where you're meaningful to them, where it's really a two-sided street. Why does that matter?

• 0:28Speaker 00

  For us, like you said, it's a two-way street. So what we can contribute, when our GPs are successful, we are in turn also benefiting from their strong performance and become successful. For six months, facing on the trade, 12 2.0 investment generated an 8% return. That's roughly four times of the 2% return. I guess the U.S. aggregate index for bonds during the same period.

• 0:55David Weisburd?

  You have a very unique background for chief investment officer. Tell me about your background.

• 1:00Speaker 00

  Thank you so much again for having me on today, David. It's a real honor to be here. I'm a first-generation immigrant from Taiwan. My mom brought me and my brother to the U.S. when I was 14 with very little English ability. I eventually graduated from MIT with a degree in mechanical engineering. After college, I worked in the aerospace industry as an engineer and the semiconductor industry as a consultant. Spent 12 years in the family office, gaining invaluable investment experience. In 2018, I saw an incredible opportunity to join the Kansas State University Foundation's investment team. And when our longtime CIO, Lois Cox, hired in 2023, I had the privilege of stepping into her role.

• 1:40David Weisburd?

  So you're a first-generation immigrant like myself. In what ways was being first-generation an advantage? And which way was it a disadvantage?

• 1:48Speaker 00

  I've always felt that I've been an outsider for the most of my life. Being new to this country, being somebody who had transitioned from career to career positions throughout my life. I've been an engineer, I've been a consultant, and then coming into the family office and somebody who came into the endowment foundation space without a whole lot of pedigree. So this is something that I find to be both a disadvantage and an advantage. The advantage being that I can be more adaptable. I can.

• 2:22Speaker 00

  Gain comfort in my environment and I've learned to really try to open myself up by sharing my own personal life to people who may be less familiar with my background. That's one way for me to also get them to open up to me and to learn about their culture and their backgrounds. So I do find that to be an advantage for me to build connections with people in different backgrounds.

• 2:44David Weisburd?

  Silicon Valley is the ultimate place where the ultimate outsiders become the ultimate insiders, whether it's Peter Thiel, Elon Musk and countless others. When you look at top GPs or people that you're investing in, do you also find that there's this theme where some of the top managers are outsiders?

• 3:01Speaker 00

  True. I find that to be incredibly motivating factor. Being an outsider motivates you to try to work hard because you know that you don't, you are not given that endowment in some way. You are not, you are not given the chance to fail multiple times. When, when you think about any emerging manager, anybody who's coming into a space, who's a newcomer, who's an outsider, most people don't give you a lot of chance to fail. When you think about the asset management industry, it's very easy to sometimes see a, for example, if, whether it's a diverse manager or a first, first time manager, they will not be getting

• 3:41Speaker 00

  the same treatment as somebody who may have already had a track record, who may have failed in their fund, but they are given the chance to restart. But for somebody who's a first timer, you can very well have a large slowdown and then you'll be out of the space.

• 3:55David Weisburd?

  The deeper I go with the top general partners to top entrepreneurs, there is a dark aspect to it in that the very same things that make them the most successful are oftentimes rooted, at least initially, from insecurities, from not being enough, from being an outsider. It has them do these, you would say, inefficient things of spending 100 hours a week, once they're already billionaires, and just always striving to prove themselves and to be better. Some of them are able to channel that dark energy into a lighter energy. How do I change the world? You look at Elon, how do we make human species multi-planetary?

• 4:37David Weisburd?

  You look at Blake Scholl, how do we make travel more accessible? But a lot are still stuck in this dark aspect. Talk to me about how you suss out the motivation in your managers.

• 4:49Speaker 00

  Think about alignment of interest. I think about the person, their makeup, what they are, what they are representing, what kind of community are they coming from? And what role do they play in that community? What's their aspiration and goal in their life? And that's where, where I focus. And, and that fit is very hard to find. And in many ways, it's almost like dating. You're trying to find your ideal mate and you have to go through many hoops in order to find that ideal fit. For us, it's oftentimes a multitude of things from the person's motivation, the alignment of interest to the vision for the strategy, to whether it's actually a fit to the rest of the investments in our portfolio.

• 5:30David Weisburd?

  Let me tell you about a conference I'm very excited about, Alpha on the Delta, which is coming up in late April during Jazz Fest in New Orleans. Unlike some of the larger conferences, Alpha on the Delta is limited to 150 allocators and 30 niche managers on an invite-only basis. It's an authentic and different kind of event with some really great people. If you'd like to learn more and request an invite, visit www.howiinvestdelta.com. That's W W W dot H O W I I N V E S T D E L T A dot com. I hope to see you there. I learned in my career, when you start out, you get really excited about these big names. Harvard Management Company, of course, I love Harvard,

• 6:12David Weisburd?

  but Harvard has the, the pick of the litter in terms of which fund they wanted. So it ends up being, in some ways, unless you're one of these mega funds, a one-sided relationship where you really benefit a lot from Harvard, but Harvard may, may not benefit as much. What you're saying is you're picking, based on your endowment size, which is roughly 1.2 billion, you're going after a manager where you're meaningful to them, where it's really a two-sided street. Why does that matter? I'm sure you care about getting the co-invest, getting information, getting meeting times with the GPs. Tell me about why it's so important for you to actually also have value. For the GPs.

• 6:48Speaker 00

  Like you said, it's a it's a two way street. So what we can contribute when we when our GPs are successful, we are in turn also benefiting from their strong performance and become successful. So that's where this is a two way partnership. We want our GPs to be successful, but we also are mindful of the size of their opportunity set. So we don't want them to grow too big. So that that there's always a delicate balance of thinking and envisioning their future with them and thinking about what's their optimal size. And but at the same time, helping them if they can grow to a larger size to have more stability within their organization, we will do our best to help refer to other like minded allocators

• 7:33Speaker 00

  to help them grow.

• 7:34David Weisburd?

  I want to double click on something they said earlier. You said we have forty to fifty managers. They represent one to a couple of percentages in the portfolio. Obviously, not every manager you're you're allocating the same amount. Just to play devil's advocate, why is it so important? Let's say one of those managers blows up. Obviously, it's not what you want, but why does that affect your portfolio so dramatically?

• 7:55Speaker 00

  Because we have less number of managers. Each manager would take a more meaningful position within the book. And that that's where we have managers. When we are allocating or considering allocation to a prospective fund manager, we always think from the perspective of we only have five people. How many managers can we comfortably establish a close relationship and and work with over the long term? And that's where the forty to fifty managers in our portfolio becomes sort of a sweet spot. That that's where we feel we can adequately cover the investment opportunity sets within our portfolio relatively well, fulfill our fiduciary responsibilities by knowing our investments,

• 8:35Speaker 00

  knowing the risks, and also at the same time, having enough bandwidth and manpower to establish that close relationship with our fund managers. So that that's where when you have only forty to fifty positions, the position size from anywhere between a percent to ten percent of our portfolio. And if you have a manager that fails. The one for 1% position or even a 10% position, that's a lot more material than, for example, a larger portfolio with 300, 400 positions and fund managers that you can tolerate the impact of 0.3% to 0.4% as opposed to for us, it's a failure of a manager that can be a 1% or above impact to us.

• 9:18David Weisburd?

  At Kansas State, you guys make these tactical investments. Going back to 2020, when you made your first tactical investment, tell me about that trade and how do you use tactical investments in your portfolio? Managing a fund is complex. Tax season doesn't have to be. That's where Carter comes in. You may already know them as a leader in cap tables and fund admin. Now they're setting the new standard for smoother tax season. With Carter Fund Tax, managers get world-class accounting and tax support. You could review financials, 1065s and share K1s with a click, all in one platform. With expert guidance every step of the way, you'll stay compliant and ahead of schedule without the headaches.

• 10:00David Weisburd?

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• 10:04Speaker 00

  Sure, so in 2020, market dislocations created unique opportunities and TALF 2.0 was one of them. It's a government initiative designed to stabilize credit markets by providing low-cost leverage on asset-backed securities. We knew that this wasn't an undiscovered trade because TALF 1.0, right after the great financial crisis of 2008, had delivered outsized returns for several fund managers. So this time, we certainly expected competition to be fierce for this opportunity set. Instead of jumping in blindly, we partnered with a Kansas-based fund manager that anticipated the crowding effect. They were prepared to move fast, identify the best opportunities and deploy capital efficiently.

• 10:49Speaker 00

  We took up a substantial portion of SPV they set up, allowing us to gain meaningful exposures without the operational complexities of a direct participation. By allocating a sizable portion of our core bond portfolio to this tactical opportunity, we turned the short-term market dislocation into a compelling Source of Alpha, which really set the stage for our tactical investment approach moving forward.

• 11:12David Weisburd?

  Double click on the trade and what trade did you make in 2020?

• 11:16Speaker 00

  We partnered with this fund manager that invested into investment grade asset-backed securities. So the RMBS, EMBS securities through the TELF 2.0 program, where the government offered nonrecourse loans at a low interest rate for the fund managers to invest in this space in order for them to rejuvenate and stimulate the credit market to ensure that we don't have a run on the bank in the credit market when 2020 happened. This was a measure that the federal government has established post refinance crisis. So in this case, we knew that the TELF 2.0 program is going to offer credit facilities.

• 11:59Speaker 00

  But what happened in 2020 was also unique in that you had a sharp market downturn in March 2020. And then right away, within a couple of months, market had a very strong bounce back. So that opportunity window was very short. The amount of securities that qualify for TELF 2.0 at the valuation that makes sense for fund manager were limited. So this was a case where partnering with a smaller fund manager that was nimble, that was able to quickly act and deploy capital efficiently into a smaller opportunity set really make a difference. Many of our peers were also interested in this opportunity.

• 12:41Speaker 00

  But in terms of execution, many of them struggle with bureaucratic hurdles. They have to wait for their board to approve the trade. And some of them partner with larger managers that were not able to efficiently deploy capital. Because once you find out the opportunity set is smaller than you think, you are not able to call as much capital as you would expect to deliver that investment outcome. So. I would say the ability to be nimble and to be able to execute fast. What's the difference maker for us?

• 13:09David Weisburd?

  I spoke to Scott Chan, CIO of CalSTRS, and they had this prepared mind waiting for a dislocation, what they would do, and that's why they were able to take advantage of that opportunity. Talk to me about how you put yourself in a position to execute. You know, it's one thing to have the idea, but how do you corral the resources? And how do you make sure that you're ready to take advantage of a dislocation when it occurs? There's one investing category that's outperformed major U.S. and world stock markets over the past three years: private infrastructure. Private infrastructure is expected to double over the next 10 years with the continued development of AI, increased demand for power generation, and the modernization of supply chains. This asset had previously only been available to large institutional investors,

• 13:53David Weisburd?

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• 14:12Speaker 00

  One of our superpowers, I would say, has to do with the trust and the relationship with our board and the asset management committee. Our asset management committee has the oversight of all we do, but our team was given full discretion over management selection as well as making the investments necessary as long as we fit within the top-down strategic asset allocation framework. So this is where we are able to have the ability to be nimble. We can take advantage of practical market opportunities and dislocations based on what we are seeing in the near term, and that has been a source of alpha for us by being

• 14:52Speaker 00

  able to take calculated, thoughtful approach to deliver returns in a risk-managed way to help us generate a differentiated return from our target benchmark.

• 15:04David Weisburd?

  What kind of returns were you able to realize with TALF 2.0? And how significant was this trade?

• 15:09Speaker 00

  So over six months of placing on the trade, TALF 2.0. Investment generated an eight percent return. That's roughly four times of the two percent return of the US aggregate index for for bonds during the same period. For fixed income portfolio in a low yielding world back in 2020, that's a material outperformance for us, especially when we are considering this is an allocation for our liquidity bucket, which is essentially investment grade for bonds. At a low, low yielding type of environment that we had back then. Considering the low risk nature of the trade, the the leverage provided by by Telf combined with disciplined asset allocation created a higher return, low volatility opportunity that was hard to replicate elsewhere in the bond market at the time.

• 15:54Speaker 00

  And it also reinforced our belief that tactical opportunities when we executed thoughtfully can enhance returns without taking excessive risk. It's a good example of being strategic and agile and how that can turn a short term dislocation into long.

• 16:11David Weisburd?

  I was just speaking to Cliff Asness of AQR and he believes that investors systematically are either under leveraged or over leveraged. And one of the places that they're under leveraged is their fixed income portfolio. He believes they should be much smaller, but with higher leverage. What do you think about that? And how do you think about leverage in your portfolio in general?

• 16:29Speaker 00

  Don't take a lot of leverage within parts of our portfolio. There's inherent leverage within our portfolio. We have currently about sixty five percent of the portfolio participating in what we called the growth. So that's a growth bucket that participates in public and private equity. And most of these are hundred percent loan positions on the public equity side. And in the private equity side, we also monitor the level of leverage carried by by our general partners. Amount of leverage that's taking that's a little bit higher within our portfolio comes from the diversifier, diversifier part of our our portfolio. And specifically coming from.

• 17:11Speaker 00

  The hedge fund portfolio, which makes up about 12% of our portfolio today. And that's where we are tactical. We do monitor the leverage for our fund managers, but it's a smaller portion of our portfolio. So typically, higher leverage impact can be limited. Having coming from a family office in the past where we managed a highly leveraged fund of hedge fund portfolio back in 2008 and living through the times of the great financial crisis, when the portfolio has to be locked up due to essentially all of our funds in the portfolio having restricted liquidity access to their positions.

• 17:51Speaker 00

  We certainly have learned a lesson, or for me personally, I've learned a lesson that leverage is a double edged sword. Can enhance returns in good times, but in bad times, that's when you can have your head headed to you, handed to you, when your loss can be amplified and you're losing multiples of your equity.

• 18:11David Weisburd?

  10% of your portfolio is in diversifiers, which is hedge fund like strategies. I think it's probably the closest to a black box in the endowment world where it's very secretive, many different strategies. Unpack that box for me and tell me about what some of these diversifier strategies are.

• 18:28Speaker 00

  Because the biggest portion of our portfolio, or 65% of that, is in global growth in public and private equity. Diversifiers are really seen and positioned to help dampen the volatility of the equity market because it can be very volatile at times. This is really designed to smooth out the right. We tend to invest in strategies with return drivers that are less correlated to stocks, such as hedge funds, real assets and alternative credit. So private credit are really all part of this 27% diversifier's pool. I think the 27%, 12% are in hedge funds at the moment. For our hedge funds portfolio, it's again a concentrated portfolio of six positions.

• 19:10Speaker 00

  So each position take up 1% to 2% of total allocation. I would say About forty percent of the current hedge fund portfolio are in more tactical arbitrage quant-related strategies that are seen somewhat as a black box in certain ways. And while the rest of the portfolio are in other diversified strategies, but when we are evaluating hedge funds, we always look at the broader correlation to the rest of the portfolio, liquidity of these strategies, and we also focus on, again, some of the other things I talked about earlier. Who the manager is, what do they represent, what's their alignment, what's their aspiration in managing the firm and the strategy, and try to identify a good fit to the portfolio

• 19:55Speaker 00

  based on correlation to the rest of the book, liquidity they can deliver, and also we always choose for strategies that can at least give us a eight percent long-term annualized return that will reach our long-term investment return target.

• 20:11David Weisburd?

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• 20:56David Weisburd?

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• 21:41David Weisburd?

  And then all of that has to be contextualized within the overall Kansas State portfolio. How do you measure that? And how do you know that you're diversified as an overall portfolio?

• 21:51Speaker 00

  We do look at our correlations against the broader traditional stock bond index. Over time, we try to think about our portfolio in the context of upside and downside captures in various market conditions. When, for example, the equity market is up 100%, what are and what's our upside capture to equity risk in general? And we also look at various levers. For example, looking at interest rate volatility, looking at the value of valuation of US dollar fluctuation compared to other currencies, looking at inflation levels and trying to analyze the sensitivity of our portfolio return to each of these levers.

• 22:34Speaker 00

  So those are ways for us to think about how resilient and how weatherproof is our portfolio in various environments.

• 22:43David Weisburd?

  How often do you run this diversification exercise? And talk to me about how you manage whether your portfolio is diversified.

• 22:49Speaker 00

  We look at our portfolio continuously, but I would say every quarter at the end of the quarters are a time for us to at least look at the composition of our liquid portfolio. Because most of our liquid funds have a liquidity of monthly or at least a quarterly and better liquidity. That's how we are managing the liquidity of our portfolio to meet distribution needs and other operational expense needs for our institution. So at the end of each quarter, our team usually does an exercise where we will take all of our liquid managers and divide it up among our team members for every member to do a re-underwriting of.

• 23:30Speaker 00

  Best strategy to essentially write a commentary of the fund manager and we will gather again. We typically will also assign a devil's advocate for each of the fund for the person to get into a debate. This is a way for us to really make sure that we are really thinking both the good and the bad of each of our fund managers in the portfolio today. So that first first part is where we are looking at individual fund managers and how do they fit within the portfolio based on how they did over this past quarter, any material changes to when we underwrote the strategy. And second part is also we have quarterly review meetings with our board and our committee. And that's where we also take the portfolio as a whole and look at upside, downside, overall diversification,

• 24:13Speaker 00

  benefits and correlation numbers and other metrics against our benchmark, against the various asset class benchmarks to really get a sense of if we are seeing a different scenario, if we are seeing a historically stressed scenario, how would our portfolio do and how does that compare to the prior quarter?

• 24:31David Weisburd?

  Couple of great nuggets to unpack there. One is this is not an academic exercise you do once a quarter. You're actually evaluating primarily your liquid strategies because those are the strategies that you could take some action on. So if you decide, if you make a decision, you could actually divest from one manager or invest in another manager. Secondly, I think the one of the biggest biases in asset management is that you need a reason not to re-up with somebody versus a reason to continue to re-up. If you think about it from first principles, you should be underwriting it just like Kansas State does in that, why am I in this manager? If I had it all over again today to make that decision to re-underwrite, would I make that same decision again? I think that's a rare discipline and of course the devil's advocate, I love that. I'm a big fan of devil's advocate.

• 25:16David Weisburd?

  We oftentimes within our firm, we come up to decision now we say, as a next step, we say, now let's kill it. What is the best way to kill this idea, this strategy, this hire? I think it's a really useful and undervalued problem. Tell me about the three investment categories that you divide your strategy into. Thank you for listening. To join our community and to make sure you do not miss any future episodes, please click the follow button above to subscribe.

• 25:40Speaker 00

  Yeah, so we're not too different from most of our endowment peers in structuring the portfolio into growth, diversifiers and liquidity. Each of the buckets play a critical role in balancing risk, return and stability. So within growth, this includes public and private equity. Our primary engine for long-term returns comes from growth. So we aim to invest in the best opportunities across global economy, knowing that while markets don't move in a straight line, disciplined exposures to growth assets is essential for compounding wealth over time. As for diversifiers, since we, I mentioned equity markets can be volatile, the bucket is designed to smooth out the right. We invest in strategies with

• 26:21Speaker 00

  return drivers that are less correlated to stocks and to provide stability and enhance risk-adjusted returns. Finally, liquidity bucket ensures we always have the cash flow needed to support K-State's mission. It consists of the highest quality credit assets, prioritizing capital preservation, liquidity, so we can reliably fund scholarships, faculty salaries and campus initiatives.

• 26:46David Weisburd?

  You have these three investment categories. Tell me about what target return are you trying to get on the entire portfolio?

• 26:53Speaker 00

  Sure. So when we are thinking about our target return, it's designed to ensure long-term sustainability of the endowment, and it needs to cover three key components. First, annual distribution of 4.3% currently over the average market value of our endowment over the last three years. And this is a portion where we distribute each year to support scholarships, faculty and key campus initiatives. And then secondly, we have to cover our fees and expenses, including investment management costs, operational expenses and support fees to help support our fundraising efforts to grow the endowment. And that currently adds up to be roughly 1.5% a year of the endowment's market value. And lastly, to

• 27:38Speaker 00

  maintain our endowment's purchasing power over time, we need to keep up with the rising cost of education and campus Needs, so we have to keep up with long term inflation numbers. There's always a little bit of a tricky exercise to determine what's the appropriate inflation number to use in this case. For our institution, we choose to have a two percent long term inflation target in line with what the Fed is targeting. But it's something that we continuously monitor. So every year we have an exercise of reviewing investment policy statement. To think about is this target return still the right way to to go about. Based on whether we are going to maintain that four point three percent distribution, whether we are going to charge the same amount of management fee across the foundation.

• 28:23Speaker 00

  And what that inflation assumption is. So so this is an annual exercise that that we do. Based on the changing market environment, but once you kind of add them up, today's long term target return is about seven point eight percent. And hitting those number isn't just enough. So so this is where we try to exceed it while managing risk effectively. Our job is to construct a portfolio that not only meets the target, but goes in a way that provides stability and resilience through different market cycles.

• 28:53David Weisburd?

  So so let's say you sit with your investment committee in twenty twenty six and you decide you want to increase your return. What are some of the levers you could pull in order to increase Kansas State's return?

• 29:03Speaker 00

  There are several levers that we have historically pulled to enhance our returns compared to our benchmark. While managing the risk effectively, we do have the flexibility within approved rebalancing ranges to. Place an overweight or an underweight to certain asset classes based on our market conditions. So this does allow us to be more opportunistic while staying disciplined. So for example, if we do need to increase expected returns, we can. Tactically increase the allocation to growth to equity positions when situation calls for it. Secondly, we also are somewhat different in that we we do invest beyond traditional categories.

• 29:42Speaker 00

  So even though we have a top down strategic asset allocation framework, there are some high return strategies that don't fit neatly into a conventional asset class bucket. For example, if you think about. Convertible arbitrage strategies, niche equity strategies like a sector specialist or a country specialist, reinsurance strategies or GP stake strategies, they don't necessarily fit neatly into an equity or a credit or a hedge fund bucket. So that's where we try to be flexible and we find creative ways to incorporate them. And then lastly, we try to take tactical opportunities when these locations arise.

• 30:25Speaker 00

  So like the TALF 2.0 trade we talked about earlier, we can act quickly to capture excess returns that wouldn't typically be be available in a static asset allocation model. So these are all different things that we do, but ultimately our goal is to balance risk and return while being nimble enough to take advantage to unique opportunities that fit within our governance framework.

• 30:50David Weisburd?

  So you could either rebalance, so you have your growth, you're diversified, your liquidity. You could rebalance a little bit more on growth, which essentially makes it slightly less diversified or slightly less liquid, but a higher return. You could do investments into things like GP stakes, reinsurance, or you could prepare kind of for these idiosyncratic trades like the TALF 2.0. On the TALF 2.0, without giving away the secret sauce, how are you preparing yourself for the next TALF 2.0 trade? So how do you go about scouring the market and the managers for the next great trade?

• 31:24Speaker 00

  We don't. We wait for them to emerge themselves. And sometimes when situations arise, you do see these locations. We are certainly not macroeconomists from our team and we don't profess to know the market better than the fund managers that we have investments with. So this is where we do partner with our fund managers. We rely on their expertise to identify these dislocation opportunities for us and notify us when these type of situations arise. And that's where we will then the team takes time and takes our energy and resources to underwrite these dislocation opportunities to build confidence and build convictions.

• 32:04Speaker 00

  So that when we do decide that this is an opportunity that makes a lot of sense, we will act very quickly and try to be nimble to allocate a part of the portfolio that can make a meaningful impact to performance.

• 32:16David Weisburd?

  You mentioned GP stakes, which is a hot industry. It's roughly 60 billion AUM. It's innovating rapidly. How have you thought historically about the evergreen nature of GP stakes deals and that they don't typically have a 10-year fund life? And how do you incorporate that into the endowment strategy?

• 32:32Speaker 00

  There's been a lot of growth within the space. And you have managers within different spectrums of GP stake, depending on the type of strategy of GPs they would invest ownership stakes in versus the size of the fund managers that GP stake investors would put in. From our standpoint, it's a space that we have not taken a lot of idiosyncratic risk per se. We have partnered with the biggest GP stake managers in the market, essentially focusing on the trophy assets that fund managers. Because for us, we are really thinking about it as a way for us to deliver high cash-on-cash yields

• 33:15Speaker 00

  coming from the stability of the largest fund managers and GPs out there that have continuously been able to grow their asset size and deliver a relatively safe return for their LPs. So these are the larger GPs that have seen the largest growth in their asset size. And we do feel there's some stability to how they are managed. And taking GP stakes within those fund managers allow us to be able to diversify our portfolio in some ways. Because when we think about our private equity portfolio, at our size, we tend to partner with smaller, lower-middle-market buyout type of.

• 33:56Speaker 00

  Strategies and managers at a smaller size by doing GP stake in our portfolio in the trophy largest asset managers in some way that diversifies away from our exposure to smaller managers and we get to participate in the growth of the larger asset management firms as well.

• 34:13David Weisburd?

  In many ways, that's a trifecta. You have your growth because the moix are pretty attractive in GP stakes even for these mature trophy assets. You have your liquidity. It starts to go liquid with the first quarter because you're getting a percentage of the management fees. And then I would argue it's also diversifier because management fees are contractual. So even if a fund's not doing great, there's still 10 years of management fees.

• 34:36Speaker 00

  Right. So there is a durability of the return. And that's another part that plays in our interest. We don't see it as an equity investment. We don't see it as a credit investment, but it's really components of both where if the GPs continue to grow their assets, they will continue to see a higher share of growth in their performance fees. And that performance fee along with GP's own investment in their funds would deliver our performance on top of kind of what you mentioned about the regular cash flows coming from the management fees.

• 35:10David Weisburd?

  Part of the way that Kansas State has been able to sustain the returns that you guys have sustained is by going lower middle market, going into the smaller managers and where there's more alpha. Firstly, there's also obviously blow up risk for smaller fund managers. How do you manage that? And why are you not more concerned about your small managers blowing up?

• 35:30Speaker 00

  Going concern is certainly an additional risk that's higher with smaller, less established fund managers. So we don't, we're somewhat constrained from investing and seeding day one funds as a result of our smaller team and our lack of bandwidth to really take on high conviction kind of day one fund positions. So in this case, we tend to partner with fund managers that's already relatively more established in some ways. Only the only difference being that they are size smaller. So they are in a smaller AUM asset under management sites where they may be in the inflection point of growth,

• 36:12Speaker 00

  where we see something in them, we feel that this is a partner that we can work with to grow alongside them. So if we are selecting our fund managers thoughtfully and correctly, our fund managers should do very well over the long term. And in turn, we can grow to be a bigger partner with them and we can also grow alongside them.

• 36:33David Weisburd?

  You guys also invest into small hedge funds. Tell me about how you invest in small hedge funds. And isn't that extremely risky? And tell me how you manage the risk on smaller hedge fund strategies.

• 36:46Speaker 00

  So our current portfolio, I would say we have probably a third of our portfolio funds that are sub a billion dollars. And but with that said, these funds are still somewhere between 500 or 250 on the smaller side to maybe 800 million dollars. And that's where we are not going with the smallest of the fund managers for obvious reasons, because we are trying to make meaningful allocations within our portfolio at 1% plus. And for a billion dollar portfolio, that's roughly a 10 million dollar investment. And the other thing is, we don't want to be more than 10% of the overall investment of a fund manager. And that's also seen by us as a risk factor.

• 37:31Speaker 00

  So that's where that limits the

• 37:35Speaker 00

  the floor of the size of managers that we can invest into 100 million dollars and more. So that's where we do invest in smaller fund managers in kind of a from the perspective of a larger institutional investors perspective, where they may tend to focus more on hedge funds that's over a billion dollars in AUM. But then these are not ultra small managers that have going concerns. What we try to do is we try to have a continuous dialogue with our fund managers to really understand the growth trajectory of their organization as a whole. Some of these fund managers may have a sub billion dollar hedge fund in their firm, but the overall firm is supported with multiple products.

• 38:17Speaker 00

  And overall, firm AUM is still over a billion dollars and there's still some stability. It's just a more niche strategy that takes advantage of a more fragmented or less efficient market opportunity. And those are things that usually we can we can get pretty comfortable with.

• 38:33David Weisburd?

  And it's intuitive to me why smaller buyout strategies or maybe smaller venture would lead to higher returns. In hedge funds, it would seem that the larger hedge funds have more resources for risk management, for the top quant traders, for the top macro traders. Why is small beautiful when it comes to hedge funds?

• 38:52Speaker 00

  There are there are strategies where larger is more beautiful. And then there are strategies where smaller is beautiful. So when you think about even the pot shops like the Millennials of the world or the Citadels of the world, their asset size of multiple billion dollars required them to identify portfolio management teams that can manage an asset size of a billion dollars or more for them to to be able to efficiently deploy their their resources. So they are not necessarily looking for smaller fund managers that's only seeing an opportunity set of, say, five hundred million dollars to eight hundred million dollars. So that's where when you there are

• 39:34Speaker 00

  there are things that that make where the larger the scale you are, the better you are. You can have world-class risk management capabilities. You can have better reporting capabilities and transparency provided to the investors as a larger investment firm. But then there are also investment opportunities where it may be less accessible by the largest of the institutional investors. But these are equally compelling opportunity sets. And being a mid-sized endowment such as ours, one of the differentiator for us is to be able to participate in these investment opportunity sets and even further make it a more meaningful position so that it actually drives a bigger part of our return than what you can do

• 40:18Speaker 00

  for a much larger institutional investor.

• 40:21David Weisburd?

  Tell me about your buyout strategy. What is Kansas State's buyout strategy?

• 40:24Speaker 00

  So our buyout strategy is tailored to leverage our position and size. So historically, we focused on Lower middle market bio space. This market is more fragmented and less efficient, offering niche opportunities that larger bio funds often overlook. And in some ways, they are also, many of the exits from our lower middle market bio managers becomes the buying targets for the middle market and the larger bio managers. So there is a natural ecosystem out there where exit environment can be relatively healthy when the larger funds are doing well. And additionally, we've also strategically targeted

• 41:07Speaker 00

  less trafficked regions away from the coasts. This has to do partly because we are located in the Midwest. We tend to feel have a more of a comfort to work with managers who are based out here in our region. And also, we do feel that there is a little bit of a crowding where across the nation and across most of the institutional investor space, there seems to be more of a focus on managers based in the East Coast or the West Coast. So from our standpoint, by partnering with bio managers from the New West, the South, the Great Lakes region, we have actually been able to tap into unique opportunity sets that have delivered performance numbers equivalent, if not exceeding that of the larger managers.

• 41:52David Weisburd?

  Tell me about your venture strategy. How do you look to invest in venture?

• 41:55Speaker 00

  Sure. So our venture strategy is all about gaining access to the first, to the best founders. And given our small team, we cannot underwrite a large number of funds. So we focus on building a diversified yet concentrated portfolio. So we strategically select six to seven venture GPs who each have a unique approach to us, to accessing, to tackle the challenge of accessing top-tier founders and opportunity sets. So we have a few of our GPs are somewhat seen by us as a regional champion. We have. Some other GPs within our portfolio who are thought leaders in specific sectors such as healthcare, biotech, or in AI.

• 42:39Speaker 00

  And that's where these sectors where sometimes the regional champions may not be able to identify promising new trends and technologies that's emerging. You need people with sector specialization. You need domain expertise for the investors to be able to tackle and for example, even syndicate companies to be able to realize a specific investment theme. This is probably one of the harder space for us to invest since we don't really have the bandwidth to underwrite many, many different GPs. And this is where it's the most diverse space with the most amount of ideas and people coming in with wow idea every single day.

• 43:24Speaker 00

  There's always something that's really interesting, but we just have to be extremely selective in constructing our portfolio.

• 43:29David Weisburd?

  What would you like our listeners to know about Kansas State in your endowment?

• 43:33Speaker 00

  For me, the mission to support Kansas State's mission is very personal. I wouldn't be where I am today without others investing in me. So now I have the privilege of managing K-State's endowment to ensure that more students, especially the students with that that's coming from humble beginnings, a lot of the students who are in rural Kansas who don't have that access to educational opportunities that can change their life. If I can support, play a part into supporting them to get the same educational opportunities I did, that that will be something that's very fulfilling for me. Our school has very much a blue collar mentality.

• 44:17Speaker 00

  Most of our donors are not the wealthiest donors compared to some of the other elite colleges, but they are extremely loyal. We are constantly ranked among the top with the happiest students on campus, with the most loyal and most passionate alumni base across the country. And that's something that that's really meaningful for us.

• 44:39David Weisburd?

  Thanks for listening to my conversation with Paul. If you enjoyed this episode, please share with a friend. This helps us grow and also provides the best feedback when we review the episode's analytics. Thank you for your support.