[REPLAY] - Ashby Monk – Asset Giant Futurist (Capital Allocators, EP.29)

Dr. Ashby Monk is the Executive and Research Director of the Stanford University Global Projects Center. He is also a Senior Research Associate at the University of Oxford, a Senior Advisor to the Chief Investment Officer of the University of California, and the co-founder of Long Game. Ashby advises sovereign wealth funds and large pension funds, and is involved with a bunch of fin tech companies, all of which attempt to create innovative solutions to fixing the financial future for individuals, pensions and countries in the years ahead. Our conversation starts with Ashby's early work experience and path through academia, and flows into an exploration of next generation, lower cost approaches to active management for large asset owners. We touch on investing in public equity, private equity, venture capital, and hedge funds using examples from the Canadian and Australian pensions, New Zealand Super Fund, and University of California endowment. Lastly, we discuss Long Game, an innovative company seeking to improve personal savings in the U. S. Ashby is a passion-driven, creative thinker who rightfully has the ear of some of the most important pools of capital in the world. His ideas will change the way you think about allocating capital. Learn More Follow Ted on Twitter at @tseides https://twitter.com/tseides?lang=en or LinkedIn https://www.linkedin.com/in/tedseides/ Subscribe to the mailing list https://capitalallocators.com/ Access Transcript with Premium Membership https://capitalallocators.com/signup Editing and post-production work for this episode was provided by The Podcast Consultant (⁠ https://thepodcastconsultant.com/https://thepodcastconsultant.com https://thepodcastconsultant.com/⁠ https://thepodcastconsultant.com/)

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

• 0:01Ted Seides?

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• 1:29Ted Seides?

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• 2:12Ted Seides?

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• 2:48Ted Seides?

  I'm Ted Seides, and this is Capital Allocators. My guest on today's show is Dr. Ashby Monk, the Executive and Research Director of the Stanford University Global Project Center. Ashby is also the Senior Research Associate at the University of Oxford, a Senior Advisor to the Chief Investment Officer of the University of California, and the co-founder of LongGain. Ash advises sovereign wealth funds and large pension funds, and is involved with a bunch of fintech companies, all of which attempt to create innovative solutions to fixing the financial picture for individuals, pensions, and countries in the years ahead. Our conversation starts with Ash's

• 3:32Ted Seides?

  early work experience and path through academia, and flows into an exploration of next-generation, lower-cost approaches to active management for large asset owners. We touch on investing in public equity, private equity, venture capital, and hedge funds, using examples from the Canadian and Australian pensions, New Zealand Superfund, and University of California Endowment. Lastly, we discuss Long Game, an innovative company seeking to improve personal savings in the United States. Ash is a passion-driven, creative thinker, who rightfully has the ear of some of the most important pools of capital in the world.

• 4:13Ted Seides?

  His ideas will change the way you think about allocating capital. Please enjoy my conversation with Ashby Monk.

• 4:25Ted Seides?

  Ashby, thanks for joining me.

• 4:26Speaker 02

  Well, thank you for having me. It's a pleasure to be here.

• 4:29Ted Seides?

  Why don't you take us through your background?

• 4:32Speaker 02

  My background is a non-traditional path to end up being whatever it is I am today. I guess the way I might start, how mu-- do you want the two-minute version or the five-minute version?

• 4:42Ted Seides?

  Let's go for the four-and-three-quarter-minute version.

• 4:45Speaker 02

  Four-and-three-quarter. Okay. So it starts in the country called Canada, in the town of Edmonton. That's where I was born. My dad was in university at University of Alberta, as was my mom. I was born in Edmonton. And that was 1976 in September. And in 1980--

• 5:05Ted Seides?

  Happy birthday.

• 5:06Speaker 02

  Yep. Just crossed my 41st year, which is interesting. The difference between being in your 30s and 20s, when your wife buys you sneakers in your 30s and 20s, she buys you running shoes. And at age 41, I received a pair of walking shoes. It literally, it literally says "walking" on the tongue of my new shoes for my 41st birthday. So that was a bit of an eyebrow raise. No, but so 1980, my dad was working at Hewlett-Packard and was invited down to Silicon Valley for a two-year tour of duty. He had sold, I believe,

• 5:46Speaker 02

  the first supercomputer in Canada to the University of Alberta from HP. And they said, "Young man, it's time to come down to the HQ and see what we're really working on." And he never left. So they still live in the Bay Area 30-plus years later. And so I grew up being a foreigner, a Canadian in America. And then I became an American, I think at age 18. And then I went off to Princeton and it was at Princeton that I often describe it that I majored in rowing and minored in economics. And so after Princeton, like all good economics undergrads, I was presented with the two paths

• 6:28Speaker 02

  that are available as far as I knew, consulting and banking. And I chose banking and I went off to Wall Street to do two years of investment banking and then another stint as a financial services venture capitalist focusing on what we called back then internet finance, what we might call today fintech. And we were also playing around with offshore financial centers and the ability to set up reinsurance companies in places like Bermuda and understanding, you know, how you can generate higher return and not have it taxed in these offshore environments and it can kind of change the dynamics of a reinsurance company. Anyway, all of that kind of came together to inspire me to understand more and in greater

• 7:12Speaker 02

  detail, the financial services industry. I can't say that I was like inspired by what I found within the bowels of the financial services industry.

• 7:23Ted Seides?

  How'd you go about that?

• 7:24Speaker 02

  Well, I mean, just the process of, first of all, being an investment banker and learning what it meant to do transactions was not what I thought it meant. I truly did believe that we were the center of this important institution that was allocating capital between, you know, asset owners and projects. It was much more self-serving than that. And then when I moved over to venture capital, which was my hope that, you know, this would be much more aligned with long-term value creation, even there, because I was doing financial services venture capital, the focus was as much on fee streams and transactions and extracting rents wherever possible. And so none of that kind of felt like...

• 8:04Speaker 02

  It matched with the idealistic visions I had for the financial services industry graduating from college. And then so after, I don't know, three and a half, four years, I quit. And there was a couple of reasons I quit. One was nine 11 happened. My wife was in the towers. She's fine, but she was down there and she was one of those dust-covered people that you saw on TV. That was her. She had to hide in a parking garage. So there was a stint on that day where I wasn't quite sure if she was alive. I don't want to oversell it, but it was a big enough moment in our lives that when we kind of reunited that day, we were like, what are we doing? Working 100 hours a week. We're in our early twenties.

• 8:48Speaker 02

  You know, we don't love what we're doing. And so we both kind of looked at each other and we're like, let's quit and let's go to Europe. And so we did. And so I was racing bicycles at the time. I had been a rower in college, so I understood how to suffer, but cycling was a whole different level of suffering. And so I went and joined an amateur team in Paris and traveled around Europe and raced. Well, my wife, who was still my girlfriend at the time, we had met at Princeton. She taught English at Université de Paris 5, I think, which is ASAS. And just kind of lived the dream there for a while. And then we both got into the Sorbonne to do a master's in international economics.

• 9:32Speaker 02

  We were the only two Americans in a program of 800 because you had to speak French. And that was around the time that we were invading Iraq. So it was quite an interesting time to be an American in a French university with no other Americans. So I'm just rambling here, man. So if you want to just jump in, yeah? Keep going? Go for it. All right. This is almost up to four minutes, though. So Paris, master's in international economics. I kind of got the bug for academia again. Then we went to Oxford. So my wife got in to do a doctorate, an MPhil, and then a doctorate in economics. I went to go do a doctorate in economic Geography with a guy named Gordon Clark. What is economic geography?

• 10:17Speaker 02

  It's a multi-method approach to understanding economic activity that builds theory from the bottom up instead of the top down. And rather than viewing the world through a lens of a kind of a top-down theoretical model or methodology, we kind of build our understanding of the economic environment and economic systems through big data, but also through interviews, through case studies. I mean, I guess what I had kind of lost the love of was, you know, we

• 10:56Speaker 02

  we built these models and these theoretical constructs that on the surface seem much more elegant and robust than anything we would be doing if we were doing case studies. The problem is the assumptions that went into those models were just as suspect as the selection bias that might be in a case study. So rational actors and efficient markets. I mean, I think, sitting here today, 2017, I think we'd all obviously agree that that's crazy because we are all crazy, so we're not rational. And, and at the time, like, I didn't want to spend five years doing a doctorate basically embedded in that world. I went from there to the Center for Retirement Research at Boston College,

• 11:38Speaker 02

  where I was a fellow, it's actually a joint fellow program between Oxford and Boston College. And my project there was on national retirement systems, trying to understand both the asset side of the equation, how should we invest this money, but also the liability side of the question, which is, how do we prepare people for retirement? And each of these kind of stints in my life have been very formative. The Boston College stint was formative in the sense that it taught me how intractable the problem is. In the US in particular? Oh, my God, like, we are in trouble in terms of our retirement security and with the population aging and, and the medical science only getting better.

• 12:20Speaker 02

  And so we're all going to live to 150 years old in 100 years. So we are in big trouble. And it's really, and some people will debate with me on this, but it's really a funding problem. We've got to get more money going into these programs. And what I learned at Boston College is that here in the US, we don't have a Political will to create a mandate like we have in Australia. And we don't have a political will to create a kind of crown corporation model of pension investment management like we have in Canada. And so we create these various iterations of defined contribution pension plans that are the equivalent of, if we took the parallel into the medical industry, it would be like

• 13:05Speaker 02

  saying, here's WebMD, go diagnose yourself, and here's the medicine cabinet that you can pull out of and treat yourself. And oh, by the way, WebMD is filled with a bunch of baloney. It's not just good medical advice, it's also snake oil, it's also, you know, tons of things in there that don't make any sense that people are doing, day in and day out.

• 13:29Ted Seides?

  So how is it different in Australia or Canada? How is it set up differently? And why can't the US evolve in that direction?

• 13:37Speaker 02

  Well, I think Canada's a little different because they trust their government. And so that creates a different relationship between the crown corporations, the people, and the government.

• 13:48Ted Seides?

  And the crown corporations are...

• 13:49Speaker 02

  They're arms-length entities set up by the crown, but they run their own budgets. They have independent boards, kind of, the boards can be sacked. But in some cases, they're double arms-length board where you nominate a nominating committee, and that nominating committee picks from a set of standard boards of directors, and then that, those boards of directors have the right to set the resourcing for the entire organization, internal and external, including comp.

• 14:15Ted Seides?

  And are those the, what we think of as the big pension plans?

• 14:18Speaker 02

  Oh, yeah. Oh, sorry, yes. The crown corps, it's like a legal structure that has allowed the Canadian model to exist because it's quasi-private. So the boards of directors of these public entities can set comp in such a way that they can recruit and retain very high-quality people. And the reason they do that is they've done this massive analysis of the fees and costs paid to external managers, and they've decided, well, listen, what if we did this ourselves? And stomached the political damage of paying public employees $7 million a year. I mean, we're okay paying football coaches $7 million a year in this country that are

• 15:00Speaker 02

  public, but we're not okay paying a chief investment officer that much. That's a sacrilege.

• 15:06Ted Seides?

  And how about Australia?

• 15:07Speaker 02

  Australia, they did this incredible mandate that all individuals have to contribute. It's going towards 12%. It may even go higher than that now that I think of it, of their income into a super fund. The super funds, so already you're getting enough money in the door. That's important. Beyond that, they also are professionally managed and increasingly professionally managed, as you're seeing consolidation among the super funds. And so you get this really nice mix of the individuals are putting enough money in and the assets are being managed in a way that it has to be called professional. Like when you look at Australian Super or First State Super or Seabus,

• 15:48Speaker 02

  these are top-notch organizations that are really setting the standard, I'd almost say globally, for what the next generation of retirement organizations will look like. Like I think here in the US, we have a ton to learn from Australian Super.

• 16:04Ted Seides?

  And how do they organize their teams and manage the money? Because the active-passive debate is so pervasive in the US. And those are huge pools of money. So how do they go about organizing, presumably it's actively managed, they're internally managed, right?

• 16:20Speaker 02

  Yeah, so there is active management. Like if we take the case of Australian Super, and full disclosure, I am a consultant to Australian Super. But the organization manages an internal public equities team. They manage an internal infrastructure team, an internal real estate team. I think there's fixed income securities that are now coming online. They've set up an office in London. There's another global office that's going somewhere that I don't think is public yet. So they are building a professional team. And what you're going to is where do you choose active and where do you choose passive if you're building this internal fund? And the answer to that is where do you have an edge? And I think that is increasingly the question most pension funds are asking themselves is,

• 17:04Speaker 02

  it's not like, how do we get access to the best managers? It's what is it that's unique about us that could facilitate privileged access either to assets or managers? So if I take the example of the University of California, where again, full disclosure, I'm a senior advisor, we have this 10 campuses, we have five of the biggest hospitals in the world, we have three national labs, there's 10 billion in R and D. It turns out that external managers are fascinated by this ecosystem. And so we can go out to external managers and say, listen, we'll partner with you and we're going to add value in a way that you can't even understand today. And over the last three years of watching Jagdeep Bhushir and his team implement on that, I can tell you, that works. Like,

• 17:49Speaker 02

  they're getting into managers on terms that I would describe as aligned, and I never would have imagined we could actually do it. I mean, in theory, I loved the idea, but in practice...

• 18:01Ted Seides?

  And is there, is there a specific example you could think of where Jagdeep and his team brought some resources to bear that probably nobody else could have?

• 18:10Speaker 02

  I mean, we're constantly tapping the energy labs for insight, massive energy laboratories within the UC ecosystem to be able to assess and understand opportunities and deal flow. We are tapping the medical science communities for understanding, you know, the future of gene editing and things like that. But even beyond like those, let's call that research and due diligence and understanding the market, we partnered with Bo Capital, which is in effect the entity that is UC Ventures, and that's a guy named Vivek Ranadive that's running that. We partnered with them and we brought the deal flow that is privileged to the University of California, to the partnership. And so the idea was specifically

• 18:54Speaker 02

  to say, listen, everybody's chasing the top venture funds, they're hat in hand, walking Sand Hill Road. Like, we have all these companies that are coming out of our ecosystem that are being funded by those Sand Hill investors. So we could anchor a new fund and take the rights that we have to participate in those deals and endow this new venture fund with those rights and immediately put that venture fund on the map as a key player in the valley. And so that was what we did.

• 19:23Ted Seides?

  Yeah. And was the concept broad-based, or meaning, there's a lot of deal flow, are you trying to be the best venture capitalist, or is it, hey, let's just do a pseudo-index of the opportunities that we have and we think that's going to work out really well because of the access?

• 19:38Speaker 02

  So my, what I wanted to do and what happened is a little different. So what happened was it's a combination of what you just described. That's what is happening, where there's a great entrepreneur who built a company called Tibco, sold it for many billions of dollars. He's recruited this guy who was an early hire at Facebook and Google, and he's building what looks like a very experienced entrepreneurial team to help scale businesses. And then they have privileged access to all these deals in the ecosystem. If I was going to do it my way, I might have designed it like this, where we were creating all these little seed funds on each campus. Those seed funds would then collect rights to deals.

• 20:20Speaker 02

  And at the same time, we would collect rights to deals out of the IP office at the University of California. Those are separate entities in each campus. But what I would then do is assign those rights to a broader fund. And when a predetermined venture fund of Repute does a deal in those, we would swoop in and say, "Hi, everybody. We're the University of California. Don't bother us, but we're just going to take our 10% pro-rata share in this deal."

• 20:48Ted Seides?

  So somebody else's stamp of approval.

• 20:50Speaker 02

  Sequoia, whatever, is doing the deal. And then, literally, we could create a top-desile venture portfolio at next to no cost. And to me, that was this deliciously appealing fund structure. But weirdly, the governance kind of prevented us from going down that path exactly, but I think we got close.

• 21:09Ted Seides?

  So when you're working with, you know, it doesn't matter, California, Australia, how do you think about fees these days? And you know, you talked about alignment, and everyone's talking about it, but what can people actually do?

• 21:21Speaker 02

  People are so sick of me talking about fees, but this is my chance, right? To tell people why the hell I'm on the soapbox. So I spent 10 years trying to figure out, how do we change the behavior of the big asset owners? And... Why did I want to do that? Well, first and foremost, I think the financial services industry is capturing too much value. It's distorting incentives. We have this increasingly short horizon of investment, despite the fact that we have $100 trillion in long-term capital. We have an asset management industry and financial services industry that's capturing about 40% of all after-tax corporate profit in America. It's egregious.

• 22:02Speaker 02

  Even the research shows us that we may now have a 10x-fold increase in trading activity from the 1960s, but our financial services industry is less efficient today than it was 100 years ago. The unit cost of intermediation is higher today than it was 100 years ago in the era of steel, automobiles, railroad. And another research paper shows that as your financial services industry gets bloated, your productivity and growth begin to wane because that industry becomes a tax. Well, we're at 40% of corporate profits. Like, it's time for us to realize that the financial services industry is almost dominating

• 22:45Speaker 02

  the real economy, and it's meant to be the other way around. The financial services industry is meant to be subservient to. And so, I got into this project where I was like, okay, we need to find a way to level the playing field and ignite a new generation of asset owners that can be better stewards of the capital, but more than that, hold the asset management industry accountable and achieve alignment of interests. I didn't actually start with fees. I started by looking at sovereign wealth funds. My first book with Gordon Clark was on the rise of sovereign wealth funds, and we did that project because what seemed like out of nowhere, this class of investor emerged

• 23:28Speaker 02

  and became almost the most dominant, you know, at least most talked about investor class in the newspapers. And if, I remember the first time I put the search term sovereign wealth fund into Google Scholar in 2007. Zero. It might have been 2006, but literally zero papers have been written. And that, to be fair, owed to the fact that like a lot of these entities existed, but we didn't know what to call them. We called them permanent funds. We called them reserve funds. We called them stabilization funds. But then Andrew Rosenoff came along and was like, "These are sovereign wealth funds," and then didn't really define it. Kind of catalyzed us to begin thinking about these. But so my initial hypothesis was governments

• 24:09Speaker 02

  around the world are going to start setting these up. They're going to be big. And what an amazing opportunity to go in with a white sheet of paper and start building brand-new investment organizations for the next millennia. And so I started working in the Middle East. I started working in Canada with Aimco. I was becoming like close buddies with the New Zealand Superfund, all these places that I just found incredibly motivated and doing the right thing. The challenge is, just as I saw sovereign wealth funds as the blank sheet of paper upon which we could sketch out the idealized institutional investment organization, the for-profit financial services industry saw them as lambs for slaughter.

• 24:53Speaker 02

  And so just as we now have the New Zealand Superfund, which just clocked 20% return this year, and I would argue is the single best investment organization on the asset owner's side on the planet today, there were also the Libyan Investment Authority. There was also OneMDB in Malaysia. There was countless examples of, you know, almost borderline tragedy where the financial services industry clearly took advantage of these funds. Ireland being swindled on foreign X fees by State Street, Goldman Sachs swindling Libya on a billion-dollar derivative trade. I mean, we could go on and on, right?

• 25:31Ted Seides?

  So if you circle back to New Zealand,

• 25:34Speaker 02

  Yeah.

• 25:34Ted Seides?

  what is the ideal model for the next millennium investment organization?

• 25:41Speaker 02

  Well, so let me, I'm gonna get to that. But let me finish you on the fees. The whole point of me telling the sovereign fund story was to say, why am I focusing on fees? Well, I focused on sovereign funds for five years and realized that I was not going to get the perfect role models out of there that we needed to change the pension sphere. And so then you're like, alright, well, if we're not gonna get these new role models, then you begin to scratch your head and say, how are we gonna catalyze change? How are we gonna get the boards of directors of these organizations to change the way they invest? And yes, New Zealand, which we'll talk about in a second, helps, because they're generating such high performance with an entirely new model that is not purely passive and it is not purely driven by external managers.

• 26:24Speaker 02

  And so when I got to the fee and cost argument, I realized that if you could take the fees that were being paid to external managers and present them back to the board alongside the internal budgets that were being paid to staff, the inevitable question, time and time again, that came out of the mouths of the board members was, is there another way? Because the fees were so high. And what was even worse-

• 26:48Ted Seides?

  Fees were so high externally.

• 26:50Speaker 02

  Oh, yeah, externally. Internally is a joke. Internally, it was a joke. I mean, here in New York, you had this private equity role of $90,000 a year with a requirement to live in the five boroughs to manage a $7 billion private equity portfolio. I mean, obviously, that's gonna sit vacant for three years, which it did. But on the flip side, you're finding out that you're spending billions upon billions funding private equity managers and you didn't even realize it. And so until you had a sense for what the true cost of producing those returns were, you actually didn't have a decision to either build it internally, make it, or-

• 27:31Speaker 02

  Externalize it, buy it, you know, in the Williamson terms, make or buy. And so what the Canadians did is they got transparency around the fees and they said, "All right, well, maybe we'll make these returns internally." In America, we're still about to have this fee moment. CalPERS is having it now. They realized they, what was it, $4 billion in private equity carry was paid to GPs alone over a five-year period. That's one line item of fees. And then, of course, they're going to say, "Maybe we should just give it all to BlackRock." I mean, I don't know if that's true. I don't have any inside information. But yeah, I think the fee and cost issue, the reason why I go off on this constantly is because it is a way of improving the resourcing at the asset owners.

• 28:13Speaker 02

  It's not a way of shaming or shutting down the asset management industry. It's about catalyzing boards of directors and trustees and fiduciaries to think of their organization in the broader context of producing a return stream and then resourcing them appropriately.

• 28:30Ted Seides?

  So, one of the tricky aspects of that, if you, I started in the endowment world, and even if you have what's considered a big team at an endowment, it's not a lot of people. And yet, you're trying to create global diversification across asset classes. So it's hard to look at that model and say, you might be able to develop pattern recognition to find great practitioners, but you're not going to be able to compete with great practitioners that are covering all these different areas around the world. So how has, you know, maybe we go to New Zealand. How have they changed that model so they can participate and compete in global markets?

• 29:07Speaker 02

  Well, I think you'll find out if you dig in there, a lot of the value add that it's generated over time has been based on three, four, or five big, high conviction bets for which they have spent an inordinate amount of time on and for which they are

• 29:27Speaker 02

  Actively seeking to use their comparative advantages to get and to tilt the deck, tilt the table, whatever it is, in their interest. So they're extremely good at strategic tilting.

• 29:40Ted Seides?

  And how broad are those bets? Are we talking about a country bet, a style bet, or a security bet?

• 29:46Speaker 02

  Well, so I don't know what I can speak to in the public domain, but I mean, you'll notice like they were holding all this Portuguese debt, which then they had trouble with because the Portuguese bank defaulted and then the insurance company didn't cover it. So they got a short straw on that. But like, truth be told, New Zealand did everything right. And they'll probably get their 200 million back. But you'll see if you look at the structure of the deal, which is interesting because you can now go in and look at it. They were getting an exposure to kind of a unique banking asset in Portugal. And how did they source that deal? You know, it probably came through a set of trusted intermediaries, but they owned it directly. And so I think that's part of it. I think part of-

• 30:26Ted Seides?

  But for a big bet, so 200 million dollars, how big's that pool? It's huge, right?

• 30:29Speaker 02

  Well, I mean, when they made that investment, it was probably 22 billion.

• 30:33Ted Seides?

  Right, so you're talking about a less than 1%.

• 30:35Speaker 02

  Yeah. Yeah, okay. But so like, in my world, if you can have 100 positions, you are a highly concentrated fund. Like at UC, when we got there three years ago, I think this is all public, but it's, we had about 340 fund relationships. And now JEGDEEP and the team has whittled that down to something like 120. And it's about concentrating the bets, having higher conviction. And so like, I would push back on you on your question about, how do you get global diversification? Who says you need it? Does Norway, who is basically a global index fund, they own, you know, 1% of the global stock market? Do they understand all of the underlying assets they own? Of course not.

• 31:21Speaker 02

  But Canada Pension Plan, do they understand it? Probably pretty deeply because they're just taking a different model. One is about active management and adding value and investing in illiquids. And the other is investing in liquids and hoping to get broad diversification and just participate in the global growth. And by the way, global diversification through index funds is a fake diversification. Index funds and ETFs are often calculated on a cap weighted basis, which is a fundamentally flawed way to calculate indices. And frankly, it's even worse in the emerging markets where you have single or multiple companies making up a huge portion of the index. So it's not like you're getting an exposure that anybody would describe as representative of the underlying economy.

• 32:07Ted Seides?

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• 32:50Ted Seides?

  So a lot of what you're talking about with New Zealand and Canada is just a different model from the traditional model, in this case, asset management and retirement systems. We were talking earlier about your interest in just financial disruption and innovation. I want to talk a little bit about some of the projects you're involved with more broadly.

• 33:14Speaker 02

  Oh, man. So few things. I mean, I love to work on projects where we're bringing long-term investors around a kind of an investment thesis and then designing a new investment vehicle to facilitate some unique access point. I mean, I have this hypothesis with this notion that

• 33:36Speaker 02

  We could unlock so much capital for things that are societally beneficial if we simply change the way we intermediated between the capital and the project. So if you take this example of Aligned Intermediary, which is what I would describe as a kind of a next generation deal sourcing, deal vetting platform for long-term investors, the whole idea was to say, actually, these long-term investors, they have deep pockets, they're interested in positioning their portfolios for an energy paradigm in the future that will have the energy inputs into the economy being more clean. Everybody kind of sees the writing on the wall, but they don't know how to get access to these assets.

• 34:17Speaker 02

  And when they look to the traditional private equity funds or infrastructure funds to see if there are exciting products there, they don't see any because the fee structures are too high for the underlying assets. Those assets won't support a 2 and 20 structure. They just aren't built for that. And so when I was working with Jagdeep in New Zealand and a few others, we just came to realize that if we could design something from scratch where we could source deals on a no-fee basis and almost build this as an extension of the long-term investment teams, we could begin to move a lot more capital into climate solutions, what we call

• 35:00Speaker 02

  climate infrastructure, wind, water, solar, et cetera. And because we were going to be moving this capital, which is purely commercial and seeking out the highest possible risk return, we could go to the philanthropists that had for mission to catalyze the clean energy capital markets. And so weirdly, it was this really interesting syndicate of partners where we had these pension funds, fiduciary-bound pension funds, saying, I want to invest in those assets. I can't, but I see the potential for my portfolio to generate high returns with cash flow. And then we had the philanthropists who were saying, God, I would love to see these pension funds investing in these darn assets. We've been doing all these research projects, trying to figure out how to get that to happen,

• 35:44Speaker 02

  but all these pension plans shut the Door on us when we walk in. And this entity was basically a way to say philanthropists, stop funding research. Fund a platform that we can build incredible talent within. And that talent will then bring deal flow to the long term investors. And so that's what we did. We launched it a year ago. We've got six employees at the AI.

• 36:06Ted Seides?

  And so who, who does the due diligence on the deals then?

• 36:10Speaker 02

  Well, right now, the fiduciary obligation remains with the pension plan. And so the scope of funds that we can work with, they have to have some internal capability.

• 36:19Ted Seides?

  Isn't that the problem in the US that because of the $80,000 a year private equity guy, they don't have that capability?

• 36:25Speaker 02

  Yeah, so we have one American plan and it happens to be UC Regents. We have New Zealand Superfund, we have Welcome Trust, we have Seabass, we have WAFRA. I mean, we have like a bunch of OP Trust up north. But the reality is you need a little bit of an internal capability.

• 36:44Ted Seides?

  I want to talk about a couple of different, kind of more traditional asset classes and the asset managers and what you think it looks like out a couple of years. So, you know, start with hedge funds, which on the one hand, we've never seen more fee scrutiny. And yet assets in hedge funds are all time high, right? North of three trillion. What's that puzzle? And what does it look like, you know, five or 10 years from now?

• 37:08Speaker 02

  Yeah, I mean, I have, I have like an interesting love hate relationship with the hedge fund space because it appalls me that we are dragging some of the best and brightest minds in society, chemists, physicists, mathematicians away from, you know, what I would describe as more traditionally value adding activities and into the pursuit of basis points through a black box that is barely socially valuable, if at all.

• 37:39Speaker 02

  And so we are dragging all these remarkable people into this space and they're not generating value. So, I mean, I think, do the institutional investors need hedge funds? Maybe they need it for uncorrelated returns. I don't think they want it necessarily for alpha anymore. So, in that sense, I think there is a future for hedge funds. And I'll define it in two ways for me. When I think about what do I want to see hedge funds doing? One, uncorrelated return streams, very valuable. And especially if the hedge funds and the CIOs can develop working relationships whereby the hedge funds who are spending all this time understanding the sources of uncorrelated

• 38:23Speaker 02

  return can communicate that back into the long-term investment community in such a way that might affect the way they are allocating their risk buckets.

• 38:32Ted Seides?

  Right.

• 38:33Speaker 02

  So, that's very valuable. And frankly...

• 38:35Ted Seides?

  Huge challenge and probably won't happen, but...

• 38:37Speaker 02

  Huge freaking challenge, it probably won't happen, but the other dream I have is that somebody's going to build a knowledge management platform that can kind of better interact or interface between the knowledge of the hedge funds and the knowledge of the pension funds. Because, oh, by the way, the pension funds, they're at the center of so much knowledge, they just aren't capturing it. So, the first thing is uncorrelated returns. The second thing is, I have been working with countless entrepreneurs that want to build technology for investing. And the traditional model, if you're a technologist interested in investing, is go start a fund. Why don't you start a fund? You know, the economics are incredible.

• 39:22Speaker 02

  And I'm in pursuit of a business model for technologists that want to focus on investing that is not a 2-in-20 fund, that is maybe not Bloomberg, but is something there, selling a signal, selling a risk management product, doing something that just isn't about locking it away in a black box and charging a fee stream. And so, I want to find a way to have the current hedge fund industry cultivate this industry of entrepreneurs that are using technology to draw new insight out of the world we live in. Orbital Insight is a company in Silicon Valley that does satellite data of parking

• 40:02Speaker 02

  lots, of oil wells, and all those things. It will be profoundly interesting to long-term investors, it will be profoundly interesting to energy companies and governments, but guess who its first clients are?

• 40:14Ted Seides?

  Tetra, of course.

• 40:15Speaker 02

  Yeah. Well, so all these alternative forms of data, and I can probably rattle off 100 startups doing alternative forms of data, are now flowing through into the hedge fund community in new ways. And I think that's exciting. I think the hedge funds can play a role in building this industry of what I describe as invest tech, without being threatened by it. Some will be threatened by it, but the really good ones won't. And so I think those are two places where I'd love to see hedge funds double down, working more closely with entrepreneurs outside of their organization. The problem that I have with hedge funds is, they just have so much darn money, they can do it themselves.

• 40:58Ted Seides?

  The hedge funds initially are effectively funding the research of this data science, but maybe when the signal no longer impacts the market, those companies then can take the lessons from it and either bring it to industry or bring it to broader dissemination.

• 41:12Speaker 02

  I guess I'm hoping that we're pulling a judo move on the hedge funds, in the sense that they are so good at funding research and building unique insight, and identifying that insight in all these places around the world, that they will, in effect, now I'm really putting my cards on the table, back, plant the seeds of their own demise. By educating and communicating to all these technologists what it means to identify inefficiencies in the marketplace, what it means to build a portfolio that is perfectly exposed to this idiosyncratic risk factor. I mean, we're already seeing it in exotic betas and things

• 41:52Speaker 02

  like that. And then the hedge funds that survive are truly unique. And the 1% or 2%, you disagree with me, but I think 1% or 2% probably deserve to be making all the money they're making.

• 42:04Ted Seides?

  It's usually like that in any industry, right?

• 42:06Speaker 02

  Yeah.

• 42:07Ted Seides?

  And that's kind of...

• 42:08Speaker 02

  I mean, would you say that about lawyers? I don't know. It's not like any industry.

• 42:11Ted Seides?

  I don't know what the dispersion is, but my guess is there probably are a few lawyers that make...

• 42:15Speaker 02

  I mean, it's definitely like that among...

• 42:17Ted Seides?

  Not quite in the same way in financial services.

• 42:19Speaker 02

  I mean, we have 10x engineers in Silicon Valley that are worth 10x the average engineer, because that's just, they're creative and you treat them like artists.

• 42:27Ted Seides?

  Yeah, yeah. How about private equity?

• 42:30Speaker 02

  Well, I think private equity is only going to become more important because all of the big institutions around the world have this bogey, this expected return target they're looking at, and they're wondering, "How in the world am I going to meet that?" One of the answers that they get from their trusted consultants is, "Fill your boots full of private equity and maybe hedge funds." And so, we are going to see this giant wall of money coming into private equity in the next five years, which is going to be very difficult to manage. I mean, my hope is this leads to the seeding of a whole bunch of new private equity funds.

• 43:12Speaker 02

  I hope it leads to experiments like the one we're seeing with SoftBank's Vision Fund. I mean, say what you will about it. You might think it's crazy to put 45 billion, if you're PIF, into a single fund, but at least it's innovative. You know, PIF is saying, "We're long-term, we're big, and that's about it right now in terms of technology, in terms of the competitive advantages." And so, if somebody said, "Well, shoot, why don't we write a $45 billion check, get great terms, and go out and acquire stakes in all the top companies?" My hope is we'll see more experiments like that, just by the fact that they're going to have to experiment, but by the fact that we've seen so much just sheer chasing of

• 43:55Speaker 02

  past returns by LPs and begging for access to top GPs, it's hard to see how this doesn't end poorly.

• 44:04Speaker 02

  But then again, I know this company up in Seattle that's doing big data and artificial intelligence for creating and assessing private equity track records, and that's really exciting. The idea that you can create on-the-fly indices that literally benchmark each company in a portfolio to show whether or not a GP actually added value. There are things like that emerging, which give me hope that the LPs won't be completely swallowed by the GP selling machine. But you have to be thoughtful, and you have to have the gumption to be innovative to do any of this stuff. If all you're relying on is a fund of funds or a traditional consultant access point to a traditional GP, I don't think you're going to get the outcomes you want.

• 44:46Ted Seides?

  So what's the most interesting company you're involved with today?

• 44:49Speaker 02

  The most interesting company is a company I started. So I started a company with Lindsay Holden called Long Game. And Long Game is about trying to help people save money who struggle to save money. We started this company about a year and a half, maybe two years ago. And I met Lindsay. She was the first hire at Formation 8, which was a venture capital fund out in Silicon Valley. I'm friends with the managing partners there, Joe Lonsdale. And Joe introduced me to Lindsay, and we hit it off. And then she left FA to go build an auction company that used this kind of behavioral

• 45:28Speaker 02

  trick to capture this GTLD space, which is the top-level domains, like .ventures. And they did, I don't know what the exact number is, but it was $500 million or $1 billion in auctions on this platform that she started. And she sold that. And she came to me at Stanford and said, "Listen, my next big project is to try to convert the money people are wasting playing the lottery and gambling into a savings account." And I was like, "That'd be pretty cool if you could pull that off." And she said, "Well, there's a way. It's called a prize-linked savings account." And the Congress just passed something called the American Savings and Promotion Act, Republican-led law, signed by Obama, that legalizes prize-linked savings in America.

• 46:11Speaker 02

  And I was like, my goodness. So not only do you have this opportunity to reward people with variable prizes for putting some money in a savings account, but like if you just overlay on it a little bit of creativity, you could see how a huge amount of capital could be shifted from state lotteries and casinos and sports betting and beyond into people's personal savings accounts. And having worked at Boston College and seen the tragedy that is the personal finance landscape and the defined contribution pension

• 46:49Speaker 02

  woes, this was incredibly appealing. 63% of Americans don't have $500 to their name. It's astounding to think that, but you know, you wonder where the American dream has gone. Well, that's where it went. Nobody has any money to invest in themselves. You need some risk capital to be able to capture the American dream. And the average American debt is about $17,000. So what are we going to do? Well, we're not going to mandate them to save because that's not how we operate as a country. Our defined contribution plans aren't working. Our auto enrollment into pension plans through corporate sponsors only work if you work for the kind of company that has a plan. But in the era of the gig economy and you

• 47:33Speaker 02

  know Lyft and Airbnb and all these things, that doesn't exist. So what are we going to do? And so when Lindsay came to me and was like, I want to do this prize like savings company. And step one is convert lottery money into personal savings. Step two is gamify the process of so people don't have to be so afraid of their personal finances that they actually want to engage with their personal finances. I was completely convinced. And so I told Lindsay, her idea was brilliant. And if she wanted me to get involved, I would go on leave from Stanford and start the company with her. And I did. And she invited me to join as co-founder. So I went down to 50% time at Stanford. I kept going with my PhD students and master's students, but I was in San Francisco with her three, four days

• 48:18Speaker 02

  a week, making copies. Taking out the trash as one does in an early stage startup. And I did that in incredibly intense way for over a year. And today, you know, we have a mobile app that's on both platforms. We have tens of thousands of people who are saving through the platform. And how does it work? What's a prize linked savings account? Yeah, so a prize linked savings account is basically the more money you save, the more chances you get to win a prize. And the art here is in never, ever, ever touching the principal. The principal is sacrosanct, you know, we just don't ever play with the principal.

• 49:00Speaker 02

  And so what we do is we partnered with Blue Ridge Bank in Virginia. They pay our account holders, I think it's 10 basis points for their savings account, which at the time was more than the national average. And I think it is around that national average now. And they pay us a little bit of money. And when we take that money they pay us and turn it into prizes. And there's a few prizes. One prize is like every week we do a million dollar drawing. And we ensure that prize. You have a one in 240 million chance of winning, which by the way is better than the state lottery. But the idea is very simple that if your numbers hit, your life will forever be changed through random luck. And that, as we learned from prospect theory

• 49:45Speaker 02

  and the amazing work of Kahneman and Tversky, is critical for low income people who see the lottery as literally their only path to wealth. We've done all these focus groups. It is, it's astounding. You talk to these focus groups and you say, okay, I want you all to picture yourselves as millionaires. Picture it, you have the house, you have the car. All right, got it? Now, how did you get there? Without a doubt, the occasional person will say something other than, "I won the lottery." But 90% say, "I won the lottery." Nobody says, "I saved my money and invested it wisely."

• 50:28Speaker 02

  Some people, because we're in Silicon Valley, are like, "My stock options." And you're like, "Oh, you're not the guy we're talking to." And so, the idea here is, you have these, you put money in the account, you earn coins in the long game currency. Those coins can be exchanged for games. And we have, I think, six games right now. One of them is a social game, one is like a slot, one is like a card game, and one is a traditional kind of ball lottery game. And they all offer real cash prizes that, if you hit, you'll change your life. Now, I think we've had something like 40 or 50, 500 and $1,000 winners so far. Nobody's hit the million. We're actually rooting for somebody to hit the million because we've insured the prize. How's the company grown?

• 51:13Speaker 02

  Is it word of mouth? So, we were lucky in the sense that like, we're taking such a unique take on financial preparedness that the big newspapers have written about us. So, I don't know if you're familiar with like, a bunch of companies like Digit, or Acorns, or some of these other fintech apps. So, they're doing a great job, but their model is, "Set it and forget it," or, "Trust us, we'll do it for you." It's not engagement. So, that is appealing to people who are busy, and it's appealing to people who know they need to, they're financial optimizers. They know they need to do something, but they don't quite know what. And this is nice, every time I swipe a credit card, they'll round up and they'll put some of my money into an index fund. Beautiful.

• 51:58Speaker 02

  The problem is, 80% of Americans don't even want to engage. They're afraid, they're stressed out. I mean, these are 63% of Americans don't have $500. They're going to the pawn shop when they have a, you know, a car problem. Well, so like, how do we get these people to engage? And rather than push financial literacy at them, which the research now shows does not work, we want to educate through doing. So, we make it fun, we make it engaging. We build these opportunities for you to change your life through luck. But in the process, we put you on this path to develop a rainy day fund. And the rainy day fund is just step one. I mean, we have other products coming that will help you take control of a variety of areas of your financial life, to put it that way. How do you manage your time?

• 52:43Ted Seides?

  Seems like you're involved deeply and broadly in so many different things.

• 52:48Speaker 02

  So I could only do all of these things if the core thematic, it has to revolve around fixing finance for individuals, for pension funds. There has to be innovation in finance and the end of that innovation has to be a better deal for the companies and asset owners that rely on the industry. If you look at every single thing I'm doing, Stanford, Long Game, and there's a whole bunch of other companies that I started, which we didn't get into, and then companies I've invested in, sovereign funds and pension funds that I advise, in all of it, it's about fixing finance for them. And so, the thing that is first and

• 53:27Speaker 02

  foremost is like, that's my passion. Like, it's so fun to help, you know, I helped WAFRA, Rail Pen, and Alaska Permanent, like, launch a new private equity seeding platform called Constellation. It is my joy to spend time doing that. Didn't even get paid for it. It's projects like that that kind of get me up in the morning. I mean, you know, I think if we had a more holistic and long-term financial services industry, would the country be as fractured and disconnected as it is today? I mean, you know, that's a question that flows through my brain, which is like, imagine the 40% of corporate profit captured

• 54:07Speaker 02

  by finance was 15%, and that other 25% was simply invested in communities to create actual value for people. Would everybody feel left behind? I don't know if I have the answer, but I know that it's a question worth asking.

• 54:23Ted Seides?

  I want to turn to a couple of fun closing questions.

• 54:26Speaker 02

  All right.

• 54:28Ted Seides?

  What was your favorite sports moment? Could be as a participant or a fan.

• 54:34Speaker 02

  So, I was at... V Palestra, which is the University of Pennsylvania basketball stadium. And at the time, I was a massive Princeton basketball fan. I met my wife at a Princeton basketball game. That was our first date in 1998. I traveled with the team to North Carolina, who at the time was the number one ranked team in the country. And I sat in the North Carolina student section, painted orange. And at the half, we were up by six. So that's the level of commitment. Penn at the time was our chief rival. And we had traveled from Princeton to Philly. And there was probably about five of us.

• 55:17Speaker 02

  And at the half, we were down, I think it was like 36 to 12. And then about eight minutes into the second half, we were down 42 to 18. I was sick. I felt physically ill to the point where I was like, I might just leave. And Courtney, my wife, was like, we are not leaving. Be a quitter. We're going to stick this out. If we need to suffer, we're, you know, we're going to suffer. And they turned it around. They went on a run like you would not believe. Literally ESPN, when they did the highlight that night, they stopped the game with 13 minutes to go in the second half.

• 56:02Speaker 02

  And they were like, and Princeton is down 28, you know, to Penn. Looks like Penn's going to go on. Oh, wait, this just in, the game is now over. And then they showed the second half. It was a joke, right? But they won 53-52, Princeton, at the Palestra. I mean, I don't think I've ever been that happy. I mean, like, children being born, getting married, like, I'd love to say those were happier moments than that moment, but it was just a different type of pleasure.

• 56:30Ted Seides?

  Who's your favorite person outside of your family and why?

• 56:35Speaker 02

  Oh, my God. Who is my favorite person? I mean, I have... So I'm not one of these people who can like easily just be like, "Steve Jobs is rad." You know, I'm not that type of a person. I think in my life, I have people that I respect for different things. And you'll note that like, I drag them into my lives and don't let go. So like, I have a profound respect for Lindsay Holden, female CEO of a startup, fintech startup in Silicon Valley, navigating that world and watching her do it with grace and poise, and leading an engineering team that is practically all male. And it's incredible to watch.

• 57:16Speaker 02

  Jagdeep Bashir, I think, is a profoundly unique human being in that he can do things in the context of bureaucracies and public agencies that I didn't believe possible. If you want to see somebody who takes stakeholder engagement and makes it real, not just like lip service to it, but actually creates a value out of engaging with stakeholders and making them feel loved and cherished and not being fake about it, it's unbelievable. And there's a few other people like that in my life, like Gordon Clark at Oxford, who dragged me into the pension fund space and served as a mentor and helped me and

• 57:58Speaker 02

  my wife get through two PhDs at the same time with relatively little debt. I mean, there are people like that for whom I owe an endless debt of gratitude.

• 58:09Ted Seides?

  Great.

• 58:09Speaker 02

  Yeah.

• 58:10Ted Seides?

  What teaching from your parents has most stayed with you?

• 58:13Speaker 02

  You know, my parents were incredible role models in the sense that incredible loyalty, honesty and integrity. You know, I think my dad, when I was young, would often talk about the higher interest and he would invoke the Steve Jobs quote all the time in our family. "You've just got to put a dent in the universe." Like, "If you really want to have an impact in this world, go out and find something you're good at, but make sure it's socially useful." And so, you know, I think in terms of... The thing I'm most grateful for it is having this broader, longer-term vision and mission that is about building a better society, ecosystem, planet, whatever. You

• 58:56Speaker 02

  know, that comes from my parents. In terms of parenting, when my dad forced me, and he forced me, I did not want to go row. That was like a black belt parenting move because when you're rowing, you can't drink, you can't smoke, you can't go out late. And at first I hated it, and then obviously I fell in love with it. And so for all those parents out there, there's sort of struggling with unruly teens, which I was. I was like a skater, flying off cliffs and skis and things like that. Rowing was this incredible. And oh, by the way, like if you want to row at a high level, you gotta go to like an amazing school. So it completely reshifts your, your focus.

• 59:35Ted Seides?

  What life lesson have you learned that you wish you knew a lot earlier in your life?

• 59:41Speaker 02

  How hard, I mean, how hard kids are. So if I, if I had known, I don't, I don't know what I might have done differently, but I have two kids that are amazing kids, you know, a seven-year-old boy and a five-year-old girl. And my wife and I both work, so both of us are kind of on, you know, she runs like a data science team at a public company. So it's not like I trump her. In many ways, she trumps me. And so it's this constant negotiation and challenge. And I think I would have just loved to have known that this insane part of your life is coming, and you should sleep in, and you should go

• 1:00:23Speaker 02

  to the movies, and you should probably get ready for, you know, do, do a couple of volunteer gigs, travel the world a bit more, do those things. Because getting married doesn't change your life, I didn't find. I mean, I started dating Courtney when I was 20, she was 18, we were Princeton. We lived together for 13 years. And then we had children. It was like, this is a totally new world. This is totally new. Everything changes once the children come. And, and it doesn't help that like my kids are extremely stubborn, and I don't know where they get it. But, um, you know, it's, uh, that's what something I might have liked to have been told.

• 1:01:02Ted Seides?

  All right. Last question. You are in your waning days. I guess now we're talking about 150 years old because we're going to live a long time.

• 1:01:10Speaker 02

  Yeah, nanobots.

• 1:01:11Ted Seides?

  What advice would you give yourself today?

• 1:01:13Speaker 02

  Oh, I don't know. I mean, how did it go?

• 1:01:20Speaker 02

  I mean, you know, there's all these things that get said in those to those questions like, hey, nobody's ever gonna regret spending time with their family or, you know, nobody's gonna say, I wish I worked more. But I wouldn't, interestingly, why don't I just do like the counterfactual like, I feel uniquely privileged to be sitting in a seat where, for whatever reason, this community of pensions and sovereign funds and endowments and foundations seems to trust the words coming out of my mouth as being in their interest. And I don't want to screw that up because I don't see a lot of people out there that are unconflicted

• 1:02:02Speaker 02

  in their thinking or remarks. And so I feel, whether it's true or not, and I could be a complete windbag, but like, when I do get the opportunity to meet with these people, I get the sense like I can have an actual influence on them. And so I think, in a weird way, the 150 year old talking to the 41 year old would say, take that seriously. And if you really do want to transform capital markets, don't forget, don't ever forget who sit at the base of capital markets, and it's the asset owners. And there's, you know, here we are in New York City, surrounded by beautiful skyscrapers filled with hedge funds and private

• 1:02:43Speaker 02

  equity funds. And every moment of every day, there is a temptation to cash it in. And so I, you know, what I'm constantly reminding myself is, there's a broader project, and fine to go build companies, fine, but never forget who you're serving. And I am serving the asset owners.

• 1:03:04Ted Seides?

  Great. Ash, thanks so much. Really enjoyed it.

• 1:03:06Speaker 02

  Thank you for having me.

• 1:03:08Ted Seides?

  Thanks for listening to the show. If you like what you heard, hop on our website at capitalallocators.com, where you can access past shows, join our mailing list, and sign up for premium content. Have a good one and see you next time.

• 1:03:24Speaker 04

  All opinions expressed by TED and podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of capital allocators or podcast guests may maintain positions in securities discussed on this podcast.