Ed Grefenstette – Bold Allocations at The Dietrich Foundation (EP.437)

Ed Grefenstette is the CIO of The Dietrich Foundation, which supports charitable organizations in Western Pennsylvania through a truly unique investment strategy that seeks to first, last, and always grow the assets. Bill Dietrich, a successful industrialist, published historian, international investor, and innovative philanthropist, formed the foundation after selling his business for $170 million in 1997. Since then, the pool has grown 11.5x to $1.5 billion after distributing $400 million to supported charities, including contributions that make it among the largest donors every year to Carnegie Mellon University and the University of Pittsburgh. Over the last twenty years, the Dietrich Foundation's performance sits at the very top of all endowments and foundations. Our conversation covers Ed's journey to investing and mentorship by Bill Dietrich, which led to him taking the helm at the Foundation in 2007. We discuss the Foundation's bold approach to illiquid investments, with 90% of assets invested in venture capital and private equity, its governance structure, and its thematic focus on innovation and emerging markets. Along the way, Ed shares insights into managing liquidity, constructing the portfolio, selecting managers, and navigating geopolitical risk to maintain conviction in an uncomfortably different strategy. Ed's approach and results will open your aperture to what's possible in an institutional portfolio with the right goals, structure, and governance in place. 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/)

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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• 0:46Ted Seides?

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• 2:12Ted Seides?

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• 2:57Ted Seides?

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• 3:32Ted Seides?

  Hello, I'm Ted Seides, and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can join our mailing list and access premium content at capitalallocators.com.

• 3:59Speaker 01

  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.

• 4:18Ted Seides?

  My guest on today's show is Ed Refenstein, the Chief Investment Officer of the Dietrich Foundation, which supports charitable organizations in Western Pennsylvania through a truly unique investment strategy that seeks to first, last, and always grow the assets. Bill Dietrich, a successful industrialist, published historian, international investor, and innovative philanthropist, formed the foundation after selling his business for $170 million in 1997. Since then, the pool has grown 11 and 1/2 times to $1.5 billion after distributing $400 million to supported charities, including contributions that make it among the largest

• 4:59Ted Seides?

  donors every year to Carnegie Mellon University and the University of Pittsburgh. Over the last 20 years, the Dietrich Foundation's performance sits at the very top of all endowments and foundations. Our conversation covers Ed's journey to investing and mentorship by Bill Dietrich, which led him to taking the helm at the foundation in 2007. We discuss the foundation's bold approach to illiquid investments with 90% of assets invested in venture capital and private equity, its governance structure that lets it do that, and its thematic focus on innovation and emerging markets. Along the way, Ed shares insights into managing liquidity, constructing the portfolio, selecting

• 5:40Ted Seides?

  managers, and navigating geopolitical risk to maintain conviction in an uncomfortably different strategy. Ed's approach and results will open your aperture to what's possible in an institutional portfolio with the right goals, structure, and governance in place.

• 5:58Speaker 02

  Before we get to the interview, investor relations pros, this one's for you. Registration is open for our next cohort of Capital Allocators University for investor relations and business development professionals, happening in New York City on July 8th and 9th. Even better, we're offering an early bird discount for registrations before Memorial Day. Our first cohort was a total blast. It's rare that capital raisers spend time with each other, discussing best practices and sharing common challenges. This year, we're bringing together a powerhouse lineup of industry pros to share their best ideas and help you sharpen your edge. Head to capitalallocators.com/university to learn more and save your spot.

• 6:42Speaker 02

  Hope to see you in July. Please enjoy my conversation with Ed Greffenstein. Ed, really excited to do this with you.

• 6:51Speaker 03

  Thanks, great to be with you, Ted.

• 6:54Speaker 02

  Why don't you take me back to how you first got interested in investing?

• 6:58Speaker 03

  Sure. Well, I've been a CIO now for 18 years, which is hard to believe. But really, I'd say the most consequential thing that happened in my career was probably meeting Bill Dietrich in 1999. Of course, today, I'm privileged to have been the CIO there for the last 15 years. But he had a profound influence on the direction of my life. Maybe I'll go back to college because that leads to how things unfolded.

• 7:26Speaker 02

  Why don't you go all the way back?

• 7:27Speaker 03

  Okay, we'll go all the way back. So I was born and raised in Pittsburgh, and I was the eighth of nine children. And my dear Irish mother said that the babies arrived with pleasant regularity. And later, when my wife and I had three children, my father called it a starter set. They grew up in very, very modest circumstances. And my father was able to attend college thanks to the GI Bill. He came back from World War II and went to Duquesne University, earned his accounting degree, came out and joined a subsidiary of the Hillman Company here in Pittsburgh.

• 7:59Speaker 03

  As a clerk and after a couple of years joined the parent company for the next 60 years, worked for and alongside Henry Hillman, ultimately becoming CEO of the Hillman Company. And he and my father had a wonderful relationship. Henry Hillman was truly a pioneer in private equity and venture. If you look back at the league tables in 1960s, if they had those, pre-venture, so to speak, the Hillman Company was right there in terms of investing in early-stage companies. 1970s venture finally began to take form and Henry Hillman and my father were anchor investors in Kleiner Perkins Fund I and a few years later in KKR Fund I.

• 8:40Speaker 03

  I learned a lot about investing from my father, not just technology and innovation investing, but really about people, how people are really at the core of making good decisions in private investing.

• 8:53Speaker 04

  So where'd you take that when you went to school?

• 8:56Speaker 03

  I went to Georgetown and got an economics degree, met my wife, that's the most important thing that ever happened to me, and stayed for law school. Practiced law for about five years as a litigator. I came home and I remember I had a memorable conversation with my wife and she was expecting our second child and I said, "Honey, I think I'm pretty good at this. This job will always put food on the table and a roof overhead, but I really don't love it." And she said, "Well, what do you want to do?" And I said, "My interests keep going back to finance." Being supportive, she said, "Well, go and retool." So I did. I applied to Carnegie Mellon in our backyard to get my MBA. I remember getting a phone call from the admissions office and I was pretty excited. I thought they were calling

• 9:37Speaker 03

  to personally welcome me and the dean said, "We'd really like to have you, but we're a very quantitative program and you're just a lawyer. So we'd like you to take eight credits of pre-engineering calculus before you matriculate." And I said, "Are you serious?" And he said, "Yeah." He said, "All you lawyers know how to do is divide hours into tenths for your billing." And I said, "Well, that's probably fair." So I got the calculus and I finished the program, which was a great experience. That really started my second career in investment banking.

• 10:08Speaker 04

  How'd you get from the investment banking side over to investing?

• 10:11Speaker 03

  I joined PNC Capital Markets in Pittsburgh and we did M and A advisory mostly on sell-side deals in lower middle market. And after doing a few of those, you sort of understand how the structure and the financing takes place. Being a little ambitious, I sat down with one of my colleagues and said, hey, how about if we go and raise a private equity fund and we can be a principal in these transactions? So we pulled in one of my high school buddies, a forensic accountant, and one of my MBA buddies who was an engineer, ops guy, and we went out to raise a private equity fund in 2000. That's how I was introduced to Bill Dietrich as a potential LP.

• 10:51Speaker 04

  So how did that relationship start and unfold?

• 10:56Speaker 03

  It was a very memorable meeting for me. I know that. I'd heard about Bill and people told me this man is punctual and punctuated in everything he does. So I was sitting there in his reception with my pitch book, rehearsing my 45-minute presentation. This was 2000. Bill came walking down the hall and he looked like a character out of the F. Scott Fitzgerald novel. He was 6'1", white hair, horn-rimmed glasses, early 60s, pinstripe suit, pocket square, rep tie. He came and shook my hand and said, "Bill Dietrich, follow me." And he spun on his heels and went down the hall and I practically ran after him. We went into a conference room. He sat down, looked me square in the eye, put his watch right in front of him and said,

• 11:40Speaker 03

  "Well, I'm here and I'm listening." And that's how the meeting began. I immediately said, "This is not a man to be trifled with." So I, in my mind, jumped to a shortened version of my presentation. I gave him a 10-minute pitch as best I could.

• 11:55Speaker 04

  So what happened after the pitch?

• 11:56Speaker 03

  He was a Marine too, so he likes salty language. So at the end of the pitch, he slammed the table and says, "God damn it, I love it. I love the passion, I love the approach, I love the thesis, I love the people. I'm not going to give you a nickel," he said. "I only invest in world-class managers with long track records and you're nothing but a greenhorn." I said, well, I appreciate the quick and candid feedback. And he said, but I like you. We ought to have lunch and we did. And it was a very pleasant way, I thought, for him to say no. But much to my surprise, next quarter, he invited me to lunch again and then a quarter after that. And it was six and a half, seven years where we had these quarterly lunches in Pittsburgh and really got to know each other.

• 12:37Speaker 04

  So what happened at your fund over those six and a half, seven years?

• 12:41Speaker 03

  We ended up doing okay. We got 2X net for our investors. But what we discovered in investing and we were targeting the micro market. So controlled transactions of industrial companies, one to three million in EBITDA. And by the way, we thought we had a very clever pitch, Ted, on why we were investing in these companies. We said, you know, these small companies are like a small ship and it's easier to turn a small ship than a large ship. You see how sophisticated that metaphor is, Ted? And we realized much later that that's an incomplete metaphor and that modest waves can also capsize a small ship. So the distribution of returns looked more like a venture portfolio. We had a horrible zero transaction and we had an 8X. It all worked out, but it was a heavy, heavy lift.

• 13:26Speaker 03

  And through all these lunches, Bill and I got to know each other and he wanted to know exactly what we were doing and why. And then we had a very momentous lunch in about 2006. He said, you know, I've been listening to you, Ed. I really want to invest in your next fund. And I said, well, we're not going to do it for these reasons, I explained. And he said, well, I have a better idea. I said, what's that? He said, I chair the investment committee at Carnegie Mellon. He said, we have a terrific guy as CIO, but he needs to move on. He's a brilliant guy, smart guy, but he's got three speeds, slow, slower and stop. According to Bill, he was a charge ahead guy. And Bill said, you'd be terrific. I wasn't so sure, but Bill convinced me after a couple of lunches. And 2007, I threw my hat in the ring when CMU was doing a search.

• 14:09Speaker 03

  In the spring, they selected me and I became treasurer and chief investment officer at my alma mater and Bill was the chair of my committee. So we worked really closely together and worked well.

• 14:20Speaker 04

  What'd you find in your time at CMU?

• 14:23Speaker 03

  It was a great opportunity because they wanted to move the program from consultant centric to staff centric. So we were relying on Cambridge. We moved away from them. I hired Chuck Kennedy, who is now the current CIO at CMU as my number two, and we built out the team and Bill was supportive all along the way, especially instrumental as we got through the global financial crisis, of course. And then in 10, he and I sat down at our same table at our same place and had another momentous lunch. In that one, he turned to me and said, okay, Ed, I've been secretly interviewing you now for about 10 years and I've decided you're the guy. And I said, what are you talking about? And he said, well, I've been building up this trust

• 15:07Speaker 03

  and has designed to fund the Dietrich Foundation upon my passing. And I'd like you to come and join me and work with me and be my designated successor. So that once I do pass, you'll run the foundation and run it until you're 70. That was the offer he made me in 2010. I kind of demurred because I was very happy where I was and said, hey, can we have this conversation again down the road? But I think he knew he had cancer at that point. A sense of urgency to get me on board. And I joined him. He died from complications of that in October of 2011.

• 15:42Speaker 04

  I'd love to hear a little more about Bill, leading into what this foundation has become.

• 15:47Speaker 03

  Well, he was a remarkable man. The term Renaissance man is used probably too often, but he was a historian, an industrialist, a philanthropist. I think, character wise, he always struck me as having a high sense of purpose. He has a sense of urgency, as though he was really battling to get as much done in any given day as he possibly could. There was that sort of ethic around him. He was a great storyteller, in part because, as I learned later, he'd read nearly 4,000 books in his life, which is a remarkable figure. That's 50, 60 a year for a long time. He was one of the great conversationalists you'll ever encounter. He wasn't in your face about what he knew, but he would weave in anecdotes relative to

• 16:32Speaker 03

  history or something, usually amusing nature, and he was just a wonderful companion and a fellow from whom I always learned a great deal. On top of that, in his 40s, when he was running his company, he went back and got his masters and PhD in political science. So he was a remarkable fellow, but I'll give you a little bit of his history and how he led up to his charitable vision.

• 16:55Speaker 04

  Sure.

• 16:55Speaker 03

  Bill was born in Pittsburgh in 1938. His parents moved with Bill when he was young to a lovely little community called Conneaut Lake, about 100 miles due north of Pittsburgh. There, he was reportedly a precocious child, read again incessantly, really gravitated toward the Boy Scouts and became an Eagle Scout. In fact, later in life was awarded the Distinguished Eagle Scout Award, which is no small thing. But he told me the story when he was in high school researching a paper to write using the Encyclopedia Britannica, which is probably something some of your young listeners have

• 17:34Speaker 03

  no idea what it is, but it's a set of volumes of hardcover books in which he would do research. He said he was 16, researching something under the letter P, and he came across Princeton University in the encyclopedia. He said, Ed, I read it. It said Princeton has produced more Rhodes Scholars to Oxford than any other US university. He thereafter marched into the kitchen and told his parents, Bill Dietrich is going to Princeton University. He didn't know where it was, but he was going to Princeton University. And he did. He got into Princeton. That was a big moment for him.

• 18:11Speaker 04

  What was his business that led to the foundation at his passing?

• 18:15Speaker 03

  Well, when he came out of Princeton, his father was a serial entrepreneur and had most recently started a company called Dietrich Industries, not far from Pittsburgh. And as Bill described, it was a horrible business model. His father had started this thing as a lumber and steel distribution center, trying to buy scrap steel cheap from the mills in Pittsburgh and then punch them into valuable, small pieces. It was horrible. But Bill was trying to keep it afloat. Eventually took over in the 1970s. Bill really landed on a product that he bet the farm on, which was non-load-bearing steel studs. So really, light metal, roll form steel that would hold drywall up.

• 19:00Speaker 03

  And Dietrich studs became wildly popular, and that business just compounded. By the mid 90s, it had grown to over 2,000 employees and production in 19 states and 400 or 500 million a year in revenue. So he really had a success on his hands.

• 19:18Speaker 04

  What led to him selling the business?

• 19:21Speaker 03

  He was greatly influenced in all of those books. They're all history, biographies of great men and women, political science. And Andrew Carnegie was a focal point of his study. Carnegie wrote an essay in 1899, I think, called "The Gospel of Wealth." Either in that or in a subsequent piece, Carnegie wrote something like, "It is more difficult to give away wealth intelligently than to make it in the first place." And now, let's remember that when Carnegie wrote that insider trading was legal, okay? Maybe that meant a little different thing back then. But it resonated with Bill. Bill sat there saying, "I'm gonna have a lot of money when I sell my company. What am I gonna do with it?

• 20:04Speaker 03

  How am I gonna handle that wealth wisely and responsibly?" So before he sold the company, he put all the stock of Dietrich Industries into a trust. So he had made the commitment there that the proceeds would go into the trust designed to fund the foundation upon his death. And that's what he did. So he started with 170 million in the trust in 1997.

• 20:27Speaker 04

  And what was that vision that he had for how to manage that money intelligently?

• 20:33Speaker 03

  First of all, he wanted very much to give back to the community from which much of it came and where he grew up, and he loved Western Pennsylvania. So he started to have designs around who was going to receive most of the funding. But then, having served on 12 different boards in Pittsburgh and seven different investment committees and chaired a few of them, he was really driven by the opportunity he saw to improve on the model, so to speak, improve on how long-term capital might be managed in order to optimize the advantages you have of an impermeability pool of capital. So that was his early thinking.

• 21:14Speaker 03

  How do I build a better mousetrap around managing impermeability capital? And that was really, I'd say, in the 90s, his principal focus.

• 21:23Speaker 04

  What were the problems that he saw with the model that he wanted to improve upon?

• 21:29Speaker 03

  Well, first, everything he did. He dove in with both feet and read everything he could and studied other foundations. And I think he really wanted to avoid, at the high level, some of the other notable foundations that have become politicized. As he would say, they got hijacked by rogue trustees generations later or decades later. And really, the founder's probably spinning in his grave. So Bill wanted to avoid that. One of the things he wanted to do, and this is a structure issue, was to predetermine the beneficiaries. So he would have some control from the grave. That was one piece of it. But certainly, back to the investing side, he really wanted to tackle that thorny issue

• 22:12Speaker 03

  of how you maximize the advantages of impermeability pool capital? And how do you address the governance challenges of doing that? Because from his perspective and his experience, the greatest opportunity for an impermeability pool was to be as illiquid as possible. He wanted to push the envelope of asset allocation. That was not something he thought about without study. He looked at academic and financial theory. Many of your listeners are familiar with mean variance optimization approach to portfolio construction. That is, you're trying to find an efficient frontier of an asset allocation where you

• 22:54Speaker 03

  can maximize return for a given level of risk, or said differently, minimize risk for a given level of return. And anytime you use the mean variance optimization model unconstrained, it pushes you entirely into privates because that's the historical return profile. And Bill's like, that's for me. I want to see if I can do this. And when he was first telling me about this, I told him, you realize we're going to be a Harvard case study one way or the other. I still don't know what the last page is going to say yet, so we're still in process. But he wanted to push that. To him, that made a great deal of sense, but you couldn't do that unless you have the governance support around it.

• 23:37Speaker 04

  So how did he build the structure of the governance to allow you to invest in a different way?

• 23:43Speaker 03

  He first decided that everything had to be as well documented as possible. If you had a shot at persistence and sustainability of this, it had to be well articulated and rooted in thoughtfulness. And as he always said, clear writing reflects clear thinking. So when he crafted his charitable trust document, alongside of it, he wrote a 16-page statement of philosophy, which was his explanation of why he wanted to pursue a high-growth strategy for the benefit of the supported organizations and how he wanted to go about doing that.

• 24:23Speaker 03

  And right after we formed the foundation, I expanded on that document and wrote a further overview of investment philosophy, which is even more detailed about what we're doing and why.

• 24:35Speaker 04

  So beyond writing down that structure, how did he improve the governance? Because lots of people write their investment policy statements.

• 24:45Speaker 03

  Yeah, he put in the controlling trust document the fact that he wanted the trustees to delegate investment authority to the CIO and CEO of the foundation. That's unusual. We do not have an investment committee. I remember back when Bill was recruiting me from CMU, I asked him what you would have asked Ted. I said, hey, what's the governance structure going to look like at the Dietrich Foundation? And he said, Ed, I served on many investment committees. Investment committees should always be an odd number, and three is too big. I was like, God, I love your style. I said, you're going to put that right in, it's in the document. That is one thing that Bill thought was important to separate, to the extent possible, the oversight and governance from the actual investment management.

• 25:28Speaker 03

  Because I serve on many investment committees today. You have great experience, of course, and you know that career risk aversion is a very powerful and probably not something a lot of people admit to. But career risk aversion drives a lot of behavior. And Bill felt to the extent you could put some distance between the asset allocator and the oversight or governance group, you had a shot at allowing the CIO to be more bold. Because Bill always said, boldness is necessary for outperformance. Undoubtedly, that is true. You need to be able to have the flexibility and the latitude to build something that doesn't look like everyone else.

• 26:09Speaker 04

  There are a fair number of investment offices that do have delegated authority. What's different about how Dietrich is set up that's allowed you to pursue this quite different investment strategy relative to the other people who do have delegated authority?

• 26:25Speaker 03

  That's a good question. I think it's just a question of degree. If you read through our documents, we very clearly lay out, we believe over long periods of time, illiquid's going to outperform liquid, small's going to outperform large, equities are going to outperform fixed income. We're really pushing the bounds of that. For instance, we have not had a direct exposure to the USSP 500 or any US index since 1997. Okay, this is not a portfolio that looks like anyone else's. So we explain what we're doing and why, and I think that's a big part of it. But it requires constant reinforcement. Some things are trivial, some are more serious.

• 27:10Speaker 03

  There's a trivial thing that we do. Whenever we present performance information, I always start with the first column being the 20-year return. And then the 15, and then the 10, and then the 5, and then the 3, and then the 1. And I have a big line across the top where the first column, it says, "Less Noise." And there's a big red arrow going across in the far right, it says, "More Noise." We always, of course, address the short-term performance, but we just keep reinforcing the idea. Listen, you can't possibly target a performance over a long period that outperforms everyone else unless you're willing to embrace an uncomfortably idiosyncratic portfolio.

• 27:53Speaker 03

  And part of that has to be a willingness to look wrong some periods of time, because you look totally different during those periods. So it's something you just reinforce, reinforce. I can't say it's easy. It's hard, especially when there's turnover in trustees. But we try to keep it consistent. We try to keep our thoughts well-articulated in paper. This requires constant oversight.

• 28:19Speaker 04

  How did Bill think about the assessment of you as the CEO and CIO with a group of trustees? Where he wants you to have delegated authority, but there are, in theory, still some guardrails that the trustees have to monitor you within.

• 28:37Speaker 03

  No question. And it's very explicit in the Declaration of Trust and Bill's Statement of Philosophy. The principal responsibility of the trustees is to evaluate the CIO in present. But it said it should be focused on exceptional, long-term performance. So in the end of the day, Bill said, listen, you got to give the CIO enough rope, but you might have to hang the guy or gal if they're not doing their job. So the expectation is very, very high. Fortunately, we have been performing as far as we can tell by all reported surveys, our returns are number one for the trailing 10, 15, and 20 years. But now we're being tested because this short period here with the S and P, doing what it has done over the last 30 odd months,

• 29:22Speaker 03

  and the private assets resetting a little bit. This is testing the conviction. This is where the fortitude risk comes out and is front and center.

• 29:31Speaker 04

  So let's dive into the investment program. So you mentioned a love of illiquids. What did Bill set as the goal for the investing of the foundation?

• 29:42Speaker 03

  The goal is exceptional, outstanding, long-term performance. And that's ill-defined, but in my conversations with Bill, we always said, well, just take some broad equity global index, and we ought to be outperforming that by 200 or 300 basis points net of everything over long periods of time. And we've done that. In terms of the actual construction of the portfolio, Bill left that largely to the CIO, except to note in his documents that he felt that the private equity universe would continue to offer compelling risk-adjusted returns. That's a point about which I agreed with him totally. I think there's logic to that. It's interesting to me, in fact, that a lot of investors,

• 30:25Speaker 03

  when they talk about private versus public investing, talk about private equity should generate a premium return over public equities. I changed the verbiage a little bit on that. When I think about it and I talk about it to people, I think private equity is true equity return, and public equity is a discounted or a lower expected return. The reason for that is simple, I think. There's no free lunch in this world. I think we can all agree on that. And you pay something for the luxury of, and of public security. Only a fractional share of a publicly traded company. And if you change your mind, you press a button and T plus two, three, you have the cash on the barrel

• 31:08Speaker 03

  head. That's incredible luxury. You stop and think about that. Would you pay for that is a lower expected return? So over long periods of time, we should continue to enjoy higher returns from the private side. Bill summed it up by saying, Ed, liquidity isn't free. And therefore you should be selling your liquidity to the market as much as you can. But there are limits to that. As we sit here today, we're 90% illiquid, which is pretty much the upper threshold of my comfort. We'd like to be about 80 or 85, but it's been a first class problem. We've gotten there through performance.

• 31:42Speaker 04

  So 90% illiquid is a far extreme of what you hear about in a pool of capital like that. How did you come up with that number compared to a 50% number? That is more common in some of the more aggressive endowment and foundation portfolios.

• 31:59Speaker 03

  Well, I was just trying to capture that additional return. And we didn't set out saying, hey, we should target 90. When I took over the portfolio from Bill in 2010, I think we were probably 50% illiquid. But the returns have been robust. We did not have in the last 10 years, any US public equity exposure, except public positions in our private book. So that was entirety of our US beta. So the private actually continued to outperform the public in our book. So that stretched out. So we're taking the last five or seven years. We've been more careful and deliberate in terms of our fresh commitments to liquid strategies, trying to get that number down.

• 32:41Speaker 04

  What are some of the structural aspects of managing liquidity, commitment size that you've figured out that have allowed you to get to that upper bound?

• 32:51Speaker 03

  The portfolio is very mature at this point. Your listeners might be wondering, how's this guy sleep at night at 90% illiquid? But if you look at the dollar weighted average age of all of the partnerships we're in, it's about 7.1 years old. So we are as a portfolio out of the J curve. So I actually looked at this number just the other day. If you look at our last 10 years. We've gotten distributions of 1.4 billion dollars on capital calls of 1 billion. So that's 400 million. That's pretty much equal to our total distributions to our supported organizations, by the way, because this May, we will make our next annual distribution. That'll take us to 400 million.

• 33:34Speaker 03

  So the portfolios mature, even this last year in 2024, to give you a data point, when the marketplace was facing a lot of strain around the lack of liquidity, we had our second highest year in distributions and the second highest net distribution minus capital calls. And again, that was due to having a very diverse and a very mature book. So that's number one. The other way we're able to manage it today is we do have a line of credit, which is we have nothing drawn on it today, but it's equal to about 12% of our total NAV. So if we need to pull on that, it's available to us on a timing issue.

• 34:15Speaker 03

  And the other thing that allows us to operate this very high level, which is all by design, is that we are not a private foundation, but structured as a 509A supporting organization under the code. As such, we don't have to comply with that 5% payout otherwise required, and we can pay out 3% of our NAV each year, which is the recommended amount in Bill's trust document and which our trustees approve each year. So that 3% spend is obviously more modest than most organizations. That's helpful as well.

• 34:52Speaker 04

  Before we dive into this private investment program, what do you do with the other 10% of the portfolio?

• 34:58Speaker 03

  Well, you'd think it would be in cash. Some of it is, but we have a fair amount of exposure in China, so we have a bit of a hedge play there in the other asset pool. But we have some long-only, couple of hedge funds, and we actually have a component in emerging market slash frontier market equities, but nothing in the S and P 500. So it's pedal to the metal.

• 35:22Speaker 04

  So let's dive into this private program. Within the concept of wanting to invest in less liquid assets to be out on the efficient frontier, where does that 90% fall in, say, venture, private equity and other areas of the private markets?

• 35:36Speaker 03

  So if we take the 90 as a whole pie, 100%, probably 55% of that pie is venture. And then the other is split evenly roughly between growth equity funds and buyout funds. We don't touch any real estate. We do very little in the energy space. It's principally traditional venture across a number of sectors and then more traditional growth and buyouts globally.

• 36:02Speaker 04

  So within that structure, how have you gone about figuring out how you want to deploy the capital?

• 36:09Speaker 03

  Stepping back, we really take a thematic approach to investing generally. From our perspective, as Bill always said, the market timers Hall of Fame is empty. Okay, so let's pick some themes that we believe are going to play out over the next decade or so and try to find the very best, most talented managers to exploit those themes in the right parts of the world. So the two major themes that sound of course through our portfolio are innovation in all of its forms and second is the broad opportunity set in the emerging and frontier markets. Innovation is obviously best expressed through venture capital and that's the belief that even though we've had incredible innovation in the last couple of decades, we still think

• 36:54Speaker 03

  we're in this super cycle of very exciting stuff across from deep tech, obviously AI consumes so much of all of our conversations today, all the way through healthcare to consumer and we express that mainly through venture capital. And that venture piece is probably split evenly roughly between the US and non-US. Most of the non-US in venture is in emerging Asia and Latin America, a little bit in Europe. Bill always said Europe is the largest open air museum in the history of man. So he's

• 37:29Speaker 03

  I'd rather live in the US, vacation in Europe and invest in Asia. That was another line of it. So we try to find opportunities that we think fit in that innovation theme. It could be across the globe and we spend a lot of time traveling, trying to build ideas, connect the dots. As one person asked about this concept of connecting the dots, I said, well, first you have to find the dots. So part of this is traveling and getting out and visiting people on the ground. On the buy outside, we've been mostly biased toward the US. Most recently, I'd say the last five or six years, we've been really leaning in on the special situation subsector within buyouts because we think there's going to be some challenges ahead

• 38:12Speaker 03

  and some shoes are going to fall. So we want to have some dry powder prepared for that. I don't want to make it sound like we're dogmatic, however, if we run across opportunities that we think are extraordinary and fit. I always tell my team, the legendary football coach in Pittsburgh, Chuck Knoll, always said when it came time for drafts, he said, I always draft the best available athlete regardless of position needs. I want the best available athlete and we take that approach. So when we travel the world, we meet with 300 managers plus a year. We have a lot of friends who are part of our network, which help us filter before things go in the funnel. We run across people who are sometimes extraordinary in unexpected places and we'll dig in there.

• 38:57Speaker 04

  That other large theme of emerging markets certainly was a lot more popular, say 10 years ago than it is today. How have you thought about that allocation going forward and the potential revision of that thesis as many of those markets have not performed as well as the US?

• 39:14Speaker 03

  That's an important question and you're right. If you step back and look at the broad arc of globalization, you can really make the argument that when the Berlin Wall came down in 89, if you made any bets that were long on globalization, long on geopolitical stability.

• 39:34Speaker 03

  You were rewarded until a couple of years ago. So now it's especially challenging, we think, because as allocators, you've had this muscle that hasn't been exercised in a long time. And that is, how do you underwrite the effects of geopolitics? How do you underwrite the effects of this movement from globalization to what you might call modern mercantilism with less cooperation and more competition? So we spent a lot of time thinking about this very issue. It's not easy because there can be screaming opportunities. And China might be a perfect example today where intellectually, a lot of CIOs know these valuations are getting unjustifiably cheap.

• 40:19Speaker 03

  But back to career risk, they don't want to walk in in front of their investment committee who have been reading these horrific headlines and inundated with bad news about the state of affairs, and they just don't want to stick their neck out. And they don't want to be told, I told you so. So there's this tough dynamic, but an important and new necessary underwriting around geopolitics. It used to be just a left tail analysis, but now it applies to innovation as well. You have to think about geopolitics, how that affects where innovation is developed and how it's sold. And on top of that, supply chains to support it, even capital flows. It's a complicated environment right now. We're in the middle of re-underwriting that theme.

• 41:04Ted Seides?

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• 41:41Speaker 02

  This is not an offer to sell or investment advice. Investing involves risk, including the loss of capital.

• 41:47Ted Seides?

  And now, back to the show.

• 41:51Speaker 04

  When you put together innovation, emerging markets, take out Europe and Asia, it leads to China. I'd love to hear more about your full history investing in China, how that's evolved to where you are today.

• 42:05Speaker 03

  I don't want to leave that European remark, by the way. I want to make sure I tell my European friends, "We love you. Okay, we're spending more time in Europe." I'm not as dogmatic as Bill was. So Europe is actually growing in focus for us. Didn't want to let that come and hang out. But China was an amazing insight that Bill had. And I'll tell you the quick story on that. During these many lunches that he and I had, I think it was 2006, he had just returned from China, and his eyes were like saucers. He was very excited. And he leaned across the table and said, "Ed, now's the time." And I said, "For what?" He said, "I'm going into China hard on privates."

• 42:47Speaker 03

  I said, "Really?" I said, "That's the dumbest thing I've ever heard, Bill." I said, "The only way to make money doing that is invest, lose all your money, and then write a book about it." And he said, "No, no, no, you're wrong, Griffin Stedt. Let me explain." And he went through his thinking. In 2006, he began to build a little sub-portfolio in China. He didn't believe US managers could parachute in. He only wanted to support local teams who had the Guangxi to get the real deal flow and understand the market. So he approached it in a thoughtful way. 2006, he said, "I'm going to invest a little bit with about 10 different GPs. No real track records here, so I'm going to learn as I go, understand these people, understand how they

• 43:31Speaker 03

  perform, and then over time, go deeper with a high conviction subset," which was, to me, a very logical approach. So he began to go to China three, four, or five times a year, week on end. And by the time I joined him in 2010, the China allocation was probably about 6% or 7% or 8% then. And I began to travel extensively too. I think my wife keeps track. I think I've made 50 trips to Asia since 2007. And when I took over his Dietrich book in 2010, our China portfolio was mostly growth equity, a little bit on the venture side. When Bill and I sat down, I told him, hey, we should really go all in on venture

• 44:15Speaker 03

  because there's a lot of reasons why that's going to be, I think, more compelling. And he agreed and we did.

• 44:21Speaker 04

  Where did that 6% or 7% grow to?

• 44:24Speaker 03

  We timed it pretty well because we began to invest during a great run up in the Chinese private markets. We peaked at a total portfolio exposure in China of 38% in late 2020, which is a big number. Today, as we sit here, we're about 19% or 20%. I was just preparing some data on that. And of course, some of that was the fact that the last couple of years, we've had a reduction in the unrealized value in some of these holdings. But we also got a lot of liquidity. In fact, our portfolio in China, over the last 10 years, produced 160 million of excess liquidity.

• 45:06Speaker 03

  160 million distributions over capital calls over the last decade in our China book. That's great. And that shows the pipes work. So many of my friends in the business say, the pipes really work to get the money back. Yes, we get the money back. So a big chunk of that reduction of 38%, 39% exposure down to 20-ish, 10% of that, half of that reduction was really distributions. And the rest was probably the rest of our portfolio outperforming the venture over the last five years.

• 45:34Speaker 04

  How have you thought about continuing commitments going forward with that exposure from where we are today?

• 45:41Speaker 03

  China's hard to underwrite in the best of circumstances. Bill always said, you gotta get on a plane and go to do direct due diligence, especially in a place like China. He used to sum it up by saying, Ed, you can't shoot moose from the lodge. You gotta get mud on your boots. So we would travel quite a bit from 2008, '09, all the way until '22. We felt like we had a very good sense of the risk parameters around investing in China. Our confidence was really in the fact that having studied the market and studied their political tendencies, whenever China faced a really hard period, they tend to pivot back

• 46:23Speaker 03

  toward pragmatism. They tended to pivot toward business-led decision-making and stimulus and policy reform and whatever it took to get the GDP growth back. Those GDP numbers are all wrong, by the way, but they're directionally correct. But they would pivot always toward pragmatism away from strong ideology. Twenty-two is very disappointing. We saw Xi and the other Beijing policymakers really a disappointing tone deafness to what investors around the world were looking for in terms of guidance and predictability. They did some things

• 47:03Speaker 03

  with respect to their every-five-year congress that we felt was reason for some alarm. So we put pencils down. We haven't stopped looking. We haven't stopped investing entirely in China, but our allocation pacing has changed dramatically. So I think there are many more unknowns today than there are knowns. And it's not just on the China side. It's how the US administration is going to handle capital flows and so forth. So I think it's a time for, don't just do something, sit there. That's probably the best advice right now with respect to China. But at some point, the valuations could get so compelling that we start to lean in again. And then I think the intrepid may be rewarded.

• 47:46Speaker 04

  At the onset, you talked about lesson from your father and also, Bill, about the importance of people in this business. How have you gone about sourcing and selecting managers to fill this portfolio?

• 48:00Speaker 03

  So we've taken a couple of approaches first. We travel quite a bit. I'm probably on the road 80, 100 days a year. Rest of my team have younger families, so I don't ask them to do that much. So traveling is important and we try to meet with smart people on the ground, allocators, investors, and we try to build our own views. We also trade notes with like-minded investors. So we have a network that we're proud of, a bunch of other endowments and foundations who kind of approach investing as we do. We actually, Bill started a great idea 21 years ago, a golf outing just outside of Pittsburgh at Laurel Valley Golf Club called the Dietrich Private Equity Invitational.

• 48:43Speaker 03

  It is an oversubscribed event, so we have a hard cap on it that we're actually keeping the hard cap, Ted. And we invite about 64 either CIOs or heads of private equity from endowments and foundations and fund to funds. That's a great amount of fun. It's a couple of days, but there's also a good amount of gossip that goes on about GPs and who's in the market and what spicy off-balance-sheet information's out there about a GP. So that's part of our network as well. But really, it's at this point interviewing maybe 300 GPs a year to get to only a couple we might add in as new relationship.

• 49:23Speaker 04

  In what's been for a while, a very competitive market to access the best GPs, particularly in venture, how did Bill and then you go about trying to get allocations when you're not the biggest player in town and so many people want access to these great GPs?

• 49:41Speaker 03

  Bill had a competitive advantage because he was one of the all-time great salespeople. Personality-wise, he had this remarkable charm. He was a great storyteller. People just really enjoyed speaking with him. And when he found a GP that he wanted to get in, early on in Dietrich portfolio, he would approach you with every ounce of energy, finding other LPs that might be able to make a warm introduction. And I remember one time he said, Ed, when you get down to the wire, you gotta fight like you're the third monkey going up the ramp into Noah's Ark.

• 50:23Speaker 03

  You're gonna do whatever it takes to get in. And he just had this ability to, once he got in, in front of the GP, he would say, hey, this isn't about Bill Dietrich making more money. I'm not buying another yacht. This is about charitable good works. And can you find a million for us? Maybe he would squeeze his way in for a million or two. And he did that with Excel and it ultimately became a significant relationship for us, for instance. So he had this incredible charm and personal appeal that was a big advantage. I think now, part of our appeal is, we've been at this a long time. Our team is very stable. We're totally committed to venture and other private asset classes. We have a great story to tell. Bill Dietrich was a remarkable philanthropist,

• 51:08Speaker 03

  and I think people really enjoy his drive to help Western Pennsylvania. So that's an appealing feature. And we try to be good partners. We bring a lot of experience to the table. I think GPs who we're with feel comfortable reaching out to us and having us as a sounding board when they run into either portfolio difficulties or personnel issues. So we try to be available and not a pest, but an available and helpful LP.

• 51:36Speaker 04

  When you're working through a new GP, so not a GP that people want access to, how do you go about doing your work to underwrite a new manager?

• 51:45Speaker 03

  It starts entirely with integrity. It has to be a situation where you're 100% comfortable and happy to be partnering with the people involved. If there's any issues around that, that's a nonstarter, pencil it down, move on. Secondly, I think it's fair to say we would look for a level of self-awareness or authenticity in the GP. And that's hard to tease out sometimes. So as a result, when we're interviewing with a GP for the first time, we try to get them off the pitch book as soon as possible. We try to ask questions that can give us a glimpse into whether there's really hubris at work here, or whether there is some level of self-awareness. Because I think a little bit of fear is a

• 52:28Speaker 03

  good thing. If a GP doesn't have any fear about execution, I have a lot of fear. So there ought to be an edge around that. And there's some questions we ask to try to tease that out. We also get into portfolio construction. What are their investment sensibilities around that? Are they getting the right ownership in a venture case that makes sense? Are they managing their reserves properly? That's a big part of it. And then repeatability. This business is hard to discern skill from luck. I think if there's any silver lining to the last handful of years, it's probably this. We can go back now and look at the behavior of GPs in 1920 and say, how did you do?

• 53:09Speaker 03

  How were you thinking about valuations? How were you thinking about portfolio management? When everything was up and to the right, it's hard. But now you have at least some data. That's not insignificant. Even on the DPI front, today, there's a lot of pressure, as we know, for the GPs to improve that DPI number so they can raise Fund X plus one. And we've often said that the GPs who are selling good assets, probably at a low valuation just to get the DPI up, that's a red flag. And everyone knows this. So we really try to drill down on how they're thinking about exits and whether that is aligned with our long-term expectations around returns.

• 53:52Speaker 04

  You mentioned certain questions that allow you to tease out aspects. What are some of your favorite questions that get into that aspect of integrity?

• 54:02Speaker 03

  Well, this is like losing all my best stuff now if I go on air and tell people what we like to ask. But I'll share one. On this issue of self-awareness, say a manager's coming in and raising Fund III for $300 million target. At some point in the conversation, we'll ask a question like, assume the following. Assume you raise the 300-year targeting for this fund and assume you deploy it in the fashion you've just articulated. And assume further, there's no widespread economic calamity in the next five or seven years. And assume we sit down, have a cup of coffee in five or seven years, and we look back at this Fund III and assume we're all disappointed on a relative and absolute basis.

• 54:47Speaker 03

  What will have been the most likely cause? Now, this is not an overly complicated question, but it's often one they haven't thought about. When you take the economic externality risk off the table, it forces them to step back and look at where the real soft spots are in their execution sourcing exit strategy. Sometimes, if you can believe it, Ted, the GPs refuse to accept the premise of the question. And they will say, well, we've never failed. We've never had an underperforming fund. I refuse to accept the premise. And that's usually a pretty big flack. But sometimes they say, you know what? We've spent a lot of time thinking about this. And if we screw this up, we have a great track record.

• 55:31Speaker 03

  But if we blow this going forward, it's probably going to be because of X, Y, or Z. That's an interesting response. And usually we then double click and say, well, what are you doing then to mitigate the risk of X or Y or Z? And how do you think about that? And how do you maintain awareness around those risks? Do you have it on the corner of your whiteboard in your office? And occasionally you say, hey, are we doing X, Y, or Z? Then it becomes a self-denying prophecy. So it gives you a little glimpse and decide of whether they occasionally step back, perhaps off-site, and really do self-assessment. Hey, we have to do this better? Or we have to really avoid these mistakes that we know are within our control?

• 56:10Speaker 04

  You touched a little bit on the aspect of portfolio construction and mentioned the importance of reserves. What do you like to see? You know, say, a venture manager and how they go about thinking about portfolio construction?

• 56:23Speaker 03

  I don't want to name names, but there's a very large, prominent, leading VC that is now raising $2, $3, $4 billion funds. What we've liked about their philosophy and approach, which has kept us with this GP as they've gotten larger, is how they handle portfolio construction. This particular manager is willing to stick the neck out. When they see a company they've backed in the seed and Series A, they will lean in hard. On the subsequent rounds, to the point where at the end of portfolio

• 57:03Speaker 03

  construction, they might have forty, fifty percent of the fund in three or four companies. That to us is exactly how a two or three or four billion dollar fund needs to be structured in order to hit a four or five X net return. Now, if you're talking about much smaller seed managers, that is really strategy dependent to some degree. What gives us pause, however, is when you have a manager maybe trying to jump from seed to series A. They don't have the reputational firepower to really lead those rounds. Or if they say, we only want to lead the rounds, we really probe as to whether that's adverse selection.

• 57:46Speaker 03

  Maybe reputationally, you only have the opportunity to lead in deals that the big dogs don't want. It's a very complex mosaic and we look at the specific circumstances of every case to try to figure out, hey, should this be a strategy we should be comfortable with, where they write one check, no reserves, we want to get as large a piece as we can? Or do we see a skill set where they can say, hey, thirty, forty percent is going to be reserved, we know how to lean in for the breakout winners?

• 58:16Speaker 04

  How do you apply the same thinking to your own portfolio construction? About sizing of commitments and how you build it up across the strategies?

• 58:26Speaker 03

  Well, I think there's always attempted size based on conviction. I was talking to a friend who runs a prominent fund of funds and he said, yeah, we did all the math on this and really at the end of the day, it should be equal weighting every, every. I said, yeah, that's no fun. You get this enthusiasm for a manager, hey, we want to lean in. But it's good discipline, I think, to be biased toward equal weighting because there's a tendency to say, okay, well, I'm not quite sure about this one. Let's do a half of a bite on this one and see what happens. I think that's a very dangerous slippery slope to get on. We have a saying that there's only so much beachfront property in the D-Turk portfolio. So it's either hell yes or no.

• 59:08Speaker 03

  We've been migrating toward that and I think that's the healthier approach to take, but it's tough because there's some stuff you really, really like, but it's not a hell yes. So we try to keep warm and keep an eye on.

• 59:20Speaker 04

  Have you thought about co-investments?

• 59:24Speaker 03

  I always remember the Groucho Marx line of, I would never want to be a member of a club that would have me. That's the ultimate adverse selection joke. We always think about that. If we get a call from one of our GPs, we always ask, we know we're charming, but why are they really calling us? So the first question is always, is this in fact, an adverse selection situation? If not, we'll look hard at it. We have a couple of GPs where we have such a close relationship, we really feel like they are reaching out and giving us some preferred looks at some deals they're excited about, where they've maxed out on their capacity. And so we have done some of those. So I think we did only a few through

• 1:00:03Speaker 03

  2014 through 2018. We've done more as we've really tried to build closer relationships with some GPs. So I think we've done about 32 in the total portfolio. And it only amounts on a cost basis, maybe about 5%, 6% of the total NAV. So we're going in baby steps.

• 1:00:26Speaker 04

  What's your take on the concept of co-investments as a way of defraying fees, which isn't something you've mentioned?

• 1:00:33Speaker 03

  Well, we certainly asked for that. And that's a part of the appeal. I think I told you once about the story of a very, very large pension fund that I was on a panel with one time. And co-investment came up and people were talking about performance. This very large, not to be named pension fund representative said, well, we've done a thorough analysis and we've outperformed in our co-investment program, all of the primary GP fund returns from which the co-investments came. Kind of looked at them and said, well, that's interesting. Can I ask my panelist a question? And I said, well, that's pretty remarkable. I mean, if you normalize for, he was saying normalize for fees, the co-investments

• 1:01:17Speaker 03

  are outperforming the underlying fund performance. I said, well, that tells me that you're doing something that maybe your GP should do. You're filtering somehow, some way better than your GPs are, aren't you? And took offense to that question. But in truth, you think about the math and a typical bio fund might have 12 positions. If you look at all the data, maybe in most cases, only three of those 12 outperform the total fund return. If that GP comes to you and says, Ted, I got a co-investment for you. What are the chances you're going to get one of those three out of the 12? Otherwise, you should give an incremental dollar to the fund and you have a total portfolio. Now, you normalize for fees, maybe you get a little buffer in there.

• 1:02:00Speaker 03

  But the venture is even worse because of the power law and there's only a couple of companies that outperform the whole fund. So I'm skeptical of those who have large co-investment programs who claim they're outperforming the underlying fund managers because it's hard. And if they're doing a better job than their GPs, they should bring their GPs and give them some instruction.

• 1:02:20Speaker 04

  What are your thoughts on continuation vehicles?

• 1:02:23Speaker 03

  I think it's a good thing that there's more creativity in creating liquidity today, no question. I think we always look at each individual circumstance independently. We always start by asking, why isn't this company being sold right now? What's preventing this company from being sold in the normal operations of the fund? And is there a reason to hold it? And is this GP the right GP to be holding this asset at this point? And you have to get into the specifics of the alignment and the incentives around it. The old joke, if you meet one foundation, you've met one foundation. Every organization has different features to it. Every SPV seems to have nuance to it.

• 1:03:07Speaker 03

  And that's hard work on the LPs and that's why LPs are, I think, stressed about it. Because suddenly you have 10 of these a year, you have to underwrite. But we're not immediately adverse to it. But we would always like to see the option of rolling your equity exposure without much prejudice.

• 1:03:22Speaker 04

  I'd love to ask you a bit about some of the challenges in continuing to outperform with the model that you have at Dietrich. The first that comes to mind is just the attractiveness of these private assets relative to how they were, say, when you came in the seat 18 years ago. How do you think about continuing to pursue the strategy in a market where the private assets are fairly more expensive and more competitive than they were?

• 1:03:50Speaker 03

  And the fees in carry structure is is premium in some cases. We have a European GP. We actually are underwriting right now. We really like the firm, but the way the waterfall is calculated and the fact that the GP is actually charging some fees to the portfolio companies, they need to generate a 5.6x gross to hit a 3x net for the LPs. That's a nonstarter. So yeah, there's more competition. There's more premium term funds out there and that's putting a lot of pressure on the thesis that private equity will have return over time. We just think you just have to be slow and patient. We have the benefit of being small. We're only 1.5 billion.

• 1:04:34Speaker 03

  We don't have to write 50, 75 million dollar checks. And I think if you swim around and look at the opportunities in smaller fund situations, you're still going to find some inefficiencies. You're still going to find some returns that are impressive. The evidence of persistence of high quality funds and that premium, they're both under pressure. So this is not an easy game, but we think it's still worth playing.

• 1:05:02Speaker 04

  It sounds like you haven't been challenged on the liquidity side in these last couple of years. Maybe it was a little different in 08, but you probably hadn't built up to as much privates as you have today. How do you think about managing through where you really don't control the assets and you have so much in illiquidity?

• 1:05:21Speaker 03

  I should have mentioned in the global financial crisis, Bill, before I joined him, I remember I joined in 2010, but I remember if you looked at his unfunded commitments as a percentage of his NAV, he was hard charging, as I said. He had probably 70, 75% unfunded relative to NAV. In a portfolio, there's only 50% liquid, by the way. So Bill, what are you doing? And he had a line of credit and he said, Ed, I'm going to the secondary market. It's time to throw some sandbags out of the hot air balloon to get over the mountains. He did it. He went out and went to the secondary market and got rid of maybe 40

• 1:06:06Speaker 03

  or 50 million of unfunded commitments and got paid. He took great pride in that and went back to the bankers, by the way, and had a lot of fun telling them, oh, you guys have this AAA paper, you can't push. And I was able to sell these secondary interests and illiquid assets. This is a deep market. And at the time, secondary market was probably in total 10 billion. I think last year was $160 billion global market for secondaries. So the secondaries continue to be deeper and deeper. Today, that unfunded as a percentage of NAV for us is about 19%. We don't have a lot of logs we're throwing on the fire right now. So we're being very careful and we're trying our best to keep our important

• 1:06:48Speaker 03

  relationships, but maybe adjusting the check size a little bit until we get the illiquidity down a little bit.

• 1:06:55Speaker 04

  You mentioned earlier that this last couple of years haven't been the best for the strategy on a relative basis. How do you continue to communicate with your trustees to make sure they have confidence in you? Sure, the 20-year numbers are good, but maybe 10 years from now, if this continues, it could be a tougher slog.

• 1:07:13Speaker 03

  Yeah. Well, we've tried to be as transparent and clear as possible that we think that this is just another shiny object in front of us, the S and P 500. And you know this, and most of your listeners probably do. The amount of concentration today in the S and P 500 is extraordinary. If you take the top decile relative to the remainder public securities in the US, it's at 3X. It's the highest ratio market cap in 100 years. So you have really seven stocks that are driving a lot of the S and P 500. What we've tried to do is just remind our trustees, we're playing a long game here. And I actually, in a recent presentation,

• 1:07:56Speaker 03

  went back and said, the energy stocks were the thing. Energy stocks, six of the top 10 market cap companies in the world in the 70s were energy stocks. And they were 24% of the S and P 500 versus 4% today. And everyone said, that's the new normal. Forget about bonds, this is energy. And then that collapsed. And then it was Japan. And the next decade, Japan's the new normal. The Nikkei exploded. And eight of the 10 Market cap companies in the world were Japanese companies and Japanese stocks were at that time 45% of the MSCI world and the US was 33%. The next decade, of course, the tech bubble or the NASDAQ was up 15x over 10 years. Oh, my gosh, that's the new normal.

• 1:08:41Speaker 03

  So you try to bring historical context around these periods of time where there's something shiny. Whereas if you look over long periods of time, we think our portfolio holds up pretty well through cycles. But the S and P is having its day. Now, the US stocks are what 65% of MSCI world? That's an enormous number. I'm not saying we're in a bubble, but I'm not saying we're not. I just think we have to keep our eye on the horizon and go back to first principles. And our first principles are, I think we're going to be rewarded if we maintain the fortitude.

• 1:09:16Speaker 04

  So as an additional challenge, one of your first principles is innovation. And for sure, the Mag 7 seemed to have captured a lot of the innovation economy. I have to imagine at some point in time, you scratched your head and said, hmm, what would Bill say about these stocks that are innovating and capturing such share of that? How have you wrestled with that portion of the growth of the Mag 7?

• 1:09:39Speaker 03

  Well, there's no question they're driving a lot of innovation. The question is at what price can you access that? As we sit here today, I can't tell you that it's a no brainer to put more money into those companies versus maybe the vertical winners that are going to emerge as a result of, say, AI becoming more of a utility. I think Nvidia is a play on many different themes and theses, but ultimately we're talking about, is the platform at issue? Is AI going to become a commodity layer? And will it become like AWS? People are just buying their share of time.

• 1:10:21Speaker 03

  And the more interesting plays from this point forward might be the verticals that sit atop. That's the question we're wrestling with, but I'm not ready to back the truck up and go into the Mag 7 right now at these valuations.

• 1:10:34Speaker 04

  So you still have some time left before you hit Bill's espoused 70 years old. So much of this model ends up being tied to you as the leader and Bill as the leader before. How have you thought about succession?

• 1:10:48Speaker 03

  Bill did throw out the 70 number. I'm 58 right now. 70 seems like a long way away. I think I'm going to think long and hard about that over the next five years and think about how much gas I get left in the tank because this isn't an easy enterprise, traveling around as much as we do and really preparing for that successor. And you're right, when Bill was in the final stages, he looked me square in the eye and said, hey, your biggest job is going to be finding your successor. And I don't take that lightly, but we also got to make sure we have the board prepared and the new trustees all singing off the same sheet of music about what we're trying to accomplish. And that way, the successor will have a fighting chance to keep this thing going.

• 1:11:30Speaker 04

  How have you worked through thinking about your successor?

• 1:11:34Speaker 03

  It goes back to first principles. Bill even put in that statement, a philosophy document, hey, I want to see a force of personality and work ethic that doesn't typically align with most foundations. He thought most foundations were sleepy. He wanted more of a Dietrich Industries sense of urgency because he always said, hey, the only reason why we succeeded is we were always three bad quarters away from bankruptcy. He always said, good lord, that gets you on your edge. I think that's necessary for a CIO in this position because you have a lot of responsibility and a lot of weight on the shoulders to maintain the boldness necessary to outperform over time and during tough periods, articulate the reasoning and rationale behind the approach

• 1:12:19Speaker 03

  you're taking. So yeah, I'm thinking a lot about this.

• 1:12:22Speaker 04

  What are you most excited about in the portfolio going forward?

• 1:12:26Speaker 03

  We're really excited about some of the companies in our portfolio that are in the defense field. We have nice exposure to Enduro and we have a couple of others that we're really excited about. And Enduro is not going to be the only winner in that space. We have some direct co-investments in that we're super excited about. I don't want to name names and jinx it. We also have been building our portfolio in India. India, Bill and I had invested in back in 2010. It was a disappointing experience. I brought on one of my managing directors in 2014 and he joined us. I said, what do you know about India? He said, nothing. I said, you're perfect.

• 1:13:06Speaker 03

  I said, I have a bias and I want you to re underwrite, throw Clorox on the whiteboard and start scratch. And he did and he traveled and he met everyone that we thought was thoughtful on the space. And we've been rebuilding and building that portfolio. We're really excited about some of the managers we have there. India is, I think, on a really exciting trajectory. It's hard to compare India to China for many reasons, but the demographics are far superior. I think 50% of Indians are under 30 years old. I think it's 32% of Chinese. Capital markets are reforming and maturing before our eyes. Modi and Modi's got a lot of faults for sure, but he's done a remarkable job in terms of

• 1:13:50Speaker 03

  the tech stack and the ID program that they've implemented. Urbanization, tech leapfrog. India is an exciting theme for us, so we have probably as much unfunded commitment there as we do in China. So we're excited about our relationships.

• 1:14:06Speaker 04

  Ed, I want to make sure I get a chance to ask you a couple of closing questions. What is your favorite hobby or activity outside of work and family?

• 1:14:12Speaker 03

  Since I was 12, I've been passionate about golf. I played in college. It remains a passion of mine. I have always said it's the one game that teaches you a lot about life. I think Bobby Jones called it a fickle mistress. You never know what you're going to get, but good bounces, bad bounces, outside of your control and all you can control is how you respond. So it's a lot like life.

• 1:14:36Speaker 04

  What was your first paid job and what did you learn from it?

• 1:14:39Speaker 03

  First paid job was delivering newspapers and the penny saver. I think I was nine or 10. I was so excited because I got one of those metal change makers that you clip onto your belt that held nickels and dimes. And I just felt like the king of the world when I was able to go up and collect when it was due and all the responsibility with counting the money and so forth. That was a good first job.

• 1:15:03Speaker 04

  How's your life turned out differently from how you expected it to?

• 1:15:07Speaker 03

  I think if I would go back to my 21 year old self in college and say, hey, when you're 58, you're going to be an asset allocator and you will have traveled the world many times over and you'll have all these exciting conversations with smart people investing in innovation and so forth. I don't think I would have believed it. I think my 21 year old self would have said, oh, backup, what's an asset allocator? What does that mean? So yeah, it's amazing how the twists and turns in life take you to places you never expected. And as I said at the outset, Bill Dietrich was a huge part of where my life ended up. And I'm grateful for having met him and I'm honored to carry the torch for.

• 1:15:48Speaker 04

  What's a mystery that you wonder about?

• 1:15:51Speaker 03

  So professionally, I wonder how any LP could agree to terms where there's an American waterfall. Okay. And for those who are uninitiated on this topic, an American waterfall pays the GP a carry on a deal by deal basis. Okay. Imagine the absurdity of this in extreme case. Nine zeros in a row, nine complete wipeouts, and the 10th deal is a 3X and the GP gets paid on the carry on the 3X. A European waterfall is a total portfolio return. GP doesn't see any carry until the LP gets all of his money back. There are American waterfalls out there and somehow, some way LPs are committing to those funds. And that's a mystery to me. On the personal

• 1:16:34Speaker 03

  front, I have almost three granddaughter and I can't understand how she can eat so many popsicles. She could eat six popsicles and a tiny little body and come back and say, I want another popsicle. So that's a personal mystery.

• 1:16:48Speaker 04

  All right, Ed, last one. If the next five years are a chapter in your life, what's that chapter about?

• 1:16:54Speaker 03

  I think anytime you go into your 60s, you're thinking about the future and as I said earlier, how much gas you have in the tank. So I'll be focused on my succession planning at the Dietrich Foundation and then thinking about if there's anything else I want to try to accomplish professionally before I spend more time. And regardless, I'm going to spend more time with the grandkids. So that's probably how I'll spend the next five years, just doing some planning and hopefully seeing the portfolio just be our rocket ship again.

• 1:17:23Speaker 04

  Ed, thanks so much for sharing this incredible story.

• 1:17:26Speaker 03

  Thanks, Ted. Great being with you.

• 1:17:28Ted Seides?

  Thanks for listening to the show. To learn more, hop on our website at capitalallocators.com, where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more. Have a good one, and see you next time.