Pod Insights Capital Allocators Matt Bank - "GEMs" of Risk, Asset Allocation, and Manager Selection (EP.419) About this episode Matt Bank is the Deputy Chief Investment Officer at GEM, an OCIO that manages $12 billion for forty clients. GEM was founded in 2007 by investment leaders at The Duke Endowment and Duke University Investment Management Company.
Our conversation covers Matt's path to investing under recent guest David Salem and lessons learned about risk and governance while under his tutelage. We then turn to Matt's move to GEM and its positioning in the OCIO industry. We cover GEM's approach to asset allocation and manager selection, and close with Matt's thoughts on active and passive investing, venture capital, hedge funds, and drivers of success going forward.
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3:32 Ted 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.
3:59 Speaker 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.
4:18 Ted Seides? My guest on today's show is Matt Bank, the Deputy CIO at JEM, an OCIO that manages $12 billion for 40 clients. JEM was founded in 2007 by investment leaders at the Duke Endowment and Duke University Investment Management Company. Our conversation covers Matt's path to investing under recent guests David Salem, and lessons learned about risk and governance while under his tutelage. We then turn to Matt's move to JEM and its positioning in the OCIO industry. We cover JEM's approach to asset allocation and manager selection, and close with Matt's thoughts on active and passive investing,
5:00 Ted Seides? venture capital, hedge funds, and drivers of success going forward. Before we get going, this is a holiday week in the US, and I want to offer everyone celebrating a very happy Thanksgiving. I'm deeply grateful for your engagement with our content and gatherings, and for my team that helps bring it all to you. Earlier this week, during a strategic discussion with one of our partners, he paused and said, "Your job sounds like so much fun." It's a true gift to be able to answer him, yes, it is. I hope you and your family have a wonderful break, enjoy each other's company, share a great meal, and take time to reflect on what you're most grateful for.
5:45 Ted Seides? Wishing you health and happiness at the beginning of the holiday season. And while you're at it with your family, thanks so much for spreading the word about capital allocators. Please enjoy my conversation with Matt Bank. Matt. Great to be with you.
6:02 Speaker 02 Thanks for having me, Ted.
6:04 Ted Seides? Why don't you take me back to your path that led to investing?
6:08 Speaker 02 Well, to say I wasn't well-suited for the professional world initially is an understatement. I spent every break in college climbing mountains with friends. We would go to Ecuador, Patagonia, Alaska, Switzerland, Colorado. Never thought I needed to get an internship, never expected to have to do anything. My line of sight ended at graduation, it seems. Beginning of senior year, I ended up getting a little bit spooked by watching all of my friends getting their investment banking jobs and decided, hey, you know what? Maybe I should go to New York for a couple of years. Decided to work at a law firm, thought that gave me some optionality coming out. And within a year was fortunate enough that recruiter at Goldman saw enough on my resume to offer me a job there. They had a hole on a principal investing team. I fit the bill, joined that firm in 2005.
6:53 Speaker 02 And really, the rest is history. I spent a little bit of time there, eventually moved with a partner over to the asset management business within Goldman, which was a strategic priority into and around the global financial crisis and had a terrific experience there. First time really being around people who were as ambitious and driven and committed excellence as folks were that I got to work with. What led you to moving over to the allocator side of the business? So in 2007, my dad passed away unexpectedly. It was really a shock. He was relatively young, relatively healthy. That's one of those moments in life that really sets you on a different course. It causes you to reflect on decisions you've made, things you've done.
7:35 Speaker 02 And I recognized in myself that I hadn't been quite purposeful enough about career decisions I'd made, was drifting through my experience, really ruminated on it for a long time and decided I should just go back to business school, pick myself up, figure out what perspective I needed to get on what the future looked like. Through serendipity, I met a guy while I was at business school named David Salem, who you had on the podcast not too long ago. I met David for lunch one day and we bonded over David McCullough books and constitutional history and a whole slew of things that had absolutely nothing to do with allocating capital or investing in any way. And it was really my first entree into this liberal arts approach to investing, thinking
8:17 Speaker 02 about organizational design, psychology, some of the history of markets, things that really lent themselves to the curiosity that I had about the space. I hadn't been exposed to the allocator world prior, but David had just left Tiff and he was setting up a small private partnership in Boston at the time. And I decided to join there between my first and second years of business school and see what that was like. It was not without a little bit of peril. On my first day there, David was still in the process of moving down from New Hampshire, so he was not in the office. Another colleague was in the process of moving up from Virginia. He was not in the office. And so it was just me and a bunch of computers in an empty office space in Boston. And I thought, well, this will either work really well, or it'll be some form of calamity.
9:00 Speaker 02 We'll figure that out. And it turned out to be a great experience.
9:04 Ted Seides? So what'd you learn over the path of the time you were working with David?
9:08 Speaker 02 So I was involved in every aspect of building the firm, as you could gather from the fact that there were really three of us there initially. That was asset allocation, portfolio construction, manager selection, putting together marketing decks, putting together the trading apparatus. Anything you could possibly do, I was involved in. And so first off, there was this breadth of exposure that I think was critical in my development. Second of all, David's very much a first principles thinker. It was a great education and curriculum in how to think about deploying capital for perpetual or multi-generational clients. The thing that really struck me most of all through my time there was just a recognition
9:51 Speaker 02 that the trust bar that is required to take discretion over is really, really high. I always say, anytime you're trying to be the investment office for an institution or a family, you have to clear the highest trust bar in asset management. For a family, it's their hard-earned legacy. For an institution, you're often engaging with a committee whose capital it is not. They are temporary stewards of that resource on behalf of an institution. And the idea of handing that responsibility over to someone else is momentous. Just the fact that you needed to approach any of these engagements with the utmost candor, integrity, and client-centric mindset, I think, was all critical.
10:31 Ted Seides? When you thought about the investment side, what were some of the first principles that most resonated with you?
10:37 Speaker 02 One would be risk first in all things. The market offers what the market offers. You cannot will the market to offer you more. What you really need to understand first and foremost is what a client's risk tolerance is across a couple of key dimensions. From there, you can figure out how to deploy capital on their behalf. But without a sense of what they're willing to live with, what types and degrees of risk they're willing to incur in pursuit of their goals, you can't deploy their capital. So that part of the process, let's get structured for success. That aspect of things that happened well before the first dollar was invested in the first asset was a critical part of it. The other one, just in terms of how you go about finding opportunities, was looking
11:18 Speaker 02 for people that were really psychologically aligned with generating good returns. I've come to view the money management world as really being subdivided into firms that are looking to find their way into the AUM Hall of Fame and others that are looking to find their way into the returns Hall of Fame. And those are very different sets of incentives. It's very different structures. They look very different. And so making sure you align with folks that want to be partners with you for the long haul, I think, is a really critical feature.
11:47 Ted Seides? When it comes to sitting down with a client and trying to understand their risk tolerance, how do you both define that and figure out what that is for that person?
11:58 Speaker 02 It's art, science, craft, all the above. I think institutions have four horsemen of risk. There's shortfall risk, which is the probability that over time you will just not meet your liability stream. So you need to have a portfolio that gives you a fighting chance to get there over long periods of time. And that's just a candid conversation about what the purpose of the capital is. What are you trying to do with this? For endowments, it's pretty straightforward. There's typically a real growth element and there's a stable supportive operating budget element. And you can model those out pretty clearly. There's also drawdown risk. So drawdown risk is about the path of returns. Can you live with the volatility that is endemic to markets?
12:39 Speaker 02 That has a practical element, which is you can't have too much volatility of the operating budget. And so you have to be able to control that to make sure that the CFO and the finance teams of these institutions can draw a stable amount of capital every year. And it also has a behavioral element, which is how much can the committee tolerate? Because everybody has a breaking point and you have to know going in what that is for people. So we try and be very clear with folks what equity tolerance they have, because equity is going to be the primary driver of volatility in any of these portfolios. And what that may mean from a path of return standpoint. The third one's liquidity. You not only need to follow a fairly steady path of returns over time, but you need to have access to capital.
13:24 Speaker 02 Some institutions spend four and a half percent like clockwork every December. Some want to spend 15% in some years and 3% in others. And that changes very much your ability to use private assets in the portfolio. If one of those big spending years happens to correlate with a period of market drawdown, where the liquid part of the portfolio is experiencing more pain, that's problematic. That becomes very expensive capital. And so you have to manage around some of the liquidity constraints. And the last one, which I think is the most delicate, is variance risk. Or what I'll call with clients embarrassment risk, which is how far behind benchmarks, peers, whomever, are you willing to be at any given time?
14:06 Speaker 02 That one is something that is generally unknowable in advance. It's very hard for people to put a number on how far behind they're willing to be. You have to intuit it from the setup. Is this a donor-supported institution? Is there likely a capital campaign in the future? Advancement people hate going to big donors and saying, we're great stewards of your money. Look how far behind the benchmark we are. You have to be sensitive to that. Whereas in certain cases, private foundations, where the governance is much tighter and clearer, they may have a much wider embarrassment risk tolerance. So that's through candid conversations, trying to suss out with individual committee members what their preferences are, making sure you understand how the collective fits together.
14:50 Speaker 02 And then obviously what the institutional needs are.
14:53 Ted Seides? When you've taken this deep understanding of how are you going to work with clients and get into the investing side, I'm curious what happened that led to you joining Global Endowment?
15:04 Speaker 02 So I had spent, as I said, six years alongside David in Boston, had a great experience there, but I'd also gotten to know Stephanie Lynch, who was one of the co-founders of JEM, and just became very enamored with JEM's business model, its reputation, what a terrific business the founders had built over the 10 years prior, this is around 2017. And she invited me down to Charlotte. I had never lived further south than West 12th Street in Manhattan, and my wife had neither, and so we made the trip down to visit the team, see what it was all about, and really just fell in love with the place. It was a perfect setup for me, in the sense that the founders had built this terrific business, terrific
15:44 Speaker 02 reputation, the heritage out of Duke was a real advantage in the marketplace, and you had an ownership group that was very interested in staying independent and perpetuating the business. So there would be logical transitions off into the future of leadership roles. And that was really important to me. I wanted to have an impact on something and be able to have real agency over the outcomes. Joining JEM in 2018 was a bit of a leap personally, but professionally, it was a very logical next step and gave me a chance at a bigger platform to continue to expound and engage with a wider array of clients.
16:22 Ted Seides? Why don't you tell a little bit more about the history of JEM until you showed up?
16:26 Speaker 02 JEM was founded in 2007 by the CIO at Duke University's endowment, DUMAC, Thrice Morton, his head of privates, and Stephanie, who at the time was the CIO of the Duke Endowment, which is the family foundation in Charlotte. The premise was to deliver the governance model that the leading universities were utilizing, which appeared to be at that time an extraordinary advantage relative to consultant-led or committee-led institutional pools of capital, and also the portfolio sophistication and access that came from having a dedicated team working in these markets all the time. That was a well-trodden There were some other firms that had done similar things. Alice Handy at Uvimco spinning out earlier in the decade to found Investor.
17:10 Speaker 02 Mike McCaffrey and the team at Stanford founding McKenna and Palo Alto. There were a couple others as well, but we were the Duke team. The model was really to just bring to bear all of what we'd learned from that experience and that form of engagement with a single client and spread it across a select group of smaller institutions that lacked the institutional scale to do it themselves.
17:32 Ted Seides? What was the core of how you would describe that governance model that was successful for Duke historically?
17:39 Speaker 02 Governance is one of those things where the best practices are all very well understood and yet the execution is very inconsistent across institutions. I think what the leading universities figured out was, for one thing, the independent management construct was really, really helpful. You had independent management companies that sat alongside the universities where they had a single client, they were deeply integrated with the needs of the institution and they understood how to construct the portfolio to meet those. Yale's built differently from Harvard, built differently from Stanford, built differently from Notre Dame. They all had their own unique approach to that, but it was tied in with the university's specific objectives. You also had a collection of individuals on the boards of these places
18:22 Speaker 02 that were well ensconced in what was expected of them. What we observe at smaller institutions is sometimes inconsistent expectations around committee engagement, what that means and requires a lot from an investment committee chair to effectively shame the people who don't participate, who show up cold at meetings, who can't follow the material, et cetera. And I think that the large universities obviously had the advantage of really sophisticated alumni bases from which to draw those folks, but they benefited meaningfully from the really deep engagement and love for the institution that those people showed.
18:54 Ted Seides? What have you seen when there's a committee that isn't following these basic principles? In terms of how you go about helping move them forward in the right direction?
19:04 Speaker 02 First of all, the forms of dysfunction are varied. They can come from a lot of different places. The first step is obviously diagnosing what it is that's going on. Is it political issues related to committees relative to other committees? Is it a weak chair relative to what the needs are for that particular institution? Is it the composition of the committee? Is the construction insufficient to deliver what the institution needs? Charlie Ellis would tell you five to seven committee members is the right number. We see some institutions where they have 14 to 17. That's too many. It's very well understood that after a certain point, the loss of motivation and the loss of coordination of a committee operating that way undermines any of the overarching objectives they might have.
19:49 Speaker 02 The skills and resources that committee members bring to bear is a critical piece, too. There's a view that, well, if somebody is any way related to investing, they must be useful on an investment committee. And I have found that to be true in spots, not universally true. The more important things tend to be the soft skills. Is this person a good listener? Is this person open-minded? Do they work well and collaboratively in a group? Those are things, interestingly, that often aren't typical of really successful money managers because they're used to being the sole decision maker. It's everything from committee construction, committee skill set, the way the committee engages. The way we try and help is multi-dimensional.
20:33 Speaker 02 We share our views on these issues in delicate ways. We write a lot of white papers on what good governance looks like to try and lead horses to water. And then you have to just develop advocacy and relationships over long periods of time. I think that's one of the beauties of JEM in that we have a few dozen clients. We are not trying to be all things to all people. The engagements that we can have with clients are much deeper. We are much more integrated. We are intending at all times to effectively be their in-house investment office, a partner at the table with them, trying to solve all of these various issues and challenges, rather than some vendor who flies in quarterly for performance reviews. That's an important piece of it, too.
21:15 Ted Seides? I'd love to ask you about JEM's business model in the context of, say, OCIO as an industry. You joined 10 years in, and it's changed a lot.
21:28 Speaker 02 It has. It's changed even in the Six years since I've been at JAM. I view it as really three phase shifts, the third of which we're embarking on now. The first phase, really 2002-ish, I would credit Alice Handy with kicking off this trend. Until about 2015 was really governance driven. It was about a recognition that committees gathering four times a year in a consensus oriented environment of their peers was not an optimal model for making portfolio decisions. That was turbocharged through the global financial crisis when people realized they didn't have necessarily a terrific handle on the risks in the portfolio and also access to more and more complex and crowded markets.
22:11 Speaker 02 The second phase, I like to characterize as the death of diversification in 2015 onwards, which is the more simplistic the portfolio, the better from a returns perspective. The more US large cap equities you owned, the better your portfolio did. And you really didn't need much else. Bonds were sufficiently negatively correlated to equities that in drawdown periods that protected you. Interest rates were zero, volatility was low. There was very little need for other types of beta commodities, credit, real estate, et cetera. And the niche strategies that had led endowments to have so much success in phase one weren't really necessary. In fact, there were some pretty stiff headwinds that those strategies faced.
22:54 Ted Seides? What did that do to the OCIO business when the bells and whistles of active management didn't really matter in that phase two?
23:04 Speaker 02 Psychologically, what it's led people to believe is that OCIO investing, total portfolio investing, endowment investing, however you want to characterize it, has become commoditized. When things become commoditized and industries mature, they consolidate. And so what you've seen is a lot of consolidation in the space. You've seen wealth aggregators buying up OCIO businesses, bolting them onto their practices, recognizing that, geez, I think we need more scale here in order to distribute more products through the pipe. And that will be the key to generating the kinds of profitability that we need as a business. We don't think of ourselves as business people. We view this as a profession rather than as a business per se.
23:47 Speaker 02 Doesn't mean we're blind to the business pressures associated with it, but in general, the philosophy is different. We've resisted. Those siren calls for consolidation and come to the view that our independence is actually critically important in our ability to do the right thing for clients. No shareholders looking over our shoulder with a revenue target for us. We don't have salespeople running around the world looking for OCIO mandates. We are going to win on investment excellence in our deep integration. Fast forwarding now into phase three, we're in a different environment now. We can all talk about the nature of the market regime that we're in. More inflation volatility likely, higher interest rates for longer likely.
24:31 Speaker 02 U.S. stocks have a huge valuation premium relative to the rest of the world. Maybe that persists, but maybe it doesn't. And maybe expected returns going forward are lower. And maybe you need an alpha engine in the future to make sure you can meet your nominal return goals. Our view is that quality of execution and the engagement that you can have with institutions to make sure a portfolio is optimized for their specific set of needs, those are going to be the touchstones for the next five to 10 years.
24:57 Ted Seides? So I'd love to turn to how you go about doing that for your clients and maybe start with how you think about managing the pool.
25:06 Speaker 02 The first thing for us is to start with what we call an enterprise assessment, which relates to a number of the risk factors we talked about earlier. What you're trying to diagnose is an institutional tolerance to bear certain forms of risk. How do you do that for an institution that has an operating business? Let's just take your typical school endowment. And we look at it in a couple of different ways. One is, what's the budget reliance? How much of the budget does the draw support? If the draw supports a very small part of the operating budget, all things equal, that makes you a little bit more tuition dependent, which may be a good thing, maybe a bad thing, depending on how confident you are in enrollment demand. We look at the operating condition.
25:51 Speaker 02 Are cash flows positive or negative? Are margins positive or negative? What are the trends in capital demands out of the institution? That changes your flexibility in terms of how much risk you can take. We look at endowment flows. There are some institutions that have very loyal alumni who give very eagerly on an annual basis, offsetting the draws that come out of the endowment. That is a huge advantage relative to institutions that are spending 4%, 5% out every year. And then the health of the balance sheet, unrestricted versus restricted. How much borrowing capacity might there be? You're trying to get a sense there of if there's some shortfall in endowment draw, what other levers can the institution pull in order to plug that deficit? And what you come out with is not a prescription about how much risk an institution should
26:36 Speaker 02 take, but a sense of the flexibility that institution has to take certain forms of risk if they choose. So then there's the qualitative element of what does the committee care about? Are they trying to grow this resource over time to build a new building? Or increase the commitment to academic excellence? Or provide more scholarships? Or whatever it might be? Or are they satisfied with just meeting the return goals over time, preserving intergenerational equity and preserving the real value of that corpus? And that becomes a choice that the committee has. There are a lot of institutions, in particular, I think, post-COVID, that are going in very different directions.
27:17 Speaker 02 Higher ed is a classic case where you have one college or university closing or merging with another every week now. On top of that, you have an enrollment cliff coming around the pike because people stopped having children in the global financial crisis. And so those kids would be 17 or 18 years old now, enrolling in college in theory. But there's going to be 15% fewer of them over the next few years. So there's some real strategic issues that a lot of institutions in that space in particular are facing. And there are similar versions of that if you look at foundations or healthcare systems. They all have their own idiosyncratic business issues to deal with. And the key is understanding what can the institution bear? And then what is the committee trying to accomplish with the assets to help it with its mission?
28:00 Ted Seides? So at the end of that enterprise assessment, you can imagine some type of a spectrum of, say, risk tolerance, what they're trying to accomplish. You then have to put that into action. How do you think about what to do now that you've made that enterprise assessment?
28:16 Speaker 02 The nice thing about it is each of those risk factors that we talked about, shortfall risk, drawdown risk, illiquidity risk, variance risk, maps pretty cleanly to a form of risk exposure that you might have in the portfolio. You know, as an endowment investor, that your nominal return goal is going to be high enough that you need a very healthy dose of equity in there. It's going to have to be at least half of the portfolio, probably a little bit more than that. And then the question is, what forms of diversification away from that do you need to incorporate? The first thing for us is always deflation hedge in the form of interest rate risk. There are also periods of unanticipated inflation beyond that.
28:57 Speaker 02 You use things like commodities and real estate to hedge those particular periods. And you can run all of these factors through your model and figure out what is the optimal mix that gets the client to its goal within the constraints of its risk budget. You overlay, obviously, the alpha that you think you can generate in each of the opportunity sets that you'll ultimately leverage. How much can you get from private assets? How much can you get from public assets, et cetera? And bolt that on top of what the beta is providing you from a return perspective. But it's a fairly straightforward model. I don't believe that we're trying to win in terms of portfolio construction in the way the assets are assembled. We're mostly trying to win through manager selection within those tools. But the key is making sure the portfolios are arrayed
29:42 Speaker 02 in a manner that's aligned with those goals. So you said there's a range, and there are. Some clients have more equity exposure because they can tolerate more drawdowns and they're seeking a higher return goal over time. Some have lower illiquidity targets because they need more access to variable capital or they need it more frequently. Those two end up being big drivers. Passive and active is another component of this conversation. If you have low variance risk, then maybe some of your equity exposure should be passive or indexed in a manner that's going to reduce your tracking error to underlying benchmarks. And you'll have to make up for the loss of alpha from that somewhere else. So these are all trade-offs that you make over the course of a modeling exercise.
30:22 Ted Seides? So in this phase 3.0, when you've made these trade-offs, you mentioned alpha is going to be super important. You've got to get through manager selection. Let's walk through that process of sourcing of managers.
30:35 Speaker 02 It's varied by the asset type, but I think at a very high level, we're looking for three things. We're looking for skill, we're looking for an attractive market, and we're looking for alignment of interests. So break down each of those in turn. And skill, absolute skill is pretty easy to find these days. Everybody out there is well-trained, they've got a great story, looks really good. The question is, what's the relative skill? This is a Michael Mubison concept, this paradox of skill, that when the aggregate skill level goes up in a universe or a population, luck has a disproportionate effect on the outcomes. The key is finding these games that you can play within these different markets where relative skill is really what's dominating the outcome. We spend a lot of time trying
31:19 Speaker 02 to figure out who's got some kernel of excellence that leads them to have an advantage relative to their peers or competitors. Ideally, it's durable, no edge is ever fully durable, and ideally, it's predictive of better outcomes. In public markets, those things can be an aspect of portfolio strategy. It could be risk management, it could be analysis, it could be temperament that leads you to a view that this person has a chance to be excellent relative to everybody else that's in competition. In private markets, that's sourcing capability. It's oftentimes deal hustle. It's structuring. It could be operational chops, depending on the nature of the strategy pursued.
32:04 Ted Seides? How do you go about assessing the difference between two managers, so let's say, public markets, that seem attractive on a lot of those characteristics, but you really only want one for your portfolio?
32:16 Speaker 02 Public markets are, in my view, very interesting because you typically have a lot of data. And as a result, you get a chance to look at trading history. You get a chance to look at letters they've written in advance of market moves and understand what was the thesis, how did that play out? We spend a lot of time with managers talking through decisions they've made and why. That's the primary driver of it. You see the data. And you ask people what their rationale was for when things transpired, why they transpired in that way. You're always trying to disentangle luck and skill. There have been situations where people are right for the wrong reasons and you ding them for that. And there are times when people are wrong for the right reasons and you try and
33:01 Speaker 02 give them credit for that. And then you try to make sure that you examine that data in those conversations over a long enough period of time that you get different market environments. I always joked after COVID, we learned more about our managers in those six months than we had in the prior six years. Cause you see how they react to market stresses and stimuli in a different way. Temperament ultimately becomes a key feature in this that you often don't get enough iterations to really see. But some managers that we were watching turtled during that period and didn't turn over their portfolios and others really rose up and traded out of things that had a 20% forward IRR for things that had a 30% forward IRR and were very active. And I think that element is something you just have to get through. A lot of monitoring and discussion.
33:46 Ted Seides? So to get at more data requires more time. How do you balance your interest in a fund that's been around for a longer time and therefore you have more data to assess with something that's earlier in their stage of development?
33:59 Speaker 02 There's typically things you can see for day one launches and there's things you can't see. The thing you can see often is business analysis, research intensity. You can reference those things with peers and former colleagues and bosses. What you can't see are things like portfolio management and temperament. You spend an inordinate amount of time trying to predict how people will behave and act, but it's always imperfect. There's other things that can creep up that cause challenges too. How is this person going to build a team over time to support them? Oftentimes, young managers haven't had to deal with that. We try and lend our expertise in some of those areas to help them through those processes. But again, you don't know ex ante. Part of it is how
34:42 Speaker 02 you size and how you control the risk within your own portfolio. I think we're always trying to build conviction. One of the things that we do with a lot of relationships is look to secure capacity rights in the future. That tends to be the scarcer resource because once it's obvious the manager's good, it's too late. And so you'd better have a relationship early. You'd better have added value in some other way to them. You've better been a good LP along the way. So we just try to make sure that we're crawling, walking, running with people who are building their own firms for the first time.
35:10 Ted Seides? So in the context of doing your due diligence, I'm curious if there are any techniques, questions, processes that you have that help you get there?
35:19 Speaker 02 There always are. I won't reveal all the secret sauce here, but I think we've tried to take a very multidimensional and multidisciplinary approach to this issue. The team is extraordinary that we have. They are very well experienced in this. We have years of networks and relationships that we can draw on to ask about people and their pasts and what their work style has been. And then we look at other forms of insights. We had someone from an intelligence agency come in years ago and give us a tutorial on how do you detect deception? How do you read body language? It's an interesting insight into other ways to sit across the table from someone and how to glean information. We spend a lot of time on how do you ask questions?
36:03 Speaker 02 It sounds like a very basic thing, but analysts come in and people don't know how to ask questions, particularly questions that are open-ended enough that it leads you to truthful, candid answers. Getting people to ask questions that are not leading, that don't guide somebody to the correct answer is very difficult, actually. You have to ask things in a way and in a manner that gives people across the table from you permission to answer it in the most candid way that they can. That's another art form that I think goes into this that is subtle and we're constantly trying to improve on to make sure that the answers that we get are most instructive in leading us to the truth. Is this person really good? Have they been successful because of the skill that they have? Is that skill durable?
36:48 Speaker 02 And can we underwrite it and back them in the future because of it?
36:52 Ted Seides? What are some of your favorite tips for how to ask good questions?
36:55 Speaker 02 The biggest one is being quiet after you ask. There is a strong tendency psychologically to fill space with words. Oftentimes, it's elaborating on a question or changing the framing of a question if you don't immediately get an answer. And instead of doing that, just be quiet. Just hush up, let the person sit with it and figure out how they're Going to deal with it. That tends to be the biggest thing you have to coach out of people. The other one is asking things that are truly open-ended, meaning you're not encouraging a particular form of response. You just ask it in a manner that is almost curt sounding when
37:39 Speaker 02 you phrase it, because you need them to not only answer it, but interpret what it is you mean. And oftentimes they'll get anxious about that if the interpretation could be in a negative way. So there's a lot of little tools and tricks and the team is constantly trying to refine those and share them.
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38:34 Speaker 03 This is not an offer to sell or investment advice. Investing involves risk, including the loss of capital.
38:40 Ted Seides? And now, back to the show.
38:44 Ted Seides? Love to turn back if there are any differences in your assessment of private market managers.
38:49 Speaker 02 Privates are very different in the sense that you typically have a decision point, which is, are you going to commit to the fund or are you not going to commit to the fund? You watch people who focus on public markets and there's this constant rumination that goes on about, okay, the quarterly letter comes out. How is the arc of the thesis evolving? How has the market moved? There's a very pensive process that goes on in constantly evaluating the public managers. Private side, it just tends to look more transactional and execution oriented, and that's the nature of it. In the underwriting process, though, it's a fairly similar exercise. We try to understand what has led.
39:30 Speaker 02 To a person's success, we do a lot of references on individuals. Again, it depends if there's an established track record there or if there isn't, if it's a new manager to us, or if it isn't, you obviously have a lot more insight into the portfolio and where things are likely to go if you've been in funds one, two, and three, and this is a re-up for fund four. But is the sourcing edge still in place? Do they have a credible path to generating a 3X net return? That's our bogey for private markets. We expect private equity in particular to deliver 5% to 7% ahead of public markets over time. And does the strategy and does this manager allow for that? Fund size is probably the number one aspect that we underwrite. Is the opportunity set allow for them to deploy this amount of capital?
40:13 Speaker 02 Is the team structured in a way to allow them to deploy this amount of capital? There are some strategies that are much more operationally intensive. Buy and builds, for example, if you're going to do a lot of add-on acquisitions, the integration processes are difficult. Do you have a team that can support eight to 10 platform businesses and the associated taxes that come along with that? Those tend to be the big ones. I think when you're dealing with emerging managers on the private side, oftentimes it's a challenge to associate a track record specifically with them. So that really raises the bar on what you have to reference. You're calling not only peers and colleagues, but CEOs of portfolio companies that they were involved in. Other people they may have associated with at different phases of life to try to put
40:56 Speaker 02 together a mosaic of how successful this person is likely to be, why they're spinning out on their own, and what it is that's going to lead to success in the future.
41:04 Ted Seides? For the corollary of public market managers, how do you think about the assessment of data that is available?
41:10 Speaker 02 In normal times, when there are distributions and other sorts of things that lead to funds opening and closing and having a natural life cycle, you do have quite a bit of data. It's not a lot of swings, and we've had situations where a manager's historical track record is mixed at the firm that they're with. And yet, we decide it's a good investment opportunity, given how they've reshaped their approach, what their deal box is, where they're going to spend their time, how they've built the team, what their sourcing edge is. So you have to take it in context. I think one of the things that we've done over time is backed managers in a deal by deal format and independent sponsor context.
41:50 Speaker 02 That's been compelling for a number of reasons. One is the returns that have been associated with that strategy have been excellent over time. Another, though, is that you get a lot of insights into how deals evolve that you wouldn't have gotten otherwise. That as a Fund One LP trying to diligence a pre-fund track record, you would not have been able to monitor over time. Obviously, you're doing this all ex post. Watching someone live through a collection of deals, engaging with them along the way, helping them navigate different things that pop up with businesses, CEO resigns, something goes wrong, COVID happens, is incredibly helpful.
42:29 Speaker 02 One of the things we've done, obviously, to amplify our own ability to underwrite these things is just get in earlier and do things on a deal by deal basis, where then you can build conviction into a Fund One commitment.
42:40 Ted Seides? When you started doing the deal by deal investment and then analysis, I'm curious if there are things that you learned because you had, say, more transparency into what was going on that you weren't quite sure how to calibrate because you hadn't done that as much as investing in funds.
42:58 Speaker 02 Yeah, I think there are always learnings here. We started this process in about 2015. My partner Jay Ripley really led this. And it was born out of a series of visits to private equity annual meetings where they show you the page of performance track records and the pre-fund deals are great, three and a half X, whatever it might be. Fund one is good, Fund two is okay, Fund three is eh, Fund four, and monotonically downward sloping returns as the assets under management group. And so the joke was always, well, how do we get exposure to that thing, that first one? So there was a view that this was going to be a better opportunity set for us. There have certainly been a lot of learnings over time. One of those is how do you structure these types of engagements?
43:41 Speaker 02 Do you put them in a single vehicle? Do you have them in SPVs? How do you deal with follow-on capital? There's a whole slew of terms and conditions that really varied across. The different strategies, buy and builds are different from turnarounds are different from corporate carve outs. How you supported a manager building a team over time, getting involved with conversations about when do you hire a CFO? What if you're having a partner issue? All of these things that sort of border on therapy, you learn over time how to navigate those and what the right guidance is and best practices, how to educate people and those sorts of things. And I think to constantly raising the bar on our sourcing apparatus to continue to find new folks and top grade.
44:26 Speaker 02 For a long time, the way this worked was we would look at all the big firms, typically firms that had a really compelling strategy, typically firms that didn't necessarily pay the moneymakers all that well, so there was an incentive to leave. And run through all those firms and figure out who the real stars were. That's a great method. It's a very crowded space now and there are folks that are spinning out of all sorts of firms all the time. And so making sure that you have a dedicated sourcing apparatus that is constantly in this market, trying to make sure that we are the first call for them when people decide they want to leave whatever middle market firm they're at. That has been a concerted effort over time.
45:09 Speaker 02 That was always part of it, but I think as the world gets more complicated and more crowded, that's becoming even more important. I'll give you an example. Six members of our team were at the McGuire Woods Conference in Dallas last week, which is the biggest independent sponsor conference in the world. A number of years ago, there were a handful of capital providers. This year, there were 430 capital providers to go along with obviously a growing number of sponsors as well. Interestingly, about a quarter of those capital providers were people from other larger private equity firms who recognized that it's a sourcing apparatus for them to partner with independent sponsors. So the world has just gotten very crowded. We all have stories of people who are trying to roll up HVAC businesses and plumbing companies and paving businesses and things like that.
45:53 Speaker 02 But there are a lot of services opportunities out there and you have to be able to separate the wheat from the chaff. There's a lot of chaff. Finding those folks that have credible, referenceable track records and a real path to generating excellent returns. It requires a lot of proactivity.
46:08 Ted Seides? So this idea of finding an opportunity early like independent sponsors, but then over time it grows and gets crowded leads to this original question about the second assessment of markets next to manager assessment. And we'd just love your thoughts on how you go about assessing a market that a manager's participating in.
46:26 Speaker 02 At a very high level, I think you're looking for a dynamic where there's some advantage to be had. So corporate carve-outs are always been our classic example where on the other side was a big public conglomerate, new CEOs installed, wants to divest from a particular business unit that's underperforming. That's a great setup. They typically have a time clock where they'd like to get rid of that thing. And if you pay three times, four times, five times, eight times, doesn't really matter. What the CEO can't do is show up to the Wall Street analysts next quarter and say, we still own this thing. So whatever it takes to get rid of it, they're going to do. And that has been a really, really powerful dynamic. It turns out the lower the purchase price, the better your return prospects might be. Surprise, surprise.
47:07 Speaker 02 I think more broadly, though, market assessment is about dynamics where an edge can be exploited. So biotech's another example where there's clearly in that marketplace an advantage to specialization. There aren't many like that in public markets where the generalists are clearly at a disadvantage to the specialists. You can develop an edge. You can develop an interesting viewpoint on different disease therapies and different drugs that are coming to market and win that game. And there's a lot of cases at all the endowments of firms that have done really good job in that space over time. China, for a long time, was a good market because the share of equities owned by retail investors is very high. And so in theory, again, back to the main point about relative skill, that's a situation
47:51 Speaker 02 where the skill dispersion is high. In theory of institutions trading with less sophisticated retail buyers, that should be an attractive market. And then there are some corners of markets that are just capacity constrained. And so you know that the large asset managers cannot play in them. Those with a significant efficient deployment of capital problem are not going to be there moving inefficiencies out of the way. And so those are situations that we also like. Those tend to appear more, again, in private markets or in sort of alternative betas than they do in public markets.
48:22 Ted Seides? When you're building your portfolios of managers, you like to have all of the managers in these alpha generating areas of inefficiency. But over time, things get more competitive and you kind of have to have a core of things that hopefully someone's outperforming, but it doesn't have that area of specialty. As you go to construct your portfolio, how do you think about balancing the two of the need to have core asset exposure with this constant search for something special?
48:48 Speaker 02 I think it varies a bit by the opportunity set. In public markets, for example, we think of about half of our portfolio should be in what we call foundational assets. So these are things that are going to provide you core beta, oftentimes quality like exposure, maybe tilt larger cap. You can't do the whole public equity portfolio in niche special situations managers, to be sure. And then you have a couple of other buckets. You have structural opportunities. That may be things like biotech where regardless of the beta, you like the alpha opportunity so much that it's going to have a place in the portfolio. Then you have opportunistic assets where that might be related to dislocations or things that are more transitory where those managers might come and go depending on where
49:32 Speaker 02 the opportunity set is over any given three to five year period. And then you have this sliver, which we call diversifiers, which would be things to balance the rest of it. There are parts of public markets where active managers just don't go very much. Consumer staples, utilities, parts of energy sometimes, but you need those to manage your overall tracking error. So I think there's always a core satellite dynamic. We think about it in terms of how attractive is the beta, how attractive is the alpha? There are situations where you'd love to have everything where the beta was attractive and the alpha was attractive, but oftentimes those aren't always aligned. On the private side, same idea. You have more willingness to seek alpha there. First of all, that's the role it plays in a broad portfolio.
50:16 Speaker 02 So you need to generate alpha from the private side. But are there zero large buyout funds that can generate sufficient returns to have a place in our portfolio? Of course not, no. And we have several that are measured in the billions and they just happen to have compelling enough strategies that they think they pass the bar. The key on the private side is you have a much broader opportunity set. And so we have a lot more diversification there by manager and by strategy. That portfolio is just a longer list of line items than the public is. And so I think you have more degrees of freedom to get to a sufficiently diversified place through more diversification.
50:51 Ted Seides? On the public side, that core part of your exposure, how do you think about the movement to passive management?
50:59 Speaker 02 There's two kinds of passive. There is what I'll call anti-active, which is really a philosophical view that active management in public markets is a loser's game. To borrow Charlie Ellis' term, it can't win. No one can win. It's not worth trying. There are clients of ours that hold that view. And we are perfectly capable of building portfolios that incorporate a portion of a portfolio that's passive. I have a very strong view that the portfolio a committee can stick with is the best portfolio for them. And if you constantly bang your head against a wall trying to get someone to believe that active can be better, the first whiff that it underperforms, they will immediately scrap the whole thing
51:42 Speaker 02 and shift to passive at great cost to them. So we're happy to build a portfolio that has passive component to it. As long as people recognize you now have a higher alpha bar at the rest of the portfolio and therefore may need additional liquidity or something else to try to increase expected returns. I think from here, passive, the anti-active version, is just less compelling than it has been in a long time. If you go back to 2014 and you look at the expected returns for equities at that time and you run it forward, it was about 4% and what we've gotten is 9% or something extraordinary. 1.8 standard deviations over what we expected at the time.
52:25 Speaker 02 If you do that from here, where expectations are even lower today, given where risk premia are and where valuations are, it's going to take more than 1.8 standard deviations from here to continue to meet the bar that a lot of clients have for their passive equity exposure. So I think the bar on passive has just gone up, in my opinion. It's hard to fight with people who have an anti-active view about that. It's an unwinnable argument. The other form of passive, which I'll characterize more like indexed exposure. For a long time, it was very difficult to find compelling active management in Japan. So what did we do? We plugged that beta. Similarly, in some of the segments that active managers don't often play, consumer staples. We view indexes as a compelling tool
53:07 Speaker 02 for balancing tracking error, for completing exposures and making sure the portfolio is properly balanced. We use them that way. We typically don't use passive as simply a plug to reduce tracking error.
53:21 Ted Seides? When you are filling part of the portfolio with passive and you need that increase in alpha on the active side, you immediately think of venture capital. So I'd love to get your views of how venture capital going forward plays in your portfolios.
53:34 Speaker 02 Venture capital is in an interesting part of its evolutionary cycle. It has been a primary return driver for a lot of leading endowments for a very long time. Interestingly, for a lot of that period, if you asked 20 of the largest endowment teams what their roster of the 20 best managers were in the space, you'd have, I'll be conservative here and say 60% overlap in terms of what's on that list. So it was very much an access game. It was very much can you get into as many of those folks as you possibly can to have a credible path to generating really good returns. We've just gone through a serious capital cycle in venture where post-COVID, everything accelerated, valuations, assets raised,
54:19 Speaker 02 and now we're on the backside of that. And we are in the process of decapitalizing that space broadly. And that's going to have implications for how people use venture going forward. The base rate in venture has always been terrible. 60% of venture capital firms generate less than cost. So not only are you not keeping up with equities, you're losing money in more than half of venture capital funds raised. It has always been a power law, right tail oriented asset class.
54:47 Ted Seides? Even for firms?
54:48 Speaker 02 Firms, yeah. And what you're seeing now is that there's still demand, tons of demand for what was on that list of best firms previously. Where we have really refocused our attention is engagements with those great brands that have been disciplined about fund size. There are a number of other firms that are great brands that have not been as disciplined about fund size, that are now supermarkets for lower cost of capital investors. The space is institutionalizing very rapidly in that sense. And certain forms of alpha are becoming beta. They're selling a different thing. So engage with the brands that have been really disciplined here and then figure out who's going to be on The list of great brands five years from now.
55:33 Speaker 02 It's a really hard game in venture, really, really hard. And historically, we had a view that let's wait till Fund Three. Once we can see that this is working and the brand is established. You don't have that opportunity anymore. And you need to get in early in these situations. Our sourcing apparatus is turned on to seed and micro managers today trying to figure out who is going to provide the returns going forward that is going to allow them to establish a credible brand. We just backed a group, raised $350 million for Fund One. It's three partners coming together out of three storied franchises. They have a view that particularly Series A and early-stage founders are underserved by the multi-stage firms.
56:19 Speaker 02 They're small, multi-stage partners have other things to worry about. And there's a view that they can do a better job. So I think that's all part and parcel of an evolution in the strategy. The math of venture is just very daunting, particularly at mass scale. When you think about the likely probabilities that a certain number of companies are going to fail, certain are going to be middling outcomes. And then a very select few are going to be very right-tail extraordinary experiences. How big do those extraordinary companies need to be to justify the fund size? And even at 300 to 500 million dollars, you need to be a part of a couple of 10 to 20 billion dollar enterprise value companies, which is not small.
57:03 Speaker 02 And you need to avoid a dilution along the way to some extent. There's a lot of things that go into it. And if you're raising 5 billion, just multiply all those figures. You basically need one of five generational companies within that portfolio to meet the return bar.
57:17 Ted Seides? How do you think about hedge funds?
57:19 Speaker 02 Hedge funds for us have been a source of alpha in the sense that we want total returns. We've never really used hedge funds, not in a long time at least, for volatility dampening. We can do that in other ways. You can just take down equity risk and increase bond exposure. So we wanted our hedge funds to be able to generate sufficient Net returns that they were sort of compelling in their own right. That led us over time to a place where we had a lot of directional long short managers who had sufficient alpha that they could overcome some of the volatility dampening just endemic to being less than one net. The portfolio overall today is about 50% net exposure. We have some AR again.
58:00 Speaker 02 That's partially related to stock bond correlation going up in our view that going forward, you're going to need more diversified sources of portfolio protection. So we've done some things in reinsurance space. We've done some things in market neutral. We've done some things in arbitrage strategies. Hedge fund space in general is an interesting industry dynamic at play. Launches are down relative to history. It's getting harder and harder, I think, for a standalone, single strategy manager to build a durable business. And some of that's related to what the pods, multi-strats are doing, hoovering up a lot of the talent that's out there. When you meet with those firms, you realize what an extraordinary data advantage they
58:42 Speaker 02 have in managing their talent and seeing where skill really resides and evaluating that on a minute by minute basis. And then obviously the leverage component is huge, too. When you cut through the data, the long short spread of the equity long short strategies, the pods is good, not always world class relative to what we see in other situations. But if you lever that three, four, five, six, seven, eight times, it becomes very, very compelling. So I think that shift of talent toward these bigger platforms is likely to continue. That'll have some consequences for the industry overall, but I think it's just fundamentally changed the game a bit in terms of how you get that exposure today.
59:25 Ted Seides? So let's turn to the last pillar of your assessment in alignment. When you think about alignment of your capital with your managers, how do you try to implement that?
59:36 Speaker 02 We have seen this. Every which way over time, there's forms of over alignment, there's forms of under alignment. I think what you're trying to solve for is, first off, what motivates the person across the table from you? What is the intrinsic driver of their commitment to success? Are they returns focused? Are they committed to integrity? Are they going to do the right thing irrespective of whether this goes well or poorly? That becomes a critical analysis piece because you cannot structure your way into alignment if it is not inherent to the person you're across the table from. Now, you try, you try to
1:00:16 Speaker 02 defend yourself in some instances. In terms of fee structure, we try to make sure that we're paying for alpha, not beta, paying for the outcomes that we're going to be happy with. And we try to make sure that the level of fees is appropriate for the strategy that the manager's running. And then you think about terms broadly as well. What's the liquidity of this overall portfolio? Is there a trade off to be made there? What are capacity rights that you might secure? Because you don't want managers to outgrow the opportunity set too soon. And so you almost are willing at the early stages to pay a little bit more than you otherwise would in order to incentivize that form of behavior. You're trying to lead breadcrumbs down the path to really good outcomes for you and for the manager in a
1:01:01 Speaker 02 way that keeps everybody in the same boat, rowing in the same direction. We don't want to be adversely selected either. A lot of times, managers that are willing to negotiate with you on fees are not managers you'd want to invest in. One of the partners had a phrase long ago that was, "We're trying to convince people who don't need our money to take it." That becomes the fulcrum challenge in a lot of these negotiations. And so sometimes you have latitude and sometimes you don't. This is another area where being early really matters, both on the public and private side, because you can help craft those terms and find ways to endear yourself to a manager and be treated well and fairly all the way through the relationship.
1:01:39 Ted Seides? How do you think about the impact of other LPs? So if you're early, there are other people that are trying to step in early as well. If you're later on, there are other LPs who may have had influence or should continue to have influence along the way.
1:01:53 Speaker 02 It's a critical piece of our diligence. And I think the LP base can be a source of edge for managers, depending on who's in there. If at the first whiff of a downturn in a public markets portfolio, the person's on the phone with 16 different LPs, that's not a great setup for good decision making. You do really want to be aware of who else is in here. That doesn't mean you're deferring your diligence to those folks. We don't over-rely on who's done the work previously as a signal for quality, but it does tell you what other sorts of pressures is this manager going to have on them. We've had situations where leading university endowment, for its own causes, will try to persuade a manager to change his or her strategy.
1:02:37 Speaker 02 And in one particular instance, he called and said, geez, this institution's trying to get me to focus on this particular market. I think I'd be better served not doing that. And we encouraged him to do what he believed was right. Because guess what? If pivoting doesn't work, then that institution is not going to blame itself. The only thing you can do is do what you believe is right over time. And if that institution doesn't like it, you can find another LP. If your performance is good enough over time, you will be fine. And fortunately, he stuck with it, and it's been one of our best performers over a long period of time. But it's really impactful, and you have to understand what the incentives are of the other LPs at the table.
1:03:14 Ted Seides? As you're investing today and you look out over the next couple of years, what are the different ways you're thinking about the process of manager selection compared to what you've done in the past?
1:03:26 Speaker 02 There's always an arms race in terms of the execution here. And so our team is laser focused on how do you continue to scout and access talent effectively? I think there are a couple of things that are going to continue to be very important. Number one is relying on the causes that our clients serve. We are blessed to have this handful of clients who have discrete missions, things they support, programmatic objectives, and it is very rare for us To be unable to find a cause that really resonates with a GP within our client base. The universities have been using this for decades and we effectively have forty some odd different missions that we can point to, which is really, really powerful.
1:04:10 Speaker 02 A lot of these firms have decided they really only want to serve LPs that are doing social good in some way. And so whether it's scholarships, or medical research, or social equity, or whatever it might be, there's someone in our client base that's really pursuing that objective. Number two is just burning shoe leather. We live on airplanes, doing residencies in Europe, in the Bay Area. We have a colleague now who's in Singapore full-time covering Asia for us. There's just a lot of intensity that goes into the consistent need to top grade the portfolio. The sourcing construct is something that Jay brought over from his private equity days, which was this view that if your deal people are doing a deal,
1:04:51 Speaker 02 then your pipeline is running dry. And so you need a separate set of people that are constantly refilling that pipeline with compelling opportunities, so that you know you are always in a position to be underwriting something. Deal finishes, there's something new in the pipeline. Maybe it's better than the thing you were just about to look at. That sort of thing has been really, really helpful in helping us turn over more and more stones, creating what I would call sort of micro-brands within some of these niches. Independent sponsors, a great example, obviously. We were sponsors of this McGuire Woods Conference. We've become known in that community as a funder of these types of sponsors. And we have a very compelling pitch because we can ultimately anchor their fund one.
1:05:32 Speaker 02 We can be full life cycle investors, unlike others that play in the space, may want to take credit for the deal. It's just a different dynamic. That's been really helpful. We get calls early from people who know that their friend's friend also did something similar three years ago, and we backed them. Talent follows talent. Those are the big ones. Continuing to lean on our client causes, amplifying the sourcing apparatus meaningfully and enhancing the decision-making of the team, I would say is the third one. We are a robust team. We very much focus on collaboration, culture. That's critical. It's not something you can do at mass scale, but making sure that information is flowing very rapidly, allowing a lot of autonomy to our team
1:06:16 Speaker 02 to look at things that are compelling, that meet their bar, do the work on it, send it up the flagpole, let us evaluate it. That's been really critical because you have to move quicker than you used to. I know some LPs where you could be at the firm for 10 years and you're still monitoring an old portfolio position that was three CIOs ago, and that's a recipe for a really stale portfolio. And we try and arm our very ambitious, talented people with autonomy to go out and find the next great thing.
1:06:44 Ted Seides? You mentioned that Jay had this idea that if your deal team is working on a deal, you need people to continuously sourcing it. Sounds like that could have come from a private equity firm. And I'm curious if there are other important lessons that you've brought into your investment process that you learned from some of your managers?
1:07:00 Speaker 02 We are always trying to use the best of what we see in the GPs to inform our own work. Sourcing was one of those. I think some of the process structure and how we systematically vet opportunities has been something we've brought over from other experiences. And then really how we try to motivate and incentivize the team culturally. Look, we do not want to have a massive multi-office apparatus at any point in the future. The distractions of scale are really difficult to deal with for large firms. It goes back to consolidation. I understand the
1:07:44 Speaker 02 business logic of consolidating into a big apparatus. You can push product through, you can distribute more easily. You have this army of salespeople or advisors. Nobody has ever been able to explain to me the investment rationale. How does this help us find good GPs? How does this help us deliver investment excellence for clients? How does this help clients at all? So I think that commitment to staying a boutique.
1:08:11 Speaker 02 Staying focused on the ultimate client objectives is really a critical piece of this. And that's something we obviously learned watching firms that we backed maybe outgrow their opportunity set, or change their stripes, or lose their culture, or some of these things. Culture is a very finicky thing. You have to apply constant pressure to it to make sure it retains the shape that you want it to. If left to its own devices, it will go in all sorts of directions. And we are very conscientious about that. And making sure the team is properly incentivized, that we hire well, that we train well, that we develop well, and give people autonomy. That has been another lesson of the great investment franchises out there that have stuck to their knitting.
1:08:54 Ted Seides? Great, Matt. Well, I want to make sure I get a chance to ask you a couple of fun closing questions. What is your favorite hobby or activity outside of work and family?
1:09:02 Speaker 02 I love being in the mountains. I don't get to go as often as I once did in the past, but try and definitely imbue in my children a sense of peace and comfort in the wild and the outdoors.
1:09:12 Ted Seides? What's one fact that most people don't know about you?
1:09:15 Speaker 02 I am an avid and sometimes successful home gardener. We had an absolutely bumper crop of sun gold tomatoes this year, but I'll grow cucumbers, peas, carrots, Swiss chard, melons, all kinds of things. Just love the patience and the vigilance that that craft requires.
1:09:34 Ted Seides? Something you learned on West 12th Street?
1:09:36 Speaker 02 That's right, that's right.
1:09:39 Ted Seides? What's your biggest pet peeve?
1:09:41 Speaker 02 Well, since I flew here today, I can say one of them is people who listen to the shows on their phones without headphones on. I had somebody next to me who was watching, I don't know, the third season of some Netflix show, just free and clear, which requires just a flagrant disregard for everybody around you. Professionally, it's arrogance. I think acknowledging that we've all had so much good fortune to end up in the position that we're in. If you can't do that, it just strikes me as very off-putting.
1:10:08 Ted Seides? Which two people have had the biggest impact on your professional life?
1:10:12 Speaker 02 One's my dad. This one's a little bit nuanced. He served in the army after college for a long while, was incredibly disciplined and regimented, just a workaholic through and through, was gone before we woke up in the morning, was home after we went to bed at night, and he probably did that for 30 years. I don't know that it helped his health, but whenever I'm feeling tired or fatigued, I always do remember his constant reminder to put your head down. Whenever things got difficult, put your head down. And that is the way through. I do try to balance that against the recognition that I want to see my kids and spend time with my family and do all the things that make me happy in life, too.
1:10:48 Ted Seides? And who's the second?
1:10:50 Speaker 02 I'll credit a partner at Goldman, who took me under his wing pretty early in my career there, and was instrumental in my having an ability to grow at that firm. A guy named Steve McGinnis, he was a terrific guy. Everybody needs somebody at some point to take a flyer on them and just find something about them that they appreciate and help them along the journey. And Steve was that for me early.
1:11:11 Ted Seides? What's the best advice you've ever received?
1:11:14 Speaker 02 The idea that passion comes from the pursuit of mastery, not the other way around. It's a big hoax out there that you're supposed to find what you're passionate about and then go do that. That's not where it comes from. The idea that you get up every day and try and get a little bit better at something, that's where passion comes from.
1:11:31 Ted Seides? All right, Matt, last one. What life lesson have you learned that you wish you knew a lot earlier in life?
1:11:36 Speaker 02 Well, I'll give you one that I'm still terrible at, but I keep trying to get better. It's keep your friends close. We all go off in different directions these days. People come and go through your life, and finding ways to stay in touch with people you care about who care about you is a critical source of mental health and wellness. And I continue to try to find the energy and time in my day to give people a call and check in on them and share how our lives are going.
1:12:00 Ted Seides? Matt, thanks so much for sharing these great, deep and nuanced insights into what you do.
1:12:05 Speaker 02 Thanks so much, Ted, for having me. Appreciate it.
1:12:08 Ted 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.
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