E412: UPENN Endowment: Why AI Will Create a New Generation of PE & VC Firms

AI isn't just changing technology—it is reshaping how investment firms create value, evaluate managers, and generate alpha. David sits down with Thomas Scriven, Managing Director University of Pennsylvania Office of Investments, institutional investor with experience across private equity, endowment management, and investment banking, to discuss why AI-native investment firms may outperform traditional firms, how great LPs evaluate GPs, why concentrated portfolios often outperform diversification, and the investing frameworks that separate elite allocators from everyone else.

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

• 0:00David Weisburd?

  So how will AI affect investment firms?

• 0:03Speaker 01

  There's going to be a lot of organizational reworking that's needed. And I think investment firms that are learning organizations will do a lot better. As I think about AI and the changes to investment strategies, we should back the operational value add that private equity firms need to contribute. A lot looks quite different.

• 0:24Speaker 01

  And we just backed a new firm and two very smart investment partners, but a lot younger than we usually would back. But they're teaming up with a team out of Palantir.

• 0:39Speaker 01

  Three super experienced engineers that have between them over 30 years of forward deployed engineering capabilities. We think their playbook looks very, very different.

• 0:52David Weisburd?

  Do you think the next generation of investment firms will be new firms that are AI native or old firms that are integrating AI?

• 0:59Speaker 01

  I think there's both. A lot of the old firms have some very, very smart people.

• 1:05Speaker 01

  And I think they're all very cognizant of the fact that the world is changing and the way you drive value in the future is going to look differently.

• 1:16Speaker 01

  Some are maybe adopting AI more reluctantly than others are really jumping in. For me, the question is more,

• 1:25Speaker 01

  is there a shift in where the most attractive opportunities are? You might do everything, you might be a larger buyout fund and you might have the best operational value add playbook. But this might be table stakes because everyone else has it. And the gains you get through productivity enhancement through AI, you're giving back either in price or in competition. Whereas it may be in the middle market, you can have a less sophisticated playbook, but it's a more unique playbook where you are driving value that you get to keep, that the portfolio company gets to keep. And you stand out and the buyer is buying at the end of your hold, a scaled asset in a properly AI native mid-market business.

• 2:08Speaker 01

  And that might stand out a lot more than someone who's done a phenomenal job with a billion dollar business. But that's just what you have to do. And maybe the change there is for the ones that execute well is actually not as rewarding as it is on the smaller end.

• 2:26David Weisburd?

  Going back to this firm that you backed with a Palantir engineers, how are they specifically integrating AI into their process?

• 2:33Speaker 01

  The core team of three engineers, that's what they were doing at Palantir for their clients. And so they are essentially going to be forward deployed engineers for as long as they have to, until they can build the skillsets within the operating teams, various portfolio companies, which doesn't sound so sophisticated on paper. It's actually just really hard to do. And it's really hard to find people who've been doing this for a long time.

• 3:01David Weisburd?

  So they make an investment and they go into these companies and integrate AI into the core of how the business operates.

• 3:08Speaker 01

  What's great is when you have a team like this and you're a mid-market owner of a private business, your business is doing well, but you know it's going to have to change. You know, you're going to have to do something with AI. And you meet a team like this. And this is the quality that usually only the very big buyout firms can can hire. This looks like a partnership more than a sale. I'm happy to sell you 60% of my business. If you can take my business into the next generation, I'll roll 40%. And so it starts at the early engagement, which gives you better access, more due diligence. The nice thing about AI is you can prove some of the change management that you want to affect very, very quickly.

• 3:50Speaker 01

  So it's not a future partner or a founder who's selling to you or selling part of his business to you.

• 3:59Speaker 01

  You can put in some sweat equity and show them that you actually know what you're doing, that you can actually affect change. And that's how they got their first couple of businesses. And then you buy a business that you've already spent, you've had usually more access to because you're actually showing diligence is not a painful experience for the seller if he's intending to roll. It's actually a learning experience. And so it gives you more access than you usually would get at due diligence. You have a pretty good understanding of what you're going to do before you even own the business. You've probably already run a few of maybe the easier lift AI applications. And then you can decide, is this the best use of your time? So what are you looking for? You're looking for a business that has a lot of data.

• 4:42Speaker 01

  You're looking for a business that has a lot of labor costs that can really benefit from operational improvement or some efficiency improvement.

• 4:54Speaker 01

  And ideally, you're looking for a business that would do just fine whether it went through a big AI role. I don't know, it's sort of not in the immediate impact of AI. It's really, you're going after the upside. And ideally, you're looking for a business where the AI transformation is not about cost cutting, but it's about labor force enhancement and driving top line growth. Because then culturally, you don't get as much pushback. You're not asking people to adopt AI to make themselves redundant. You're asking people to adopt AI to make the job more interesting. One of the businesses they have looked at is in the collection space, a niche collection space. And the workforce there spends an inordinate amount of time

• 5:40Speaker 01

  data processing, which is incredibly boring just for lead generation. And with AI, you can take that 80% of their job and make the 20%, which was actually going after the collection side, which is where they get their money, 80% of their job. And now you have higher retention within the workforce.

• 6:06Speaker 01

  People enjoy their job more. It's a higher margin business because each person can process a lot more claims. And you've just accelerated growth. So you're looking for sort of businesses that are slightly orthogonal to the risks of AI, but can really, really benefit on the upside case if you're willing to deeply embed AI. But you need people who have done it before. This doesn't fall in the same playbook of you meet, you have a board meeting every, every month and you tell the management team what to do. This is in most cases, especially in the mid-market, the management team needs partners that help them on the project management front. They go in, do that. And it could be six months, it could be a year. And they're ready to pull out because they've established a new workflows,

• 6:51Speaker 01

  new work streams, and then they go to the next one. So it is a more labor intensive approach. It doesn't scale as well. You can't run, except if you have a very big team, you can't run three or four deals in parallel.

• 7:06Speaker 01

  But I like it. I like it for the AI benefits, but I like it from a conviction investing point of view. It forces them to be very selective on the business models they choose and the number of deals they do because they're going to run a highly concentrated portfolio. And so that would be an example.

• 7:20David Weisburd?

  You mentioned this management term, change management. It's a popular term today, which is how do organizations institute change? Because it's one thing integrating AI in a vacuum, but you really need to have your employee workforce integrating it. And you said something very interesting, which is this investor looks for easy wins in their portfolio companies. What are some easy wins that investors are making in their portfolio companies to prove to those portfolio companies that it works?

• 7:48Speaker 01

  Last week, I was talking to one of our partners. It's been a roll up. It's gone well, but it's not the big fun driver for them. So they were thinking of selling it. It was going to be a 3X outcome perfectly fine. But a couple of months ago, they went in and said, look, dispatch management, the logistics of dispatch management in a business like this are incredibly complicated. They were done manually.

• 8:11Speaker 01

  Let's see what our internal AI team, they have a five person AI team who can build AI products internally. Let's see what they can do. Took them six weeks and they have now, for the last few weeks, been running dispatch management fully agentially, way more efficient.

• 8:34Speaker 01

  They've kept all the employees. This can be now run fully agentially. Now, the view is, well, maybe we shouldn't sell this business because we have real IP here. When you suddenly can do route management that takes into account that there is bad weather or someone had a punctured tire and dynamically and immediately reroute. There's just too many variables for a human dispatcher to do that.

• 8:59Speaker 01

  It took them six weeks to build this. If your average due diligence process is a three to six month process, you have plenty of time to run those type of experiments alongside your traditional due diligence. So I think this is going back to helps potentially sell a future partner. But it also helps de-risk your own operational approach to should we own this asset? And can we actually do what we want to do with this business? So that would be an example.

• 9:28David Weisburd?

  What percentage of your managers are using AI for sourcing?

• 9:32Speaker 01

  You should ask me this question in August. I'm having a conversation with every one of our active managers to actually go through, what are they doing in AI? Because it's very hard at this moment to sort of separate fact from fiction.

• 9:45David Weisburd?

  What's your intuition tell you?

• 9:46Speaker 01

  Well, everyone's experimenting a lot. And when you really push, say, okay, where is it? This sounds great. Where is it showing up in the numbers?

• 9:55Speaker 01

  A lot of the conversations still go pretty quiet. And it's like, ah, not quite yet. And we think it will show up in the numbers in the next few quarters. But it is still rare to see AI application that has gone deep enough and far enough where it is really showing up in the numbers. So I, and that's okay. I mean, a lot of things that one can do agentially today, you couldn't even do six months ago. So we're very confident that this is a transitionary period. And the purpose of the survey is not to conclusively find out who's great and what one can do. But it gives you sort of a baseline to judge people's efforts by over the coming six to 18 months.

• 10:36Speaker 01

  And I think that's the timeframe where we really expect to see a separation between GPs who are in the forefront and GPs who are maybe lagging a bit. At this point in time, it's still, I think, still quite hard to really differentiate. And I am quite wary of drawing too many conclusions.

• 10:55David Weisburd?

  Couple of weeks ago, I had the co-head of Co2's growth team, Lucas Wisher, on. We talked about the narrative in the market where AI is replacing jobs and the actuality on the ground, which actually AI is creating jobs, specifically in the early adopters, which are the developers and the engineering firms. Within your portfolio companies, like this industrial services company you referenced with the dispatch service, are there other cases where AI is actually creating jobs versus taking away jobs?

• 11:22Speaker 01

  My general view is it's going to be a mix of both. I actually think the more interesting AI play is going back to my earlier comment, is where they create jobs, where it really allows a business to grow more quickly and use their workforce more efficiently, which becomes sort of a virtuous cycle of why they become the winner in their category. I am not as negative, generally speaking, and just based on the anecdotal evidence, it is not clear to me that AI destroys jobs. I think it will create a lot of jobs. Whenever we have big transitions, whether you go back to the automotive industry, going from building cars individually to a factory line, there's definitely going to be friction.

• 12:07Speaker 01

  And will we do better this time on retraining employees who are impacted? I don't know. But I'm not in the camp where AI is going to destroy everybody's jobs. I actually think, and I'm being a little philosophical. If you think about the 100 year challenge for the world, we're facing a declining population. More and more older people need to be supported by a smaller labor force.

• 12:40Speaker 01

  I think if we apply AI properly, that is the productivity enhancement that we need in our workforce to, to live in a world that has a declining population in the not too distant future. I see all the risks. I see the cybersecurity risks and all of those things. But net, AI should be a winner for society.

• 13:02David Weisburd?

  One of the reasons why people think AI will be so destructive, it's an availability bias. So you could only think of the jobs that are going to be cut. You can't think of the net new jobs. And one of the reasons why you can't think about the net new jobs is because people don't have the mental space, the time, the resources to think about how to grow their business. But human beings, if there's one thing that all human beings have in common, they want to self-actualize, they want to grow, they want to increase. So every business, in many ways idiosyncratically, every business will come up with different ways to grow. That's extremely predictable. How exactly and in what ways and what future jobs will be is hard to predict. But this fact about human nature is just something that's undefeated.

• 13:40Speaker 01

  I couldn't agree more. I think it just unleashes a new form of creativity if it replaces some historic creativity.

• 13:47David Weisburd?

  And I've seen it in my own life. One of the things that I realized a few months ago is that thinking time competes for the same brain resources as doing time. So if you're extremely busy, if you're in the weeds, literally on a neurobiological level, that part of your brain is not able to think. And the way that I realized this is on the weekends, I would go biking outside and I would always come up with new great ideas. And I started to isolate the variables. Maybe it's because I'm outside, maybe it's because I'm on a bike. And maybe it's because it's the summer, all these different variables. And ultimately, I changed slots during the week in order so that I have more thinking time, especially in the beginning of the day, I would go to the sauna. I started magically coming up with new ideas because again, my brain was no longer competing with the doing.

• 14:31Speaker 01

  That makes total sense to me. If I have one complaint about my job, I find it's easy to be busy. It's really hard to find time to think. And if you went through a week, how many hours of the week are you thinking deeply? It's always a disappointingly small number.

• 14:51David Weisburd?

  I was just talking to the president of NEPC, which is a consultant. I think they're 1.9 trillion AUA.

• 14:58David Weisburd?

  And he said that most limited partners, only 15% of their time is actually spent on the investing side and everything else is spent on internal policies, on dealing with investment committees, on corporate governance, all these other things that eat up into the investing side.

• 15:13Speaker 01

  That doesn't surprise me. And going back to your very first question, which organizations will do well? And I think we are in a big transitionary period. I think it's always true that the way you are going to make money in the next 10 years is different than the last 10 years, but sometimes it's a little bit more true. And I think we're in one of those moments where it's a little bit more true. When your governance is set up that you need to go and pitch every single investment you make, you spend most of your time preparing for that pitch, right? You're spending time on due diligence and you're preparing time.

• 15:47David Weisburd?

  Which is actually rational.

• 15:48Speaker 01

  Which is rational because you need to get stuff done. You need to justify your existence. It's not good to try new things because you know what gets through your investment committee and whatnot. And it's a much higher bar trying something novel with your investment committee than something you've already, that rhymes with the last three things you've done. If you're investment committee though, you're not going to for investment sign off because that sits with you and you have to go to it or your board to explain why you're doing things and how you're doing things. So if it is purely there for you to justify your investment strategy, it does a couple of things for you. One, it forces way more thinking time. You have to step back.

• 16:33Speaker 01

  In my view, it creates way more accountability because I can sell anything that I've done three months to due diligence on and you haven't, I should be able to sell to you. I have such an information advantage, right? But explaining to a well-qualified board

• 16:51Speaker 01

  why we are shifting our buyout or our venture strategy, or why we're staying true of it, or why we're not giving up on every software strategy that we have at this moment in time is a much higher bar to meet intellectually. And so this goes back to learning organizations and forced thinking time and everything. The setup really matters because then I think you avoid that 85% of your time is essentially preparing for the pitch and internal stuff that is not.

• 17:22Speaker 01

  Productive from an investment strategy evolution point of view. A lot of the problems with investing or success with investing has to do with your organizational setup. And I think that's another example of how do you bring more thinking time into your organization? Well, how your board works really matters on that front.

• 17:38David Weisburd?

  Most investors don't lose because they lack information. They lose because they can't separate signal from noise. Every day, thousands of earnings calls, SEC filings, expert interviews and market updates compete for your attention. The challenge isn't finding more research. It's finding the few insights that actually change your investment decisions. That's exactly what I unpack in my conversation with Ryan Fennerdy. Instead of talking about AI in theory, we discuss how leading investors are using it to surface differentiate research, move faster than competitors and make more informed investment decisions. If you're an investor looking to gain an edge through AI-enabled insights, I think you'll find this conversation valuable. You can access this limited release episode by going to alpha-sense.com/HowIInvest. That's alpha-sense.com/HowIInvest.

• 18:22David Weisburd?

  To quote Charlie Munger, if you want to understand somebody's behavior, look at their incentives, sometimes it's as easy as that. Some organizations think from first principles, how do we best incentivize our investment team to get us the best outcome?

• 18:34Speaker 01

  That is definitely true. And when we partner with a new GP, and we're usually fortunate that we end up being one of the, have very close relationships with our GPs and our thought partner. And they'll ask me often in the fundraising process, okay, we seem to have good demand. These are the LPs. Our interest in partnering with us, how should we select and how should we construct our investor base? Do you know how to compensate it? Because that will tell you a lot of how they will behave. Do you know who is compensated differently for a co-investment versus the fund investment? Do you know who's compensated based on annual numbers? Or maybe something that's more aligned with, you have a long horizon investment strategy, you might have a deep J curve. Is there internal compensation

• 19:19Speaker 01

  model actually aligned with the potential challenges and pitfalls of your strategy where you don't want to be judged on the quarterly basis or an annual basis? And most GPs have no idea how their LPs are compensated. I think that's a mistake because you can only litigate so much in the documents. What you really want is a set of commercial partners that you know when whatever happens, you find, right, the world has the next Lehman event, when you need to sit around a table and make a commercial decision. Should we extend the fund line? Should we expand the fund? Should we do something that was not thought of in the legal documents? You want to know how they will act at that moment in time and what

• 20:03Speaker 01

  are their priorities? Because in the end, incentives do matter in human behavior. And I think a lot of GPs have no clue what their LPs will do in these situations based on their incentive model.

• 20:17David Weisburd?

  Incentives are a very sensitive topic. How should GPs go about figuring out the incentives from LPs?

• 20:24Speaker 01

  Well, I ask them what their GP commitment is. I know everything about their incentives. I don't think this is a sensitive question. You're just about to enter a 10-plus year partnership. Why wouldn't you want to know that? And why wouldn't both sides want to know that there's good enough alignment, good enough understanding of what both people are getting? The problem with most private strategies, you have, issues don't arise in year one, two or three, right? There's a slow feedback loop. Everything starts off well. It's in year seven, eight, nine, when where the challenges come. And so I think it's in both parties' interest that everyone's eyes wide open on who's partnering with whom and what their incentives are and how they might behave.

• 21:10David Weisburd?

  Staying on this thread of GP, LPs, incentives, you mentioned legal docs. Are legal docs really the draconian, the nuclear option? And 99% of things are figured out between GPs and LPs through constructive conversations? How would you categorize the relationship versus the legal docs if you had 100 points to split?

• 21:30Speaker 01

  Legal docs matter very little. If you're one of the two thought partners to a GP, you're in very regular dialogue. I think the conversation, and you always get disappointed on occasion, but across my relationships, I think I have partners I can do things handshake with. I think they would say the same of me. And that's arguably one of the most important things when you enter these very long-term relationships. We're all professionals. We all have a fiduciary duty. Yes, you have to have legal docs that are workable. But if that's what you're relying on, maybe you shouldn't enter the partnership.

• 22:08David Weisburd?

  It goes back to incentives. Maybe the incentives are misaligned if the legal docs are, need to crystallize some of the terms.

• 22:14Speaker 01

  This is a very complicated topic, very desocratic to the individual situation. I don't want to oversimplify it, but I do think in the end, I'm in the people's business. And I'm trying to find people where there's trusted relationships. I'm trying to find people who are fine if they're driven by wealth creation, but they're motivated by excellence, wanting their competitive juices are not just measured by their bank account, but having, being a world-class investor, being best in their, in whatever their chosen strategy is.

• 22:52Speaker 01

  And ethics matter. My most interesting conversations that have gotten me over the line with new partners have nothing to do with the investment strategy or only indirectly.

• 23:05Speaker 01

  I want to know what makes them stand tall in a room of peers 10 years from now. And it better not just be the size of their bank account, but they better, they must love their business enough that there are other things that inspire them about what they do.

• 23:20David Weisburd?

  Is the way to ascertain that, to see how they have been historically? So that really augments the reason?

• 23:25Speaker 01

  That helps. We do a ton of referencing, a lot of in-person time. So it's, it's hard for me when something really interesting shows up and said, look, we're closing in two months' time. Even if I can get the same, whatever it is, 50 hours together across multiple years is much more valuable than 50 hours.

• 23:47David Weisburd?

  You want to see that slope versus?

• 23:48Speaker 01

  So ideally, you always make exceptions. This goes back to frameworks versus rules based, but then it raises the bar dramatically.

• 23:57David Weisburd?

  Maybe you could double click and explain this frameworks versus rule-based investing as an allocator.

• 24:03Speaker 01

  Rules-based investing is you know exactly what you're looking for. You run around the world of the global remit, trying to find things that tick all these boxes, right?

• 24:19Speaker 01

  And it by definition is based on historic data. You come up with rules based on lived and observed experience. And it is your definition of like, what is most likely to succeed to help support whatever remit you have, right? Framework-based is, is acknowledging that there's a lot of information in the past. And that helps set the stage of what you filter for. But it acknowledges that some of the most interesting things will just look different. And sometimes it's worth taking on one of your risk categories, right?

• 25:03Speaker 01

  So in your rulebook, it might say, this is a little bit risky, but if you're compensated for that risk, it's okay to violate this rule in the framework, right? Whereas in rules-based investors, like, look, we're not going to do that because this score is a three on this. I might say, it might score a three on this variable. But hey, look at these three incredible Palantir engineers. That talent scarcity, it is being applied in a novel way where I can understand how this could really transform the upside case. And when I look at this, it is okay for me to violate a part of my framework because I'm potentially getting something in return, right? And it shifts the entire debate into

• 25:48Speaker 01

  what is novel, what is different, what's it sort of outside of our framework? And then it prices it in. And we're in the equity risk-taking business. So we're supposed to take risk. We're supposed to be conservatively courageous. And so how do you do that? You have a clear understanding of what you look for, and then you challenge it all the time. And when something's different, that doesn't make it bad necessarily. And some of the most interesting investments

• 26:16Speaker 01

  are when the model has just been tweaked or looks a little bit different, or you might have a philosophy of equal partnership is the best setup in organization. You only want to back equal partnership. What are some incredible investors who run a CEO-led strategy? And if you're rules-based, you might struggle, you might not spend time, but you suddenly spend time with an organization that looks a little bit differently. And you start on asking different questions around, okay, so if this is CEO-led strategy, how do they attract and retain the best talent? It feels like, and my framework just tells me where to put the emphasis of my due diligence. But if I answer it, it's okay if something looks totally different.

• 26:56David Weisburd?

  When you look at your portfolio, do you think ahead of time, what percentage of your portfolio you want to be rules-based and which ones do you want, for lack of a better word, breaking those rules?

• 27:07Speaker 01

  I don't want any rules. I just want a very disciplined approach to what we underwrite. I don't want creativity for creativity's sake.

• 27:17Speaker 01

  So this is not that riskier things are framework based and less risky things are rules based. This is that the entire process for whether it's a plain vanilla strategy or something novel allows for the identification of things that are different. It forces a clear discussion of them. It creates accountability of when you're taking on something that is different. But you also know, because we're going to get a lot of things wrong. And when you get things wrong, you should not have knee jerk reactions. You should be able to go back and say, would I make that decision again? And if I said, yes, it was to give an information, I would make that decision again. Then it was an

• 28:02Speaker 01

  okay risk to take. I tell my team all the time, we have the right, very nice investment committee memos because we think actually being able to articulate, so they're all it's in Word, not in PowerPoint. It's you have to really express, sort of write a good 15, 20 page document on any of the investments we do. There's a sort of a risk section in the back. And I always say, this is your get out of jail free card. If you describe in there the risks that we've identified, that we're willing to take on, and something goes wrong because of that, I'm okay with that because I know we've debated it. I know we priced it in. If something goes wrong and it's not in the risk section, then maybe we made a mistake.

• 28:46David Weisburd?

  In other words, you're not punishing the scientists for setting up the experiment. As long as the experiment is good, you just want to make sure that the experiment is well thought out and then let the results be what they are.

• 28:55Speaker 01

  Again, nervous was the word experiment because I want a pretty high hit rate. But yeah, that principle is correct.

• 28:59David Weisburd?

  To many people, it might seem, well, why is University of Pennsylvania, why don't they just do all the rules based? You get a look at all the top managers. But if you look back the last 40, 50 years, some of the top performing funds are in these novel strategies. If you think about the capital markets, it's a competition between supply and demand for specific strategy. If everyone's using the same strategy, the same right to win, the same differentiation, that looks a lot like data. And oftentimes, some of those best opportunities are in novel ways. So novelty, to your point, is not a thing for its own benefits. It's a way to actually differentiate and to generate alpha in asset classes.

• 29:32Speaker 01

  This goes back to the early part of our conversation. We know the world is always changing. I can't afford to have a static portfolio. So how do I create a process where we occasionally can take on something totally different and new? And there are examples of organizations that have been very, very successful for 30 years, but they're pretty rare. We should always be re underwriting our existing portfolio versus a new opportunity set. I think the discipline of having your existing portfolio always go up against new opportunities, really important. Otherwise, what you do is you just wait till something

• 30:17Speaker 01

  goes wrong in your portfolio, you get rid of it, and then you have an open slot and you fill it with something new. But in a perfect world, can front run that process and you don't do that loss fund where suddenly the business model was broken, the AOM was too big, or the the partners weren't quite as focused, or the succession planning never happened, et cetera. And that already got competed away with something new because you've always been open to something new.

• 30:41David Weisburd?

  Reminds me, what Mel Williams told me is that when he gets net new capital, everything competes for his, I believe, 11 core managers. And the best thing most of the time is more money into those managers. Once you add alpha, you just pour as much capital as you can. Obviously, you have to build a portfolio, but alpha is just so scarce. Sometimes it's not just looking for something new.

• 31:00Speaker 01

  That makes sense to me. Both in my venture buy a portfolio, our top 10 relationships speak for the vast majority of our capital and uncalled capital. But they don't start off in a top 10 position. They grew into a moment because we got more familiar because successful firms tend to build on that success. And we have quite a lot.

• 31:20David Weisburd?

  It's a Stanley Drunkamiller, invest, investigate, write a small check. And as you gain more conviction, you.

• 31:25Speaker 01

  I'm not sure I fully agree with this.

• 31:27David Weisburd?

  Tell me more.

• 31:28Speaker 01

  And they're very, we have peers who've been very successful in this, but sort of this farm team approach, plant a lot of seeds and then really double down. One, I don't think that makes us a great partner. So this from a.

• 31:43David Weisburd?

  You're an optionality.

• 31:44Speaker 01

  They're an optionality when really what we should be is their cornerstone. And really, I mean, we're really good at supporting young organizations in franchise building, right? I think a lot of investors who are raising fund one totally underestimate how complicated it is to build an investment organization. And I always say, you run an operating company first and a pool of capital second. And hopefully, we can be really helpful to you in that operating company building phase. And at some point, they're really good at it and they don't need our support to the same degree. If you have a farm team, it is very hard to build that kind of relationship because you just can't spend that much time.

• 32:24Speaker 01

  And it's, it's like they're always on probation. So I think generally speaking, we want to write a high conviction check from day one on. I'm still over diversified. It is, I'm far away from being over concentrated, so I can afford to do that. It raises the bar for me on when to pull the trigger. It is, if I had the option to write a whole bunch of little checks and see how it goes, it is very, very hard to maintain the investment discipline all fronts. So I would rather have a high bar, make it really difficult to get into my portfolio, than things slip in, you have a rising star on your team, you're

• 33:08Speaker 01

  like, I'm not sure about this, but they're really excited about it. Let's write a small check. There's some really difficult dynamics to contend with when you.

• 33:14David Weisburd?

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• 33:57David Weisburd?

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• 34:42David Weisburd?

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• 36:08David Weisburd?

  hardware when you sign up at square.com/go/howainvest. That's S Q U A R E dot com slash go slash how I invest. With Square, you get all the tools to run your business with none of the contracts or complexity. Run your business smarter with Square. Get started today. This over diversification, it's a common investment theme. I had a former investor from the Cornell Dohm, it explained it that a lot of investors were actually.

• 36:37David Weisburd?

  Double diversifying. So they want diversification on the portfolio level, but they also want on the manager level because they're so sensitive towards any one manager not doing well. Do you think in general LPs double diversified versus looking at it as a complete portfolio?

• 36:54Speaker 01

  This is absolutely true. I sit on over 40 LPs. And I can't tell you how many times LPs are asked the question of diversification within one manager's fund. And I'm like, why do you care? I mean, I get that the manager doesn't want to put all their eggs in one basket or too few eggs in their basket. I want conviction. That's all I'm looking for. And if my manager comes to me and says they want to put 40% of their fund and they have a big GP commitment into one deal, I love it. But even with having sort of that approach to conviction and concentration, when I look across all my

• 37:35Speaker 01

  relationships, and we don't have very many relationships, we're over diversified. And really, you should not look at just your asset class. You should think of diversification. If you do your job really, really well, and you have our type of setup, diversification should be just on the endowment level across all asset classes. It's really hard to do, but that should be sort of the real goal. So I love co-investing, not because of we might get if you pay a little less fees and carry. I like co-investing for a couple of reasons. One of which is I can get really big look through positions into some of the highest conviction companies of my partners, and I'm

• 38:13Speaker 01

  okay. We have a couple of businesses that are 1%, 2%, 3% of our entire endowment, and I can live with that. Most LPs can't.

• 38:24David Weisburd?

  I saw a headline, UNC endowment was 10% in SpaceX because it had gone up some absurd amount. And everybody saw it as a crisis. I thought, what a great investment.

• 38:33Speaker 01

  Don't spend that money before you've harvested it.

• 38:36David Weisburd?

  But I mean, it's a good problem to have.

• 38:37Speaker 01

  It's a wonderful, I mean, that's why you're in venture, right? In venture, you can get these outsized returns that can be transformative for a pool of capital like that. So it's a luxury problem. There's some sort of endowment management and portfolio management, things you have to work through on the interim basis until you've sort of fully harvested that position. But I mean, good for them to have that problem, right?

• 39:02David Weisburd?

  Concentration versus diversification. Why concentrated portfolios on average outperform overly diversified portfolios? And my understanding of this is the way that I explained it on the most simple level is if you're a manager and you're looking at 250 opportunities in a year, you have a top 10 opportunity set. And within that top 100, you have these top 10 that you really like. And even within that 10, you have the top three that you really like. If I'm forcing you as an LP to invest into 15, your average, you're going to go down to your number 12, 13, 14, 15th position versus if you have a portfolio of 10, you get to pick your top 10. Is that really what it comes down to? Or is there more to it?

• 39:44Speaker 01

  You have to believe that you select better in a concentrated portfolio. Otherwise, it doesn't change your returns, right?

• 39:50David Weisburd?

  You actually know which part of your portfolio is better.

• 39:51Speaker 01

  If every deal did the same, it doesn't matter if you have a lot of them or a few of them, right? I agree with you. I think selectivity matters.

• 40:00David Weisburd?

  There's only so many good deals.

• 40:04Speaker 01

  In certain strategies, there might be only so many good deals, right? Venture is complicated, especially early-stage venture, because you do need a certain, you need to be in the right businesses, but it's very hard to tell what the right business is.

• 40:15David Weisburd?

  You need a lot of luck.

• 40:16Speaker 01

  So you do need enough shots on goal. And so it's a bit of a separate conversation. But in buyouts, I do think concentration forces a lot of discipline around not having the marginal deals slip in. It means there is no room for the right, sort of the mid-level person who wants to make a career and knows they get promoted by some deployment because it is that the slots are so rare. Now, you do have to ask some other questions sometimes. Some investors become risk averse, right? They worry too much about the downside protection. Talk about my lessons learned over the last decade. I mean, that's one, right? Overweighting downside.

• 40:51David Weisburd?

  You go back to what we talked about, this rules-based, you need every deal not to be bad versus really going for the big deals, for the winning deals.

• 40:58Speaker 01

  I'm the opposite.

• 41:00David Weisburd?

  But you're saying that's the risk of a manager. If you only give them 10 positions, they have to justify every 10 position. They can't take any risk of anything.

• 41:07Speaker 01

  They're worried that a single write-off impacts their portfolio too much. Well, here again, I think if they focused on the right, making sure there's enough right tail, you don't need that many deals to, right? If you can get three to five X outcomes in a buyout strategy, if you have only eight deals, you can actually afford a couple write-offs. But that is just human nature. That's a hard thing to live by.

• 41:32David Weisburd?

  I've had several allocators say today, the venture capital ecosystem is more confusing than any time in their 20, 30-year career. Do you find that to be the case?

• 41:44Speaker 01

  You can't compare it with 10 years ago, let alone 20 years ago. It is scaled so much. It is a totally different ecosystem. The capital inflow has gone through all the way from growth all the way down to seed, right? You can see that in valuations. The amount of capital that's been available on companies being, staying private longer creates a whole different dynamic. We have an early-stage bias that hasn't changed for us. You only read about the exciting parts of venture. I think for most investors, be very careful whether you want to include venture in your portfolio. You need to be able to get into the best firms. It is close to impossible to build a high-quality venture portfolio if you don't have access.

• 42:28David Weisburd?

  How do you define the very best firms?

• 42:31Speaker 01

  Combination of firm brands and individual partner brands.

• 42:38Speaker 01

  And if you came up with a list, if I asked you to name what are the top 10 venture firms, and I didn't, I'd pick anyone else who's remotely interested in venture, I guarantee we overlap on 80% of.

• 42:54David Weisburd?

  There's consensus at the top.

• 42:55Speaker 01

  I think there's consensus at the top. And it doesn't really matter that we think that. The entrepreneurs think that. And the entrepreneurs are smart. And they're like, who's maybe going to help me? But who's going to really help me raise the next round of money? Who increases the likelihood that I can raise a Series B after my Series A? And I should have them on my cap table. And then maybe I'll take someone else, someone that I feel resonates with me or understands my industry even better. And entrepreneurs have gotten smarter, right? And then not giving 20% to one single firm, they sort of. But the way you know if someone's a top-tier brand is don't speak to all the entrepreneurs. And which entrepreneurs tell you, all else equal, I will

• 43:39Speaker 01

  take their money at a discount and valuation because I think that's actually still accretive to me. And that's the sort of the mathematical test of who are truly the top-tier firms.

• 43:50David Weisburd?

  Professor Ilya Strabilov from Stanford actually did a study on this, whether there was a brand discount for highly branded firms. And that's what he found is that founders are willing to take a lower valuation from the top funds versus just a regular fund.

• 44:05Speaker 01

  The other way to look at it is repeatability of success. And you can actually go back in time, and we did this. You can prove out that brands matter because

• 44:17David Weisburd?

  The persistence.

• 44:18Speaker 01

  The persistence, except for seed. And seed, you cannot, except for Y Combinator, which is a big structural advantage on the seed space.

• 44:27David Weisburd?

  Why do you think there's no persistence in the seed space?

• 44:29Speaker 01

  Couple of reasons. One, it's really easy to raise a seed fund. So this is a lot of them. And then if you're a successful seed firm, most of them then aspire to be a Series A firm. And so I think there's maybe some that could have built that, maybe

• 44:49Speaker 01

  sort of leave the market. I also think this is very hard. At that moment, I mean, very little to look at. And so just the curation of a portfolio that I think can happen at every other stage is very hard. And so I think this, like, these are our seasonal skill of being a good picker. It's quite hard to execute on at the seed stage. I'm not saying it's impossible, but it's versus any stage later. I mean, ultimately, you do need successes in your portfolio, right? You need round-trip journeys to build your brand.

• 45:21David Weisburd?

  You said something that reminds me. Venture capital is an access class. The founders pick the top GPs. In many ways, the GPs pick the top LPs. When you're looking at how these top founders are putting together their Series A, Series B, Series C rounds, there's always the lead check. But what do you think that those founders are looking for from the non-leads?

• 45:38Speaker 01

  Different founders look for different things. Domain expertise can be one. Trusted conciliary is another. A lot of these founders are still very young. Many are doing this for the first time. They might be really, really smart in what they're building.

• 45:55Speaker 01

  But that doesn't make them necessarily fully secure and not wanting to have someone around them that they can bounce ideas off. So I think there are a couple of the very successful partners who, I think people choose them because they want them on their board and they want, they want them as a sounding board. And then sometimes you just pick a second relationship because you know one another balance sheet in the background that might, might step in if that's a rational behavior pattern.

• 46:21David Weisburd?

  Do you risk your next fund raise? What about network centrality?

• 46:24Speaker 01

  That's what I've been on the list.

• 46:25David Weisburd?

  And how would you explain that? A lot of founders tell me they want GPs that have network centrality.

• 46:30Speaker 01

  This is sort of ties into how do firms stay relevant as partners' age and all of those type of topics. But when you look at the entrepreneur community in the cutting AI companies, and who are the arguably relevant founders that you should know? This is, we're not talking about thousands of people, right? That's probably measured in hundreds. That, in the grand scheme of the world's economy, that's a minuscule group of people. And

• 47:12Speaker 01

  Many people know the names of these people, but not many have close relationships to multiple ones of them. So for me, network centrality can be also around some diaspora from some of the most successful companies and everything. Do you have the mind share of this small group of, let's call it 1,000, probably less, most compelling entrepreneurs or soon to be entrepreneurs, right? Some of them might still be within another company that are disproportionately more likely to go on an entrepreneurial journey, have the insights, the credibility to go and raise money

• 47:56Speaker 01

  and venture as much as it gets a lot of coverage and build some amazing business is actually, at its core, is still a very small community.

• 48:06David Weisburd?

  The best answer that I've heard about this networks and GPs not aging out of their networks is you need to find the next one. So you were in PayPal, then somebody went and they started SpaceX. Now you're in SpaceX. Now somebody else went and started Castilian. Now you're in Castilian. So if you're making the right investments, you're going to get these not only companies, but these alumni networks and these great companies.

• 48:27Speaker 01

  That's right. And personality matters from a GP side. I think there are just some people who are just extremely good at talking to entrepreneurs. Sometimes it's because of the technological depth and they can have a mind meld. But sometimes they just understand the insecurities, the fears, the concerns of the entrepreneurs at that moment in the journey. And that goes a really, really long way.

• 48:58David Weisburd?

  That's why I got my master's in psychology. I thought if you could understand the entrepreneur's mind and the LP's mind, you have a specific competitive advantage over others.

• 49:08Speaker 01

  I think that's right.

• 49:09David Weisburd?

  There's this famous essay by Paul Graham about how nice guys could still finish first in terms of VCs. Do you believe that nice VCs could be successful?

• 49:20Speaker 01

  Yes.

• 49:21David Weisburd?

  And why is that?

• 49:22Speaker 01

  Business acumen has nothing to do with being nice or bad. So if you believe understanding business models matters, right? And maybe at the early stage it matters less, but I think as you go on, especially as the later stage rounds, because understanding business models really matters.

• 49:41Speaker 01

  That is in respect. I mean, bad guys can be good. Good guys can be good at it. I also think different people select for different things. And I mean, I like smart, nice people around me. I can respect or have a business relationship with someone who's a little less nice and really smart. But if I get to choose, why wouldn't I? Venture is unique. A lot of it matters getting on the cap table. And then we can have a debate on how much value add you can do beyond that. So there's sort of the nice people can have a very strong entrepreneurial resonance. Sometimes very dramatic people can have strong resonance too and can be really impressive. But I think there is room for nice people. I think having founder empathy matters.

• 50:26Speaker 01

  And that goes back to the comment I just made, like, understanding a founder's insecurities and fears and being able to support and help those, sometimes without describing them as fears and insecurities, is really important. So I think it's, good guys can come in first.

• 50:51David Weisburd?

  I like to look a lot of these things from a morally neutral perspective, just to try to get to ground truth. And then we could judge whether it's a good or bad thing. And there's a bit of a paradox, which is a lot of the people that have questionable ethics, they'll say and do whatever to get into the round. And this is a common thing, VCs over promise. And then there's the nice guy or the ethical guy or girl, however you'd like to frame them, and they might undersell. And the way that I look at this aggressive, the overpromising strategy, it's a high beta strategy. It could work in the short term. If you have a couple of hits, you could kind of get this persistence flywheel of you're in the top deals now, you could talk about the top deals. But if you don't, your reputation burns out very quickly. And this nice guy or girl can actually compound over time. Maybe a slower start, but they start to have this reputation

• 51:37David Weisburd?

  where when founders reference each other, which founders always get their information from other founders, and these are the great ones, they start to kind of build this reputation as being founder friendly.

• 51:47Speaker 01

  I probably wouldn't frame the world quite that way because I don't think being nice means you can't be aggressive or you can't be very direct. I actually sometimes think the nicest thing you can do is be just incredibly honest and stepping on some toes early on. But people know that what you say is what you mean is a great way to build a relationship and is actually being a nice person in life. And in business, you don't want to have to second guess your partners. And so for me, being, I mean, a little bit of definition of, I guess, what is nice is this actually being brutally honest is a really important trait because it's very level setting and people don't know. They might disagree with you, but they know where you stand.

• 52:31Speaker 01

  And so I'm not even sure you start slower or not. It has to do with sort of a trust building exercise. And I agree with you, there are many people who will say anything to try and get in a deal and then disappoint. And I think that part I totally agree with and reputation matters. This is a game of many, many repeated at bats. And eventually people do learn whether you are a serious person or whether you're an honest person.

• 53:00David Weisburd?

  It's also a great self-selection aspect to telling people what you feel to be the truth. You get to see very quickly how somebody reacts to feedback and whether that's somebody that you want to compound over many years or whether that's somebody that's just, there you go, so fragile, that's always going to be a fragile relationship.

• 53:15Speaker 01

  That's generally true. I mean, sometimes you might say, it's a really complicated topic because at the same time, I've had many conversations around the best entrepreneurs don't really want or need feedback. And that might actually be statistically true.

• 53:30David Weisburd?

  Alex Carr, Peter Thiel, Elon Musk.

• 53:32Speaker 01

  All of them probably absorb information really, really well. It's how they get their feedback is probably, you just need to be quite sensitive to that. They don't, they're okay taking the responsibility of the decisions. My guess is all of these guys are extremely good in actually how they build their knowledge base for many of their decisions. And so they do take feedback. They don't want it forced upon them.

• 53:57David Weisburd?

  It reminds me of the story of how Marc Andreessen first met Mark Zuckerberg. And Mark Zuckerberg was very quiet and didn't really say anything. And Marc Andreessen came away from that meeting thinking, one of two things is true. One is either this person is extremely socially awkward and just very shy. Or two, he is just the ultimate sponge. He was just listening to everybody in the room, trying to absorb information. And as soon as he figured out that he's just the ultimate sponge, that's when he decided to invest and join the board.

• 54:19Speaker 01

  I can think of a couple of our partners who run firms that where their superpower is actually listening and knowing who to go to get their questions answered. This generally is a really important skill set. It's not because you're top of the firm that you need to know all the answers and do the math behind the decision. Sometimes it's knowing who to go to. And especially in the venture world, which is so dynamic and you're looking at so many different questions. Are you really, really good at identifying the right questions and the right experts to answer those questions? And that's a very de-risking capability.

• 54:59Speaker 01

  Some people don't have that, the right sort of internal setup to do that.

• 55:05David Weisburd?

  Our advisor, Brett Harris, who was formerly CIO of Utemco, and he was CEO of Bridgewater for a while, Ray Dalio's firm. And he always talks about this believability, which is who is the biggest expert in a specific field? And knowing, it's a meta question. It's not knowing the questions to ask that's important. It's also knowing the questions of who to ask and who has that believability.

• 55:27Speaker 01

  A hundred percent.

• 55:28David Weisburd?

  How is AI going to transform the private markets?

• 55:31Speaker 01

  The biggest challenge right now is a good investor has a clear view of what is the business they're selling five years from now. I think this is very hard right now for a lot of businesses. What moats will persist? How do you think about technology obsolescence? What moats remain? What are new moats? Switching costs, all those type of topics. I think they're harder to interpret than ever. So how does that translate into what? How do private markets look different? There's a downside scenario where you say, you shouldn't have been in private markets. Actually, the opportunity set was better captured

• 56:13Speaker 01

  in strategies where you can move in and out quicker. And that long-term illiquidity is not the same advantage as it did in the past because you just have to be more responsive.

• 56:25David Weisburd?

  The optionality is just much more valuable.

• 56:27Speaker 01

  The optionality is much more important than that. Look, I think overall private markets has less to do with AI. Every alternative asset class, I mean, capitalism works in this country, works incredibly well. And so putting AI aside, you have cost of capital has come down in ventures, come down in buyouts. You should assume base case returns are going to be lower. So you have to be creative and you have to, being median or mean is not where you want to be. You never want to be in venture in that place. And I think being top quartile has become even more important for the question of what does top quartile mean? And buyouts, I'm more comfortable to predict because I think it is who has operational value add

• 57:12Speaker 01

  is going to be more differentiating again. So if you go back 20 years or whenever the sort of the operational value add playbook started to be part of the buyout industry, it wasn't just about financial engineering. There were some early firms that then made a name in that space. And but these playbooks were quite easy to copy, right? And nowadays, most firms have some sort of operational, there are very few unique playbooks. I think we're going to go through a period where playbooks look more unique again and we're going to be able to separate out firms who have done well and upfront. There's an argument to be made

• 57:55Speaker 01

  that you can actually create IP in a way that maybe you couldn't with the traditional operating playbooks where, going back to that example of a partner who's really creative on the sort of dispatch management and route planning, the AI that was, started to take that over. You can hear about that because there's no one to hire. I mean, there's only five people who built it. So if you can't get one of those people, like, that IP might be yours to keep if it's truly unique and has some novel ideas and might not be, maybe it's easy to copy, but maybe it's not. And I think there would probably be.

• 58:33Speaker 01

  Scenarios where people can build within very closely held operational playbooks that are quite interesting. I don't believe anything

• 58:46Speaker 01

  is truly unique for very long periods of time. But you asked me about five years, five years from now, I think we'll be able to distinguish who really adopted AI and created a new level of operating playbook, where it's not just about productivity enhancement, where it's being able to go in and change workflow, work streams.

• 59:06Speaker 01

  On the product innovation side, this can iterate quicker than their peer groups, which gives them a competitive advantage and

• 59:15Speaker 01

  ultimately delivers a much better customer relationship. So that, I don't think to be more necessarily more or less private equity. I just think we will go through a period where we can separate, it's easier to separate firms. And historic performance is not going to tell you who those firms are going to be.

• 59:36David Weisburd?

  Goes back to rules versus frameworks. The frameworks approach today becomes more and more important, given all the moving pieces.

• 59:46Speaker 01

  I think so, but it's my approach to how we sort of try to manage our team.

• 59:51David Weisburd?

  Had a prolific career, Morgan Stanley, Parthenon, Goldman, HIG. If you could go back to when you first started at the University of Pennsylvania Endowment 11 years ago, and you could give yourself one piece of advice, what would that be?

• 1:00:05Speaker 01

  Be comfortable to take risk. Right. The challenge, the opportunity really, and why I wasn't looking to join an endowment. But when I was doing my referencing on some other jobs,

• 1:00:18Speaker 01

  Peter and I struck up a conversation. And what was really unique is that we were really subscale and not fully institutionalized and professionalized the way some of our peers were. So at the time, we were roughly nine billion, it was less than 10% in private equity. And so I faced the challenge of really drawing this private program today, where 30 billion and over 40% in private equity.

• 1:00:42Speaker 01

  This is roughly 2015, so it didn't feel like we're bottom of the cycle. So if you feel like you're trying to build something, going into the top, little did I know that the cycle was going to go for another six years, right? And so there is a tendency that you overweight downside protection. And downside protection would be structural, or it could be that your really prime assets and the opportunity. So we haven't lost any money on strategies that were distinctly viewed as more downside protective, but the opportunity cost of those is really high.

• 1:01:12Speaker 01

  And I should have spent all my time really establishing whether there is a real right tail to determine how fat that right tail is. Is this manager investing behind the right tail outcome from day one on? Or only when the first two years have gone well, take the risk as a manager who day one on believes in the upside case, goes off to the upside case, because that makes up for many sins and

• 1:01:37Speaker 01

  you're sort of actually provides you with a lot of margin of error, especially because we're slightly over diversified anyway. So that'd be probably advice number one.

• 1:01:46David Weisburd?

  What's advice number two?

• 1:01:47Speaker 01

  If I were in this position today, there's been a huge evolution in the markets, especially around secondaries, the secondary markets, which I probably scoffed at a little bit years ago and thought it was sort of a sketchy backwater of private equity. They have professionalized dramatically. And you have the ability, if you're growing a program, to immediately create a much more mature program. You don't have to go through the full J curve. You can have vintage diversification, you can have the cash flow dynamics of a longstanding program way earlier. So I would consider, how do you use secondary markets to really, in a much more de-risk way,

• 1:02:30Speaker 01

  get much quicker to a mature steady state program? Then you can choose, do you keep the secondary kimono, or do you sort of unwind that? And then, you know, go back to a fully primary program or not.

• 1:02:45David Weisburd?

  Thomas, this has been an absolute masterclass. Thanks so much for stopping.

• 1:02:48Speaker 01

  Thanks for having me.

• 1:02:49David Weisburd?

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