E156: Inside the Mind of a $1.7B Endowment CIO w/Jim Bethea

When we're talking with folks about whether it's low or middle market buy,

we're doing it to trade ideas.

Everybody's trying to judge, do I think the other person's smart enough, right?

Am I going to come back to them if I hear that they're in some other asset class to see if whatever school or whatever foundation, whatever, is smart enough and thinks like we do.

Probably not smart enough, more thinks like we do.

Our incentives aligned is probably a better way to think about it.

But dealing with committees, dealing with budgeting, resources, things, and that leads to conversations not just about investments,

things like that, staffing.

The big 10 CIOs get together.

It's more than just the Big Ten, but we get together so we can have these idea trading sessions about this work for me, this works for you, and how can we build on that?

What are the pros and cons of managing $1.7 billion?

The pros is that we're small enough that we can do small and interesting funds.

So flexibility is the biggest pro that a small fund has.

We're also generalists.

So everyone has a view of all asset classes, and it sets the team up to be specialists in any asset class if they want to go on from here.

And it's also an easier transition to a CIO role.

From a con perspective, a small team, we have limited resources.

So we can't always do everything that we would like just from a financial standpoint, but also investments too.

It's a limited bandwidth that we have.

And, you know, being a generalist is also a con.

You know, we can't get as deep as specialists can, but we, you know, you're a mile wide and an inch deep rather than a mile deep and an inch wide.

One of the challenges that your endowment has and a lot of endowments have is picking its shots, picking which opportunities to even diligence, let alone invest to double-click on and to diligence.

I think it starts with, is there an interest in it?

And so you look and see, is this interesting?

Do we think we have some edge to this?

Or can we even understand it?

There's a lot of really cool investments that you could do that you have no idea at the end of the day what those funds are doing.

And so if you can't understand what they're doing or explain them to somebody that maybe isn't an investment professional, maybe it's just a little bit too

niche for what we want to do.

And a really quick way to figure out if something's interesting or not is returns.

If it doesn't hit the return threshold that we need, we're not going to spend any time there.

Essentially, if what you're saying is true, but it doesn't even hit our return threshold, it doesn't really matter.

Like, I'll use farmland as an example because we're in Iowa.

Farmland's great investment potentially.

It's very diversifying, but single-digit IRRs just are not interesting to us.

As generous investors, you have this interesting problem of you could invest in anything.

How do you choose a new asset class to get up to speed to?

The first thing we'll do is

kind of talk to the team will talk to each other and see like, who do we know that's in this asset class?

And then we'll reach out to those folks and ask them, you know, what is it?

What do you like about the asset class?

What do you dislike about the asset class?

Who's smart in the asset class from a GP community or maybe even other LPs?

And what's really good about the LP community is we're all trying to learn from each other.

And so nobody's really going to say, like, hey, this is something really niche for us, and we're not going to talk to you about it.

I think it's kind of the opposite.

If you express to somebody, we think you're an expert in this asset class, teach us,

that kind of feeds into their ego, and they really want to help us get up to speed.

And we've done that in some private credit spaces where people will tell us, Hey, this is a great asset class, here's why we invest in it.

And that might not be why we, as an endowment, would invest in a pension fund, invest differently than an endowment, even if we're investing in the same thing.

Obviously, everybody wants returns, but stability of returns might be more interesting for a pension fund where we need to hit high returns.

And maybe that stability isn't as important to us because you have stability elsewhere and also how they're investing.

Maybe somebody's doing private credit, but they're doing it direct and that they're underwriting

the credits, not the fund, not a company, they're underwriting the company credit, not the fund credit.

And so you're taking out that layer of fees and maybe that gets them to return that they want to, but we don't have the resources to do that same thing.

So we're not going to be able to invest the same way.

One of the interesting things that I've come across is this information bartering.

So as you get more information on a specific space, that information itself that you've gotten from different parties becomes an asset.

And yeah, you could feed that information, those insights back to other individuals in the asset class in return for more information.

And do you think about things that way?

It's not transactional and that this is a quid pro quo necessarily, but definitely when we're talking with folks about whether it's low or middle market buyout or VC or what have you,

we're doing it to trade ideas, but everybody's trying to judge: do I think the other person's smart?

Am I going to come back to them if I hear that they're in some other asset class to see if

whatever school or whatever foundation, whatever, is smart enough and thinks like we do?

Probably not smart enough, but more thinks like we do.

Are our incentives aligned is probably a better way to think about it.

And that leads to conversations, not just about investments, but dealing with committees, dealing with budgeting, resources, things like that, staffing.

The Big Ten CIOs get together.

It's more than just the Big Ten, but we get together so we can kind of have these idea trading sessions about this worked for me, this worked for you, and how can we build on that?

The interesting thing about endowments, while we all

compete, and the Kubo says we all compete against each other, and athletic

conferences say we compete against each other there, but we really don't.

The way that we solve a problem at Iowa is different than the way any other school solves the problem.

We all have generally the same return targets.

You know, it's probably 7% to 9%.

It's a big range, but that's generally where everybody is.

But you've got individual other constraints, like, you know, how much of the operating budget is that foundation?

How much new gifts are you taking in?

All these things are nuanced differences that greatly affect our ability to take risk, but there's no great database that says, like, who are our peers?

You know, our peers are similar-sized public schools, but that doesn't really tell me that what they're doing is different.

There's schools that are 30, 40%

venture, and there's schools that are 30, 40% private credit.

I don't think we could be either one of those.

And so, you know, that governance structure dictates a lot of

how you invest, what your network is.

There's a lot of variables other than your size or your athletic conference that really tell you how

an allocator thinks about risk.

On the transactional nature, lack of transactional nature in relationships, one of the standards that we hold ourselves at Westford Capital to is we make sure that every phone call that we have with somebody, they are somehow better off, whether it's more insights, whether we make an introduction.

And that's how we know that the relationship is sustainable versus us just kind of pinging somebody to get some information just for ourselves.

That's a good way to think about it.

If it's somebody's checking on a fund we're in and we're

on that recommend, that list of resources to talk to,

we'll talk to them about we invested in this fund for this specific reason.

You might invest in a different fund for a different reason.

If we're being a reference for a fund and we're doing a reference call, we're trying to, hey, this is an area that we're looking at.

This is an area we think we're good.

If you ever have any questions in this area,

feel free to reach out to us.

And you're trading that information as well.

Like, okay, put in the back of your head: if you want to learn about private credit, talk to this organization.

If you want to learn about something else, talk to another organization.

So, we're definitely doing that and trying to make each other smarter along the way.

You mentioned something very sexy, governance, something that everybody gets really excited about.

But, in seriousness, it is, when you look at the academic literature, governance, especially in pension funds, is almost one-to-one correlated with returns.

So, talk to me about governance.

What is the best practices for governance?

It differs a little bit by the organization.

And so, like,

it's what is the organization comfortable with from a governance construct, right?

Like, you know, maybe you've got a committee that wants to meet with every investment manager.

And maybe you've got another committee that, like, hey, we don't even want to talk about managers.

You as a team, just go do it.

Come back to us, talk to us about the big issues, talk to us about asset allocation, talk to us about resources, things like that.

So, it's really the organization, what they're comfortable with.

The variability of that is.

What's helpful is that everybody's on the same page and that the governance doesn't change from one quarter to the next or one chair to the next.

The target return doesn't change because you have a new CIO

or a new board member, committee member.

And so making sure that everybody understands what are each other's roles.

What's the role of the committee?

What is the role of staff?

Do you use any third-party consultants?

What is their role?

What is everybody for?

And get everybody to agree to that.

And really what you need above all that is somebody to hold all those stakeholders accountable, right?

If a committee says we don't want to be, we as a committee don't want to be involved in the manager selection decisions, okay, that's fine.

But if you then have a committee member that comes on is like, I really want to dive into manager selection discussions during the meeting.

Somebody and it's it's usually going to have to be another committee member.

If staff has to do it, it's pretty awkward.

But if you have somebody come in and say, okay, that's not what our role is.

Our role is oversight.

Our role is asset allocation.

That's really helpful to everybody involved so that everybody kind of knows what their role is.

I've had many asset allocators say this one thing, which is essentially IC should not be involved in manager selection.

They should be involved in asset selection, asset allocation strategy.

If you wanted to steal a man, the reason why the IC would be involved in manager selection, what would be that steal?

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I can't tell you that.

It kind of depends on what you're meaning by manager selection, right?

You know, one end of the spectrum is we have to bring the manager the name.

And they're not meeting with the manager, but we're bringing the name.

And then the other one is we as a committee want to meet with every manager and make the determination.

We'll take staff's recommendation, but we ultimately determine that.

We get hundreds of emails a week.

We talk with hundreds of managers in a year.

And we have myself, I've met with thousands of managers over my 20-year career.

And so you have this knowledge of what good and bad is, whereas maybe as a part-time committee member, you don't, right?

You have a subset of what that knowledge is.

You see the tip of the spear, like you see the best ideas that your staff is bringing to you, but you're not seeing the 99% of the ideas that don't even make it to that level.

It's harder to discern good from bad.

If you take the top 5% of any asset class, right?

Like some of those are going to be, you're going to like some of those better than the others, but they're all top 5%.

It's kind of like a very specific Lake Wobegon situation.

And maybe you like one better than the other, but it doesn't mean the other one's bad.

Right.

We can look at the universe and then we bring a specific manager.

You don't always want to have two or three managers doing the same thing right you get closer to beta if you do that and so what i've seen sometimes when i was a consultant what we would see is you know you always bring three managers to the finals right and and then what would sometimes happen is two get hired like they would ask us as a consultant like who do you like and we'd say we like manager a and they say we like manager b let's hire them both you're closer to beta now and at some point if you keep doing that and you slice it up enough like you're just beta you're just expensive beta at that point.

It's a little bit different in private markets because it's not a zero-sum game.

But at the end of the day, if you think about VC, right, you end up hiring, you know, a hundred VC managers, you're just closer to median, and you're decreasing that outlier events effect on your portfolio.

And so, you got to kind of think about that portfolio construction a little bit when you're selecting these managers.

I've seen this with committees where, you know, they

very much want to make a decision on that.

And it's trying to get them to understand

it is just the tip of the spear that you're seeing.

And the other thing about that, too, is there's things wrong with every single manager out there.

There's no, you know, make, there might be a couple out there where it's like, okay, this is just a no-brainer.

Citadel and Sequoia, right?

You're never going to turn those down.

Beyond that, the other...

tens of thousands of funds and managers out there, I can find a flaw in all of them.

I can actually find flaws in those two as well.

It's just in everything, you're overlooking some of these flaws because you think the return potential is better than the flaws.

Reminds me of this decision by committee.

Sometimes whoever's just loudest is the one that gets listened to.

In other words, every fund has pros and cons, but whoever just had a cup of coffee and wants to interject on a specific manager pro and con seems to be the one that outweighs the other committee members.

The other thing, too, on that would be the first voice, right?

If the first voice is pro or con,

committees, and not all committees, but I would say most committees are conflict adverse, and particularly larger committees.

Like, if you want to have more conflict in a committee, it's got to be three people.

Like, the more people you add beyond that.

So, if you got a 30-person committee, there's going to be no conflict in that.

Whoever says the first thing, that's probably going to go.

That's one thing about building a committee that people have to think about is,

you know,

you want some discussion, right?

When me or my team presents to the committee, we're not saying that we're right.

We're just saying that this is what we think and asking them for feedback, whether it's on a manager or whether it's on asset allocation.

You're doing that for feedback.

Both of our opinions are of equal value, right?

Like

if it's the committee's opinion that matters more, then we just need to listen.

I don't know if you need staff at that point, right?

Staff's opinion matters more than the committee.

You don't really need that committee, right?

And so

they both need to be be there, but they need to be of equal importance.

If one is more equal than the other

or more important than the other, then it's not going to be good for one of those two.

It's usually that the committee is more important than staff.

I don't know if there's ever, you know, maybe David Swenson at Yale, he was more important than his committee, but probably not, because there's a lot of heavy hitters, I'm guessing, on the Yale Investment Committee.

So, the committee members actually drive selection more than the staff?

When I was a consultant, I've seen that, where it's the committee's decision.

I've heard stories from other CIOs where it's, you know, we bring a manager in and its staff makes that decision.

It says, hire this manager.

And they say, no, we're going to hire a different manager.

And so

that only lasts so long because eventually your staff's going to say, why are we doing this?

And they're going to go look for a job somewhere else.

I talk with my peers of like, we're trying to figure those things out.

And if somebody has a problem with that, we're, okay, here's how you might think about that.

And here's how you might kind of drive that change.

One of the means in asset asset allocation is that the incentives are not quite right.

You have CIOs with very high bases and sometimes no carry or no upside and you also have committee members with similar constructs.

Talk to me about the incentives when it comes to committee members and staff and how you would improve it if you could.

For the most part, many members, they're not getting paid, right?

And so, you know, this is kind of a part-time job for them.

And

I'm on various boards and stuff, and I don't want anything to do with like the day-to-day management of it because I just don't know enough about it, right?

So, their incentives are more let's make them feel good because they're probably donors.

It kind of depends.

Like, an endowment is different than a foundation like MacArthur, which probably isn't raising new money, right?

And so, those

there's different incentives that our committee might have to their committee.

You know, make sure that they're happy because they're donors.

We're going to ask them for money later on

or now.

And for staff, it's you want to make sure that they're not taking crazy risk because of short-term incentives.

And I would say that 99%

of endowment staff

that has some level of variable comp short-term.

It's one in three years.

The main reason for that is because most people don't stick around for more than five, or certainly not 10.

Very, very few are tenured.

I've been here 15 years, and there's just a handful of folks that have been around in their organization for that long.

So you want to make sure that the incentives are aligned and that you can't game the incentives.

And that's why like when I talk to my peers about what their incentive comp, it is like crazy difficult to kind of articulate what it is.

And the reason why is so that you can't game it, right?

If it's, you know, if it's like one year versus peers, I'm just going to take a ton of like short-term risk.

I'm going to do a lot of secondaries.

I'm going to do probably do more VC than buyout because buyout holds valuations for a year.

And maybe my committee knows that.

Maybe they don't.

There's an information asymmetry, right?

Like we know more about what's going on in the funds and how they value their underlying companies than the committee does.

You could kind of game that if you wanted to.

And so

you're trying to design an incentive plan that can't be gamed, but it's difficult to do sometimes.

I have heard that there's a tendency to favor certain asset classes over other ones because of their markup.

policies.

Seems like an easy fix for that would create some kind of earn out even if that person left the organization.

They would not get paid until DPI, for example.

So,

what you'd see to mitigate that would be: okay, you're going to earn this comp on like one in three years, but we're going to pay it to you over three years.

So, um, you have to stick around, right?

So, so if we figure this out in year five, then you know, you don't get it.

Or what you see sometimes too is you have to be here three years before you even get any incentive comp.

So, we have to see what kind of investor you are.

And if you are kind of gaming the system for some of this stuff, like the CIO would see it, right?

And so then the CIO would have a conversation with the staff members like, hey, this isn't really how we invest.

I don't know how often this stuff happens, but like I could see like, you know, if you tell me the incentive plan, I can probably tell you a way that I could game it.

It's a never-ending game theory.

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Yeah, and then the other thing, too, about it is like how much, how much, how much dollars are we talking about?

If it's, you know, the CIO bonuses are like 75 to 100% of their salary.

And so, like, I can see why people would game that.

If it's like 10 grand,

I don't think people are going to spend too much time gaming that.

I just sat down with Cliff Asnas, co-founder of AQR, and he sits on a lot of ICs.

And one of the things that he said, one of his big pet peeves is

how committees focus on the bottom performers.

So they'll focus on the two worst performing funds.

And there's a couple of inherent problems with that.

One is you probably should be talking to your top performers, making sure that you could get more allocation, build a relationship with them.

And the second one is the low performers, especially in something like the hedge fund worlds, might be these diversifying assets that hit every five, 10 years that have very high asymmetry on the upside, but perform poorly on the downside.

How should committees think about where they focus their attention in terms of portfolios?

Aaron Powell, that's where you kind of get into governance too, is like, you know, what is the committee's role?

Is it to understand what's going on in those low or high performers?

Or is it, hey, this asset class, private equity or hedge funds, is that asset class performing the way we think it should perform?

And staff, are you concerned about any of the high or low performers in there?

You're absolutely right, and Cliff's right.

I don't get a lot of questions about the funds that have outperformed what we thought, you know, the base underwriting case, right?

But those are the ones where, you know, if it's a hedge fund more than private equity fund,

you have to think about like they're probably taking more risk than they're telling you that they're taking, right?

If they're consistently doing something that you don't think is possible, then it's probably taking more risk.

But you, you know, you're generally you're okay with it because the returns are really good.

But like we've, we've actually, over the years, have, have cut some of those top performers because we just think they're taking too much risk.

It's going to bite them at some point and let's get out before that happens.

But absolutely correct that like, I remember this when I was a consultant, like we would show like kind of that, the traffic report of like red light, green light, yellow, like who's who's not in compliance with the returns, who's outperforming and who's okay.

And it was always the red funds, the funds that are underperforming, that's who we want to spend a ton of time on.

And Cliff has experienced this, right?

Going into 2021, when value was getting crushed,

he was probably red light in almost every strategy that he had and probably every client that he had.

And guess what happened if you redeemed from them in December of 2021?

A lot of those funds were up 20%.

And he just got a Lifetime Achievement Award last year.

And you don't get that for bad performance.

That's when you have to kind of look at that.

Is this fund doing what we hired them to?

Because there's cyclicality to anything.

Maybe not private equity because that's been cyclically positive for the lifetime.

But any type of hedge fund strategy, any type of long-only strategy, like it goes in and out of favor.

And if you like a manager, if you think they're really good and they're out of favor, that's when you should be making those allocations.

And you're absolutely right.

when that manager is outperforming, you need to have those conversations with them.

Like, can we get a, if it's a private fund, fund, can we get a larger allocation?

Citadel's closed, right?

So you can't really get in to that flagship fund that they have.

They're returning capital.

And so you are fighting like, hey, don't return as much capital.

And so you're, hey, great job.

Pat him on the back, all that stuff.

Part of that is also essentially a failure of the CIO and staff to really educate the IC.

This is the role of this asset.

This is the role of that asset.

These are the ups and downs.

There's a famous case study at Pension Fund that owned a diversifier for like a decade and it was losing a couple of percentage points.

And then the staff, the year that it actually hit, I think it would have returned something like 100x

of capital.

They decided to take off the trade because nobody really knew why they had this losing asset.

So I think education is a big part as well.

I've been thinking about what you were saying about this.

reversion to the mean where you're a consultant you you present three managers and they would choose two managers the opposite of that is also very interesting i i spoke to mel williams They have this forced ranking system.

Their biggest competitor is actually more of their winners.

They're like, we want more founders fund.

We want more Sequoia.

I think there's not enough of that.

It's like, how do we further push our advantage within our portfolio versus bringing in a new manager and some would say diversifying the portfolio instead of diversifying the portfolio?

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We've used that term here, and I think it's gaining more traction.

I think there is a definite push among allocators to have

higher concentration in their output.

Like, I want fewer line items than more line items, which 15 years ago, I think the you know, pre-GFC, definitely it was let's have a thousand funds in our portfolio rather than 10 funds in your portfolio.

Alpha is really hard to find.

And if you can find it, size it appropriately.

Now, there is the flip side of that, where if you

only have

five funds in your portfolio, then

something blows up at one of those funds.

You're kind of screwed.

As a CIO,

if one of my staff members is underwriting that and that person leaves, do I have the ability to maintain that relationship, or does that relationship go with that staff member?

I think you see that maybe sometimes in the venture community, where if Sequoia doesn't know who I am and I'm like, hey,

let me try and get maintain that allocation, they might say, no, like the allocation was with somebody else, not the organization.

That's a concern is like if you build that super concentrated book, if something goes wrong with one of those managers, then

it's going to be a wild ride.

And so that gets into that education process of like, look, we think this is.

this is a really good alpha source, alpha engine, but maybe it isn't one day and is everybody okay with that?

And so we've set concentration limits with some of our managers where if somebody's above 5%, it's not that we can't invest.

It's just that we go back to the committee and say, hey, these guys are over 5%.

And so they're raising another fund.

Are we okay with that?

And everybody has to kind of agree to that specific thing because while I might be okay with it as a CIO, a committee member or another stakeholder might not be.

And so that is very idiosyncratic to our organization.

Somebody else might say 30%.

And so it just kind of depends on what that is.

What I find is if the relationship is over a longer time period.

So if you're in Sequoia's first fund,

if that concentration today is like 20%, you're okay with it.

But I don't think many people would say, even Sequoia, we're going to go 20% into Sequoia today because you just don't have that history that some of those other folks do.

Alpha is hard to find, right?

So we're going to make larger commitments than some of our peers in this space.

If I hear that, you know, Michigan's in a fund, like, I'll look and see how big is that allocation that they're in there.

Like, that might mean a lot to my committee.

But when we find out, like, okay, this is like we're in it at 1% and they're in it 10 basis points, it doesn't matter as much to them as it might to us, even if that 10 basis point position is like three times the size of our position.

And so, just because some other university or endowment endowment or pension, whatever, is in a fund, it doesn't really mean much because

there's other pools that a lot of these funds have too.

And so maybe it's not the endowment pool, maybe it's the cash pool, maybe it's some other pool.

And the resources and return considerations of those pools are different.

We might have that relationship with that organization reach out and say, hey, why'd you do this?

And they can tell us.

When you first started doing private investments, we would have these conversations like, okay, Yale's in this, somebody at Harvard's in this, whatever, somebody's in this, a university that you know and respect.

But we would still have to review the legal documents.

There's all this stuff that you have to do.

You just can't assume that because one of these schools is in there, they're negotiating

the same side letters that you are, and they're thinking about it the same way you are.

Even though these are really well-respected schools, what they're trying to accomplish from it might be different than what you're trying to accomplish from it.

So you have to think about that.

Oftentimes, these very large pools, they want co-invest, or they want other factors that are not directly related to fund performance, core fund performance.

Absolutely.

We find with family offices,

they will do a fund not because they really like the fund, but because they want co-invest.

And they're comped on co-invest.

Okay, I get that, but

that doesn't necessarily mean

that they will have the same diligence that we will.

And we've seen that with some family offices when they're like, well, we did an hour phone call, but we had done some co-invest with them.

And so we did the fund because

we met them through the co-invest.

We're just doing it because we kind of have to.

We have to check that box.

But we really just want the co-invest stuff.

And

that's a different rationale, right?

Because you can opt in or out of the co-invest.

And so if you make some kind of de minimis investment in the fund so you get these large co-invests, then

that's just a different ballgame than what we're trying to play.

I'm curious, you said on other committees.

Do you find that the size of the investment or the concentration in the portfolio is positively correlated with the fund's ultimate performance?

I never really thought about it that way.

I think what you find, like I'm on small boards, right?

So it's not like we're managing a billion dollars.

I think what you find is they just defer, smaller committees, they just defer to whatever advisor is in the room.

Like they generally don't have somebody with an investment background on the committee

or on the board.

And so, hey, we've had this advisor for 20 years.

We work with them.

We just listen to them.

And so, what's difficult from my seat when I come in, I'm like, well, I don't really agree with everything they're saying.

It's kind of like, you don't want to be that person that just disagrees, but you kind of take the conversation offline.

Like, help me understand why you're trying to invest in whatever it is and just kind of get that rationale.

I think something like real assets is a great example where people invest in real assets because they think it's an inflation hedge.

It's like, okay,

most of the time we're not in inflationary environments.

So you invest in this asset

because at some point in the future, we might be in an inflationary environment and that asset's supposed to perform well.

But what's it doing?

in the 80, 90, whatever percent of the time that we're not in an inflationary environment.

We're just trying to diversify.

Like, what are you trying to diversify from?

Equity risk generally, because every endowment

has predominant equity risk.

And what happens when

equities are down or credits are tight and all correlations go to one, right?

Everything, all these diversifying assets can trade like equities.

And so what are you really trying to get from that?

I think, you know,

Trying to understand like why people are doing things is really helpful.

And maybe they're doing it, you know, just because they want to diversify.

And a lot of the studies about diversification are like, we're going to take a 60-40 portfolio, we're going to add 10% of some asset, and that asset shows diversifying qualities, right?

Okay, but at 10%,

right?

And so now when you take that and like, okay, we're going to make it 1%, we're going to make it 2%,

maybe it's not as diversifying.

I'll have conversations like, okay, you know, take this up to 10%.

Like, oh, that's too risky.

It's like, well, the study that you're basing this whole thesis on diversification had it at 10%.

You find with a lot of these things that are diversifying away from equities, everybody puts them in the portfolio at too small a size for them to actually be diversifying, for them to do anything for returns when you do have maybe those inflationary time periods.

And you end up with the divorcification that you mentioned.

Like, that's kind of where that comes from.

Is like you just slice this pie up into

a million pieces, and you're beta.

Is that not the incentive of consultants to provide beta to their portfolios?

Essentially, they get paid on how much assets they manage.

If they could get a 20% return one year and a 5% return next year, it's not going to look as good as an 8% every year.

And they have this kind of incentive to smooth out returns and deliver beta to their clients.

I think it's right.

I think they what they try and do is educate folks about you want a diversified portfolio and

it's really difficult to find alpha in all those diversified pieces.

So, you need somebody to help you do that, and that's where the consultant comes in.

At the end of the day, what you could figure out is like, do you really want alpha or is beta good enough?

And then

does that beta actually provide what you want?

And I think we found, and certainly during COVID-19 in the GFC, a lot of things that were diversifying were not at that time period, right?

So, when you need things to be diversifying, they're not.

But it is kind of easier to say,

look,

we have four asset classes, but you have 10 asset classes, you're more diversified, right?

And it's like, you know, is private equity diversifying from public equity?

It's all equity, right?

And so you can divide this up in many different ways, but I don't know if it makes your portfolio any more diversified because you're doing that.

It's kind of like 15, 20 years ago

when I was doing mutual fund, working working in a mutual fund, doing manager selection, there's a morning star style box, right?

Like that three by three matrix.

And you need to be in all of these asset class, you know, all the different equity buckets to be diversified.

It's like the reality is they're all the same, right?

There's very few markets where growth is up and values down.

You know, you'll see that where growth might outperform value, but it's not like growth is going to be up 20% and value is going to be down 20%.

That's pretty rare.

And so you're really just over-diversifying.

And it turns out that like what is growth is also value.

And like that's not just some binary construct.

You know, it's a little bit grayer than that.

And so

you end up with a portfolio that's over-diversified.

It can make you feel good.

It's hard to imagine a world where you just have a bunch of beta and

you get to the return target that you need.

If you actually believe that that's going to happen, then you don't need, like, manager selection in that world doesn't matter.

And I know like there's the Brinson study that says manager selection doesn't matter.

I will say that they chose like the three asset classes where manager selection matters the least: public equities, core bonds, and cash.

I think you're going to win based on your underlying holdings of your cash position, right?

And so, as you introduce these asset classes that have more dispersion, VC with the highest dispersion rate, manager selection absolutely matters.

It absolutely matters what companies you own in those asset classes.

But if you didn't believe that, then you would say,

we're going to shoot for median return, and we're going to shoot for median asset

allocation and hope for the best.

And I think what would happen if you did that is you would almost always underperform.

Nobody's target is the median asset allocation.

It's just the outcome, not the goal.

And so

if you did have that as your goal, the median asset allocation, you're probably going to underperform

probably more often than not.

And so then you get into the manager selection piece of it, and it's just really, really hard to invest in some of these asset classes if all you're trying to do is meet.

I don't think you should do anything alternative if all you're trying to do is like, hey, that median return looks good

because it's going to be a wild ride.

And what's going to happen, kind of like what Cliff was talking about, when you're underperforming, that's when you're going to be like, hey, well, let's not re-up in this, not just manager, but asset class anymore.

And I think people that were kind of thinking about that, maybe in venture, because they were overallocated, those folks are still investing, right?

Maybe not as much.

I haven't heard anybody that's like, I'm completely turned the switch off on venture based on what happened or what's happening right now.

Some people did that in 2001 and then they did in 2008.

And hopefully this time they've learned the lesson.

And in this market cycle, they're definitely keeping or even adding to their.

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Winners.

What you're seeing is maybe that point, like they're adding to the winners so they're looking at that it's like okay you know we had 30 venture managers

that we've you know we've added a bunch as as you know late teens and in early 20s and like maybe we don't think the all of these funds are going to be top quartile so you're not going to re-up with some um you're going to re-up with others you're going to ask them for more allocation but you're really trying to figure out who those winners are.

Now, there's not a ton of persistence in these asset classes, but you still kind of think that your ability to figure out the process and philosophy and the people that are involved, that's going to lead to the performance.

But I think you're seeing that more in venture than, hey, we're just going to turn the spigot off.

You guys have a small staff, so I know you don't really focus on venture.

Do you look at it from a fund-to-fund lens, or how do you get exposure to that part of the market, or do you just decide not to play in it?

We have historically had kind of the growth equity piece of it.

So maybe late-stage venture and growth equity, which has performed pretty well.

We don't have a ton of the late stage stuff, it was more growth equities.

You're absolutely right.

Like, it's we're capacity constrained just from a time perspective.

And venture is, you know, it's funny because we talk about as a team, and we've got five investors, and there's a lot of funda funds that are only five people.

But there's a lot of those funded funds only do one thing, right?

And so it's not necessarily a people problem.

It's if we do this, it's going to take a ton of time.

We're going to be flying to Silicon Valley like every week or every other week.

Somebody's going to be there.

And then there's things that

we can't do.

As we think about the program, it's right now we're using fund of funds.

Maybe at some point

we go direct, but right now it's just fund of funds purely because we do have time constraints.

And there's other places that we've determined that we can find value or outperformance.

I think small staffs, and if you talk to endowments that have 20 people, they're going to tell you that they're a small staff.

So, whatever endowment you're talking to, they always say that they have small staffs.

But when you're five people,

I think there's two or three things that we can do well.

And

we could say, okay, we're going to do venture, and that's going to be an area where we think we can do well.

But the reality of that is it's going to be 10 plus years before we figure out whether we were right.

And are we willing to wait that long?

That's going to be really hard.

And I know every endowment says they have a long-term investment horizon,

but I've yet to meet one that really does, right?

Like there's somebody on that committee or stakeholder or something that doesn't have a 10-year investment horizon.

It's one year, three year, whatever.

And that's to your point earlier, that's the loudest voice.

And so

we've chosen to do fund of funds.

It's not thrown in the towel because even within that, we talked to a lot of LPs that we respect that have done this before, that have been doing venture for decades.

And we said, hey, if you had to start from scratch, how would you do it?

It's funny because the largest funds get the largest amount of money.

Obviously, they're the largest funds, right?

And they raised like 60% of the VC dollars last year.

But we kind of talked to our committee about, okay, if you have a $5 billion fund,

what is the probability that five billion dollar fund returns a 3x

like that's really hard that's 15 billion dollars think about all the companies that

need to invest in they're going to get you to that and then like a 20 20 million dollar fund 3x is 60 million dollars probably one company maybe two companies and so that led us to like think of more on the on the smaller side, which is you know seed pre-seed and and that's where we can get maybe some of those outlier outcomes the later stage stuff i I think it's just going to be really hard.

I'm not saying they can't do it,

but the probability of them doing it is pretty low.

I want to highlight something very important that you said, which is we have five people on staff.

So instead of trying to do everything, we're going to pick our shots to the two or three asset classes where we could win.

So just because you have a generalist team doesn't mean you try to be good at everything.

In fact, it means the exact opposite.

The biggest mistake I made when I first started here was, hey, here's this asset allocation.

That was approved before I started.

But then I looked at it.

I'm like, okay, let's do this.

Let's go, let's try and add alpha everywhere.

And it was just me.

So

that was impossible, right?

And then we added somebody,

one or two members along the way, and like, it's still impossible.

And so we spent a lot of time thinking about where can we add alpha?

And to

the point earlier about you're going to look at that underperforming manager on the list and be like, you're going to talk about that manager for an hour.

And if that manager is in public equities, like

what is the value add that that manager is going to have over time?

Like, if you think a public equity manager is going to outperform by 10 basis points, like

that's not a lot, right?

And so now you're probably going to allocate

tens or hundreds of millions of dollars to that manager.

So that 10 basis point

is a very good contribution to the portfolio.

but there's going to be times when they're detracting by two or three hundred basis points, right?

And so

you don't have that in private equity where you can outperform by three, four, five hundred, a thousand basis points.

And so maybe it's a smaller amount,

but you can do that.

And like your time commitment is basically the same.

Like whether you underwrite a long-only fund and it's $500 million or you underwrite a VC fund and it's $50 million or $5 million,

it's harder to underwrite that VC fund, right?

I'm going to make a statement.

I want you to correct me because it's oversimplified, which is you want to focus on a couple asset classes where you have alpha where you could outperform by 300 to 1,000 basis points.

And then everything else, the public equities, you want to potentially index and focus on fees.

So give me more nuance on that.

What do you want to do in the asset classes that you don't have the edge?

The other thing you got to think about if you don't do beta, let's say you do active management.

And if you do active management, you're you're still taking some type of

overweight or underweight, right?

Whether that's sector, whether that's market cap, or whether that's geographical region, you're taking that.

And somehow you want to be compensated for that.

So if I were to do that today, I would probably say,

let's have some overlay strategy so we're getting rid of that.

Like, if I truly think this is manager selection, let's get it rid of all these kind of regional market cap or whatever sector biases and just focus on their ability to pick stocks.

When you kind of flip it to the private side, you know, your 3% to 3%

is generally, hey, we think we can outperform by 3%

if we go in the private markets.

But

I don't think people spend enough time thinking about, but what is the public market return going to be?

Private credit's blown up today, so let's use that as kind of the scapegoat here.

Like private credit crushes

public credit on a PME basis.

And the reason is it cheats, right?

Like it's taking more credit risk than the public markets.

And you can, you know,

what's your target kind of benchmark on that?

Core or core plus, right?

And so like everybody knows you can beat the core.

It's the easiest index to beat.

You just go longer duration, more risk.

Like

a huge percentage of core managers outperformed the core index because they cheat on it.

And private credits cheating even more.

But what you have to think about on that is, let's say you outperform by 5% to whatever benchmark benchmark you're using.

Is that 5%

enough to justify locking up capital?

We're an absolute return fund.

And so what you can find in a lot of those strategies is I'm beating this public benchmark by 5%

or more, but I'm only getting 10%

IRR.

And you discount that IRR to get to an annualized return, and you end up like, I'm locking up capital below what my target return is.

And like, are you really benefiting from that?

Is it really providing you what you need?

And I would argue, no.

For us, I don't think it gets you there.

But if I was a pension fund and was trying to allocate and was worried about the volatility of returns, and I knew, okay, this is going to get me a 10% IRR every

single year,

I would allocate to that because that's a different incentive than if you're an endowment that needs to hit

a target return so you can maintain the spending power of your endowment.

To play devil's advocate, when I listen to people like a Stan Drunken Miller or Cliff Asines talk about how difficult it is for them not to pull the trigger in a down market and to hold steady, I start to think: could too much liquidity be a liability, especially when you have committee members?

So, outside of providing for the university's expenses every year and maybe having a good

runway of capital, could liquidity actually be a negative function?

And why is liquidity always seen as a positive?

Yes.

So I remember talking with some folks at AQR about this years ago, where I was like,

what's the academic study that says private capital should be 3%

better than public equities or public whatever, right?

And because my theory was that number is variable based on

kind of governance and other factors that go on, because private capital provides discipline, right?

To the earlier point of like you're worried about your underperformers.

Well, if you have an underperformer in public equities, you can sell them.

If you have an underperformer in private equity, you can sell it, but it's going to come at such a massive discount, you're probably not going to sell it.

So you do buy some discipline just from that.

So I can make an argument for certain allocators that you don't need to outperform public equities.

If you get the public equity performance from private capital, then

you're going to be invested all the time, and it's going to be a better ride than

we're going to allocate to funds that outperform, and we're going to redeem from funds that underperform.

And Morningstar has that return of like a flow-based return, and it's always less than whatever the annualized return is over the same time period because

people will allocate to hot funds and redeem from underperforming funds.

And so with private capital, you can avoid that, right?

So you do get some discipline.

And the other thing to that is, yeah, liquidity, we need to do something, right?

You do have a little bit of like, hey, we've got all this liquidity.

Let's play with it a bit.

Let's buy this.

Let's buy that.

And so you have to have that discipline that you're not always buying things because then you get up with that, you end up with a couple different scenarios there.

Either A, you could be overdiversified because you just buy a lot of different off-benchmark things,

or you're taking unintended bets.

And so you have to figure out, like, hey, let's add 5% to EM

and EM outperforms.

It's like, okay, well,

now we're 10% overweight.

I don't know what time period you're going to double your EM weighting, but let's assume that it happens.

And

are we okay with redeeming from that?

And I think what you find is you have to really kind of figure out why are you making this decision, right?

Like, why are you going 5% into EM

and predetermine why you would sell from that?

Because if you don't predetermine why you're going to sell when you buy some asset that's liquid, what I found when I was a consultant working with clients, like they just never sold.

And so that would trail off.

You know, the returns would be bad.

And then it's like, well, why did you have us do this?

It's like, you guys wanted to.

You wanted this exposure at this size.

And so hopefully your meeting minutes reflect that conversation.

You can go back and say, remember, this happened.

But yeah, liquidity, it gives you this illusion that you can kind of do things

that from a disciplined standpoint, you probably shouldn't do.

Yeah, listening to Stan Drunken Miller talk about how much he struggles with it actually gave gave me a lot of peace in that it's essentially we're ultimately human beings.

It's kind of the analogy.

Do you want to put out a bunch of chips on your counter every day and practice self-discipline or do you just not want to buy them at the grocery store?

There is a limit to human self-discipline, especially when you have the committee approach where everybody kind of reverts to the person that's the most panicked in the room.

There's a study by Daniel Kahneman

on a topic called myopic loss aversion.

So this was a behavioral finance study, and it showed that investors who check portfolio daily see losses 41% of the time, far more often than those who review every five years, which only see 12% losses in their portfolio.

So a three and a half X change just on that one factor of how often do you see your portfolio and how often are you predisposed to these swings in the market and these kind of emotional aspects of investing.

Think about private too.

You only get four marks a year, right?

But even when you get those marks,

we're at the end of March, right?

So we're just starting to get our 1231 market values trickle in.

And so you're reacting to something that's three months ago.

And in the stock market, particularly, you're reacting to something that's happening in the moment.

You can trade 24 hours a day.

So if COVID hits and the market's down 30%, you have to react right then.

Whereas with your private portfolio, like, all right, well, let's wait and see what happens.

And then

what might be happening is

well the 1231 marks were x but since then everything's improved right and so we're we think 331 is going to be higher and that's generally what happens when you go to an annual meeting and like they're they're kind of intimating what's going to happen you know that's in april and may it's like well march is going to be better um

and so you do have that where if you don't look at it um as often and you don't with private markets you're not going to worry about it as much i i definitely worry about the stock market more than I worry about privates because I can look and see.

I can look and see what the stock market's doing today.

Where will tariffs affect my public portfolio more or less than my private portfolio?

I don't really know, but I know with my private portfolio, there's not a lot I can do with it.

And even though you get the marks every quarter, you might be locked up for 10 years, anyways.

There's nothing I can do with that mark, whether I like it or not.

The only decision I can make, there's two decisions I can make.

I can re-up, which isn't going to happen in the moment,

but you could sell.

I know there's a lot of organizations out there that just use the secondary markets all the time.

We've never sold part of our portfolio, so if we were to look to sell,

if I'm on the other side of that, I'm going to be like, there's something going on in this portfolio.

I'm going to give it a bigger haircut or something.

Or you just do it every year, but you're sending a signal to the market.

I think the opposite has been what I actually struggle with, which I would have sold my winners way early on the venture side.

Once something's up 10x, it's like, you know, it's time to exit.

I don't have, you know, the cojones to basically hold something that's up 10x.

That's just not in my DNA.

But that forced hold is also, and arguably, especially for venture where everything's driven by power law, arguably even more important than not selling your losers.

The other thing you have when you sell that, like the GP approves it, right?

And so the GP knows that you sold that.

So when you go up back for that re-up, they're going to say, sorry.

I think there's this mythology to that a little bit.

And they're like, yeah, that might happen.

But if you explain to them, hey, here's why we sold, we had to sell.

And you can come up with a story that might resonate with some.

It's not going to resonate with everybody.

But if it's true, they're truly a partner and be like, hey, man, we just had to take advantage of your great fund because all these other funds we had are trash and we just needed liquidity.

Like maybe, Maybe that resonates.

But there is

if I sold

a fund, I would most likely be doing that because I had no plans of re-upping with that GP.

My guess is the GP would tell you, hey,

you're not in the next fund if you do this.

When we were last chatting, you mentioned that as you looked into the private equity asset class and how you wanted to play it, you asked yourself the question, if everyone wants wants to invest in private equity, will return stay the same?

Tell me about that thought process.

I still ask that question because I think

even though there's liquidity issues going on in private equity and private capital in general, people still are, hey, let's maybe not increase our private equity target, but at least maintain it.

And funds are growing, right?

So you're kind of increasing the dollars in that.

And so what we did was looked at how people were investing.

And, you know, the biggest funds obviously get the most dollars and the most attention.

But did we think that those big funds would have the return potential?

And

anybody can get into the big funds, right?

I can call Apollo tomorrow.

I feel like I could call them.

And if they're raising a fund, they'd be like, okay, yeah,

we have space for you.

Whereas some other funds you can't, right?

You can't do that with Sequoia.

What we did was we looked at where do we think value is going be found and um

what we where we found like the higher um ability ability for a higher return um

is in smaller funds and so you also have a lower outcome right so if you're fourth quartile it's going to be worse than if you're fourth quartile of the mega buyouts the medians are all the same and so we thought do we have some ability

to invest in smaller funds.

And so our network happened to be the Iowa network and folks that we knew at the time.

They had access to folks that were pretty smart and were in the smaller fund space.

So that's kind of how we built the program in private equity is like, let's do smaller funds.

There are a little bit some nuances to that in that,

you know, nobody's going to know who those funds are, right?

You go to a cocktail party and like, yeah, I was in Apollo.

It was great.

Everybody knows who Apollo is.

You go to a cocktail party, and like, I was in some $150 million fund.

Nobody's going to know who that fund is, right?

And they're like, Are you sure that's a real fund?

Are you not getting, you know, is that fraud?

But we, since we were introduced from our network, and some of our committee members

were instrumental in that network, that gave a little credence to this.

Like, these aren't fly-by-night folks.

It is a little different, though, and that, like, the underwrite, like, if I underwrite Apollo, I'm pretty sure that organization is going to be a going concern.

They have HR, they're pretty good at fundraising.

If somebody leaves Apollo and starts their own fund, they probably weren't involved in a lot of that stuff.

So, you know, you have conversations with them about what's the business plan of this organization.

How are you going to fundraise?

You know, and talk to them about that and get some answers to that.

And like, we remember this stuff.

I remember.

distinctly being in the

office of a fund that was raising their fund one, and they sat across the table from me and said, Jim, we're never going to raise over a billion dollars.

Fund three was a billion dollars.

Now, fund one was a 30x or 30% return, so that was great.

But we didn't do fund three specifically because he told me he'd never raise a billion dollars, and here he's raising a billion dollars.

And so, we looked to do things that other people weren't doing.

And so, we were generally a lot of the funds where you are one, if not, you know, maybe there's a couple,

one other

institutional investor.

There's usually a fund of funds, but there's not another endowment.

So we have to be comfortable being the only endowment in the space.

There's family offices potentially, but

maybe they're doing a million dollars and we're doing $20 million.

That's a big difference.

And so it was, you know,

skate where the, you know, really where nobody else was.

In the smaller funds, I think you can do a little bit of that.

It's kind of in the VC corollary to that would be pre-seed and seed.

You know, it's a little bit more capacity constrained in those areas,

but

smaller kind of leads to,

I think, better returns.

I think what somebody like Hamilton Lane would tell you is it's not fund size, it's deal size.

What I would tell you is show me a $5 billion fund that's buying $15 million EBITDA companies, all of them, and I'll believe that.

fund size doesn't matter.

And then show me a $100 million fund that only bought one company.

If the correlation is performance and deal size, I'm going to say there's a pretty strong correlation between deal size and fund size.

And lower middle market is one of these two, three bets that you decided to really specialize in at the University of Iowa.

Why lower middle market?

And what's your thesis around that?

There's so many companies in the lower middle market.

And even if there are a thousand lower middle market private equity firms going for them,

they can't cover them all, right?

It's just it's an inefficient market.

It's inefficient sellers, right?

Those, those sellers aren't as sophisticated.

I say that they're not sophisticated, and I've never met a business owner that didn't have some idea what their business was worth, right?

But they're not as sophisticated as the CEO of Walmart, right?

Like, just, just, you know,

and so it was, it was kind of playing in a pond that not that many people were fishing in.

And even if they were fishing in that pond, it's such a large pond that it doesn't really matter if there's a million other folks doing that.

You're buying these mom and pop companies that

a lot of the kind of the tailwind to this is baby boomers retiring and their kids or grandkids or whoever doesn't want to buy the business.

They need to sell the business so they can retire.

And so that is a tailwind to this, but there's so many of those.

What I always found when I was an investment banker was you have somebody that was running a company and they made whatever level of income they were making, which was, you know, whatever the revenues of the organization were, they were comfortable with that, right?

They didn't really want to work 20% harder to get 5% more income or revenue or whatever.

So they're just, let's maintain status quo.

Whereas a private equity fund can come in and be like, okay, we're going to pull these levers to grow this business till, you know, at 20%.

And we're going to bolt on some other acquisitions on this.

And we're going to get it to $100 million of EBITDA.

And all of a sudden, there's a million funds that are going to try and buy that.

And so then it becomes very competitive and more efficient on the pricing side.

The way you make change operationally in some of these smaller funds and smaller deals,

it's easy to understand, right?

You're figuring out which SKUs work and getting rid of the ones that don't.

This isn't like I'm going to buy this business.

I'm going to sell off the real estate and do kind of a leaseback thing.

And it's more like a financing game.

You're not doing that in the lower middle market.

You're employing people, job creators, as Mitt Romney, when he was running,

would talk about.

Whereas the kind of Elizabeth Warren, like they're job destroyers and community destroyers, like that's not the lower middle market.

They're not buying assets, levering them up, and selling the aircrafts and firing the people.

Exactly, exactly.

It's like a lot of the

very rare case in private equity, just for the record.

I think outside of the movie Wall Street, it's not very common.

It isn't very common, but that's what gets the headlines.

And so even if it happens once a year, once every five years, like you're seeing, I think, this in the Northeast where there was a hospital, I think in the Northeast, that went bankrupt after private equity sold it, and they're blaming private equity now.

And there's all these laws that are being proposed to have clawbacks on private equity.

That's not going to affect us directly, but it will affect us in the fact that like

maybe some of the companies that we own in our portfolio would sell to some of that stuff.

And so those buyers aren't going to be there.

They're going to be more scared.

I will say like from a buyout venture perspective, Venture has done an amazing job selling what they do to the public at large.

Buyout has done a horrible job doing that because like all you remember is like Toys R Us or RJR and Abisco and things like like that.

It's like, you know, there are probably other things going on.

Venture is ironic.

Venture has done a much better job PR, but private equity has done much better lobbying.

The venture lobby,

all due respect, has not had the resources or the effect of the private equity lobby.

I think some of that's changing now, particularly with a lot of folks from the venture community going into the Trump administration.

I think they're kind of recognizing that is where

the growth of

the United States is probably going to come.

I think there's a big baby boomer effect to some of this stuff.

Like, I don't see a lot of people from my generation or younger trying to start concrete companies.

You know, if you had a concrete company,

you're trying to retire from that, sell it to private equity, car washes, things like that.

There's just a lot of those things out there where it's ripe for private equity.

But I wonder about

kind of your point of like, you know, when we built the program and everybody's doing this stuff,

I wonder about what does 10 years from now look like 20 years from now when you kind of have this generational cliff of like Gen X isn't really starting these companies.

Will private equity exist?

The buyout industry exist to the level it is today?

I don't think it will.

And I think you're going to see just this natural shift towards VC because of that.

Like

the

ability to start a company is so much easier on the VC side.

If I'm going to start a concrete company that's labor intensive, it's capital intensive.

If I'm going to be a pre-seed fund, like obviously you're betting on the idea and the person starting the idea, but it's like it's easier

to do it at some scale.

It's easier to start a pre-revenue tech company than it is to start a mom-and-pop shop, essentially.

Yeah, that needs to change, and maybe it will.

But I think in some ways, like private credit's going to play into that, right?

Like, eventually, private credit will start lending to that.

It's taking away everything that banks lend to.

And so,

I can see that having some of these micro-private credit funds will do some of that stuff.

And so that's just going to change over time.

It'll be a little bit easier.

There's this belief that lower middle market is more risky, and there's a counter-narrative that it's actually less risky because there's less leverage.

Is it more risky with higher returns, or is it actually less risky with higher potential returns?

I would argue that it's less risky because, yeah, it has less leverage.

The fruit is lower hanging.

I don't know what some of those mega buyout funds, the levers that they can pull are, particularly now when it's America first.

And if your pathway to growth was outside the United States, that's going to be a tougher thing to do.

Hey, we're going to build a plant in China.

We're going to build a plant in Europe.

I don't know if that's going to happen.

You've maximized some of your revenue, like short-term, low-hanging fruit revenue opportunities.

So now you have to bring down costs.

Yeah, 10, 15 years ago, it was 20 years ago, let's build that plant in China, let's build that plant in Mexico.

I don't think you're going to be doing that today, right?

And so you're going to have to bring those plants back to the United States or face a tariff.

And you don't have that problem in lower middle markets.

So I would argue on that level, it's less risky.

You know, we talk with some of our lower middle market funds about their underlying portfolio companies, and they're under stress.

There's no question they're under stress.

And even though they're not as levered, you know, if it was a bank, they would have workout groups, right?

And they would just take the keys and they'd figure it out.

With the private credit, it just grew so fast, they don't have that ability.

And so they're like, okay, you're in breach of covenant, technical default, work it out.

We don't have the ability to take over your company and just work it out.

You see a lot of pick loans because of that.

And, you know, we'll get you on the other side of this stuff,

which doesn't give me a great feeling about this is a great time to invest in private credit.

What do you wish you knew before starting at University of Iowa roughly 15 years ago?

The biggest thing I wish I knew was how difficult it is with one or two people to manage the portfolio.

And so I would have hired

two people faster.

I would have hired two people rather than one person.

I would have done that sooner.

I wish I knew how cold it got here in Iowa in the wintertime.

I don't think I would have made a different decision, but maybe invest maybe in warmer coats and stuff.

The bigger thing is like figuring out how to scale the team because

at the time we were very consultant driven.

We still have a relationship with the consultant, but you're relying on that consultant.

And it's the conversation that I had with my committee chairs over the years about that was like, do we want the knowledge to be in Iowa City or do we want the knowledge to be outside of Iowa Iowa City?

And so it's hard for me to manage a portfolio if all the knowledge is outside of Iowa City.

So let's kind of bring that in-house and have the team

get that knowledge and know the companies.

And I think from a GP perspective too,

if I was a GP, I would rather work directly with the underlying LP than through a consultant because if I never meet that LP,

then

I would just intuitively think like re-ups re-ups are going to be harder.

You just don't have that relationship.

It's also relationship-driven, right?

And so, if I know somebody and on a personal level, I'm not going to forgive them for underperforming, but I'll give them the benefit of the doubt.

Like, maybe they can work through this.

And so,

I probably would have pushed for a larger team faster.

You could try to get more information and understand why that underperformance is.

Is it the market is down?

Is it part of the strategy?

Sometimes it's part of the strategy to underperform three out of four years, like in the hedge fund space.

Even in private equity, you find sometimes people are like,

we're going to take some operational, make some operational changes.

That's going to be expensive.

So the markups aren't going to be as fast.

And so we're going to look like we're a third quartile, fourth quartile fund.

One of our best performing funds was a year before the follow-on fundraise, they were deep fourth quartile.

And they said, this is what we're going to do to turn this around and they did it and it's it's a 25% IRR fund today

and so

we we knew from that relationship that they would do that and the other thing we invest in smaller funds when I when I give you know 10% of

allocation to a fund if they're raising 200 million dollars and I give them 20 million dollars I'm probably on the LPAC but I'm definitely one of their first calls, right?

And I get a lot of information from them.

Whereas if I give $20 million to a $20 billion fund, you know, I'm so far down that list before I get a call returned, and I'm not getting much information.

And you develop that relationship with folks, and you truly understand what they're doing rather than like PR talking points about what's going on.

And hey,

we can understand, like, okay, at the end of this, it's going to be really good fun.

Right now, it's got some struggles, but we're okay with it.

Jim, this has been an absolute masterclass on Dowman investing and a lot to talk about.

Want to do around two and look forward to catching up live as well.

Thank you for listening.

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