E148: TIFF's $8B Portfolio Revealed: Strategies Institutions Need

Speaker 1 I think early on, I would consider a sort of a wider range of investment opportunities, willing to take certain risks that I wouldn't now, but maybe those risks depended more heavily on a very specific future state of the world.

Speaker 1 Hey, I was confident about it. The experts I talked to were confident about it, but there were fewer paths, again, fewer paths to victory, fewer ways to win.

Speaker 1 And so, you really needed to believe that you could predict the future a bit better.

Speaker 2 Tell me me about how David Swenson from the Yale Endowment got involved in TIF.

Speaker 1 TIFF has been fortunate enough to have involvement of a lot of fantastic people over the years from the nonprofit community. It all started with MacArthur Foundation

Speaker 1 and the Rockefeller Foundations back when TIF was founded in 1991. And David Swenson, a TIF board member, Hall of Famer, and he was involved with TIFF in its very early days.

Speaker 1 I think there are like myriad reasons why any CIO or other senior executive typically gets involved with TIFF.

Speaker 1 And they're typically CIOs or senior execs at larger nonprofits and they come sit on our board.

Speaker 1 I think a fairly universal one is that they have a desire to serve a broad array of nonprofits while at the same time getting to share ideas and best practices with other accomplished investors who sit around the table.

Speaker 1 So I had not yet joined TIF when David was on our board, but I have been told over the years of his many contributions and lasting contributions from asset allocation help, recruiting other great board members and clients.

Speaker 1 Potentially, most importantly, particularly in those really early days, he helped TIFF access great closed managers just as we were ramping up.

Speaker 1 And a fun fact I learned fairly recently, so I haven't verified this, but if I'm wrong, I apologize.

Speaker 1 I was recently told that in the first edition of his famous pioneering portfolio management, a Swenson called out TIFF as actually one of a very few number of allocators or fund of funds that he thought merited consideration by serious investors.

Speaker 1 So instrumental board member in the early days. And thankfully, we have a great board still of amazing

Speaker 1 CIOs and other senior execs at a great list of nonprofits.

Speaker 2 And tell me about TIFF.

Speaker 1 What is TIFF exactly? Sure. So, TIFF's existed over 30 years to provide investment solutions primarily to nonprofit institutions.

Speaker 1 We really specialize as an outsourced chief investment officer and specialize in private market solutions.

Speaker 1 When we started, again, MacArthur and Rockefeller Foundations looked at the investment landscape of the non-mega nonprofits of the day, and they saw the lack of scale, the inability to find and access the best investment opportunities, and they saw really high fees for pretty bad investments.

Speaker 1 They created TIF to help solve each of those issues.

Speaker 1 So it's been our mission to partner with our clients closely, educate them on areas of our investment expertise and other areas of expertise, and create investment solutions that help them and support them with their long-term objectives.

Speaker 1 Most importantly, delivering what we view as the top investment returns consistently over long periods of time.

Speaker 2 How does TIFF partner with foundations and tell me exactly how that's done?

Speaker 1 At the core of it, we're trying to deliver client-centric investment solutions crafted to support that institution's long-term mission and objectives.

Speaker 1 Typically, large, medium-to-larger-sized nonprofits, small nonprofits as well. It's really been our mission to serve a broad array of clients that

Speaker 1 could fit with our expertise. So, what's included in that? The first piece is investment portfolios.

Speaker 1 That is core to our client needs based on each client's unique situation.

Speaker 1 We believe that any institution, even if it is another foundation of a very similar size, they have their own unique needs and we want to make sure that we can customize to build around that.

Speaker 1 We try to partner on other topics outside of investment as well, though investments is really the core of it.

Speaker 1 So many clients come to TIFF to outsource their entire endowment and some come to TIF just to manage a portion.

Speaker 1 Those clients for endowment would be typically coming for all or a portion of our private markets program.

Speaker 1 As you know, me and my team, we focus deeply on seed and early stage venture, lower mid-market PE, and then direct investments, primarily alongside independent sponsors in that sort of micro cap.

Speaker 1 private equity space.

Speaker 2 Foundations, are they essentially understaffed? They might be too small to have all the proper staff to do these functions.

Speaker 2 And talk to me about what you see from your foundation clients in terms of capabilities and staffing.

Speaker 1 It does vary, and

Speaker 1 it depends a bit on how they partner with us.

Speaker 1 You could have a much larger endowment with a deep team, deep back office, lots of resources, but they're of a size that they don't have the resources to necessarily dedicate to the areas in private markets that we focus.

Speaker 1 And so that could be a very different nonprofit or a different client than someone who is $50 million or $100 million. They're doing everything.

Speaker 1 They're handling all the investment reporting historically and things of that nature, but they're also managing the finances of

Speaker 1 the institution. And so it is actually quite a large variation

Speaker 1 in the resourcing that any of our individual clients would have. Again,

Speaker 1 one reason TIF was founded was to support all sorts of different types of nonprofits, from the very small and maybe under-resourced to ones that are a bit larger and more sophisticated.

Speaker 1 And so we want to have the capabilities on the investment side, the advice side,

Speaker 1 and the client management side, as well as the back office to support that wide range of different types of institution.

Speaker 2 I want to talk about model portfolios.

Speaker 2 So if somebody came to you, let's say a close family member or friend was starting a foundation, given kind of average liquidity and average foundation constraints, what would be your model portfolio for that foundation?

Speaker 2 What would you advise them to do?

Speaker 1 The standard portfolio is something like 25% private markets, 40% public equities.

Speaker 1 20% diversifying strategies, sort of low beta hedge fund portfolio as a a diversifier. And then about something like 15% to pretty traditional fixed income, think treasuries.

Speaker 1 The average nonprofits trying to obtain sort of a CPI plus five to maintain purchasing power after inflation and withdrawals.

Speaker 1 So talking about sort of an 8% target with 3% inflation. Clearly, lots of nonprofits also want to grow their corpus, not just maintain it.

Speaker 1 And so that does require this cornerstone of risk assets that could be

Speaker 1 private, public. You need that sort of equity risk relief to have any sort of hope of building the corpus.

Speaker 1 And so for a nonprofit with good financial standing, for example, moderate reliance on endowment for annual cash, fairly routine P ⁇ L,

Speaker 1 moderate. sensitivity to cash needs for some sort of lockup of capital.

Speaker 1 All this comes into play as we would think about how to, what the proper asset allocation is and helping that institution meet their objectives.

Speaker 2 And Tiff really doubled down on lower middle market and seed and early stage VC. Tell me about why you go after these two parts of the private markets.

Speaker 1 And alpha, really, like that's the summary. I should probably say more than just that.
But

Speaker 1 a core component in our view for long-term alpha generation, long-term outperformance, it's choice of strategy and approach. We believe that's really important to generating alpha.

Speaker 1 So we are focused on owning equity

Speaker 1 in good fundamental business. They're smaller.
They're earlier in their life cycle. But we're looking to capitalize on inefficiency.
So think smaller transactions, smaller managers.

Speaker 1 Everything we do is focused on inefficiency in these smaller, less mature companies because that's a fertile ground for alpha generation in our view.

Speaker 1 Less competition, certainly less sophisticated competition

Speaker 1 at our size. We can be really effective in these areas of the market.
We think that's a key

Speaker 1 competitive advantage relative to much larger firms putting a lot of capital to work and they can't focus on these parts of the market.

Speaker 1 So, again, that less competition in a massive investable universe.

Speaker 1 And then, frankly, many levers for managers we partner with, sponsors we partner with, to create value through strategic and operational involvement with their portfolio companies.

Speaker 1 And so, we're looking to partner with smaller specialist managers who can drive alpha, who could take advantage of these opportunities in these attractive parts of the market.

Speaker 1 Finding and picking the right investments in lower mid-market PE, PE, early stage VC is not easy.

Speaker 1 There's clearly a much wider return dispersion in these parts of the market than when you go up market. There's risk.

Speaker 1 It's extremely important to have tested, regimented sourcing and diligence processes tailored to these markets. It's also really important to have a purpose-built team to attack these markets.

Speaker 1 Because again, it is a different animal to invest, be really focused here versus be more diversified across all parts of the markets or be more focused on less volatile, larger cap strategies.

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Speaker 2 I was speaking to the CIO of BrokenBro, which is a $4 billion OCIO, and he has his thesis on lower middle market PE, And he believed that it was less risky than medium and large cap PE.

Speaker 2 Do you agree with that?

Speaker 1 I sort of agree with that. If you have

Speaker 1 the expertise and the team to focus on that part of the market, it can be less risky.

Speaker 1 How private equity has gotten more and more competitive over the years, freer paths to victory than there were in the past.

Speaker 1 As you move up market to perfection, the ability to add economic value, be a growth catalyst or an organizational change catalyst. Is this harder with larger, more complex organizations and companies?

Speaker 1 Are you overly reliant on getting somewhat lucky with the cycle where you can buy lower at attractive leverage with attractive leverage terms, and then the market accommodates with valuation multiples expanding, and then you sell and make some money, and maybe you made the business a little better, but it's pretty hard to change a large company in two to three years.

Speaker 1 Companies that lower mid-market PE firms or independent sponsors might partner with, they're smaller, more fragile companies, more customer concentration, real key person risks sometimes in the management team.

Speaker 1 It's harder, sometimes underinvested in terms of CapEx or technology. So I wouldn't necessarily want to buy just a pure index of lower mid-market PE managers.

Speaker 1 I do think there are a lot of ways, a lot of things that can go wrong.

Speaker 1 But if you have a process to find and sort of validate the quality of a lower mid-market sponsor, I think at the end of the day, that is a more attractive strategy, not only from a like an upside perspective, but also I think you can dampen your volatility over long periods of time.

Speaker 1 Again, you have multiple paths to win

Speaker 1 if you do it well.

Speaker 2 Talk to me about leverage. That seems to be a lot of the returns for the larger private equity funds.
Is that leverage not available to lower middle market?

Speaker 2 And when does leverage start to be a driver of performance?

Speaker 1 What size?

Speaker 1 Certainly available in the lower or mid-market. The quantum of debt is going to be less than you could get up market.
And the cost will be, the cost of the spread will be higher.

Speaker 1 And so flexibility, I suppose, of that debt wouldn't be as great as you'd see in the lower mid-market, particularly today where, or in the last couple of years, where debt has been a lot more expensive.

Speaker 1 There are more transactions we see sponsor comes in unlevered, particularly if maybe they want to do some MA.

Speaker 1 So they over-equitize the business, avoid the sort of more costly debt, and then we'll work to get to a greater scale, $5 to $10 million of EBITDA.

Speaker 1 Maybe that gets a little bit more to your size question, where they feel like they can add on the debt. The company's been a bit more de-risked.

Speaker 1 They have greater flexibility because there would be covenants to any debt, the debt in the lower mid-market. Then they can get cheaper, more flexible debt later on.

Speaker 1 But there's so much return sort of baked into the base case, even in an over-equitized transaction, that you could see your way to really attractive returns in that transaction.

Speaker 1 I don't think that that dynamic exists in the larger part of the private equity world. You really, given the prices you have to pay, you need to be able to have a substantial amount of debt

Speaker 1 to create the equity value that some of those managers are targeting.

Speaker 2 So PIF, along with other top allocators, are really focused on independent sponsors. Why are independent sponsors so sexy today?

Speaker 1 You know,

Speaker 1 we think they've been sexy for a decade. So it is exciting that other people are starting to appreciate

Speaker 1 that the universe can be a really attractive place to drive returns.

Speaker 1 Why is it interesting?

Speaker 1 The first piece is that the independent sponsor universe, it's a way to access micro Cap PE that you just, you can't get even if you're focused on lower mid-market fund investments 90% plus of deals in with that independent sponsors do are sub $10 million of EBITDA many are five less than five so again there are fewer lower mid-market firms that will will go that small and so it does open up a massive universe um of opportunities that a really high quality independent sponsor can sift through to find hidden gems.

Speaker 1 The second piece is,

Speaker 1 you know, at least today, I mean, people don't get too, too excited excited about dumping capital to back independent sponsors.

Speaker 1 It is the least efficient part of the least efficient part of the market, the PE market, the lower mid-market.

Speaker 1 Many of the companies, independent sponsor might back, again, too small for a typical lower mid-market PE manager. The use of sell-side bankers isn't universal.

Speaker 1 The quality of those intermediaries is variable. Let's say, put it kindly, is highly variable.

Speaker 1 And then most institutional peers, even though there is more interest, as you say, most institutional peers of ours don't invest in this market either. You know, it's complicated and hard to navigate.

Speaker 1 It requires a combo of kind of company underwriting and RV manager underwriting, massive amount of time and effort.

Speaker 1 And so it's hard to get people to devote, like a lot of people just don't have the resources or don't want to devote the significant resources and time you would need to be in this market.

Speaker 1 Being less efficient, as the independent sponsor market is, allows for more attractive entry prices. And over 80% of these deals are less than seven times EBITDA.
Many are cheaper than that.

Speaker 1 Cheap pricing, no guarantee of success by any means, but it is a good starting point oftentimes and it provides some downside protection.

Speaker 1 And then if a sponsor finds a good company, can actually create economic value, really help build that into a better, take a nice small business with a good product or service and make it a really great, bigger business with that same great product or service.

Speaker 1 There's a huge universe of middle market private equity firms to sell these companies on to achieve significant multiple expansion. And you have, again, lots of paths to victory, including

Speaker 1 just being a catalyst for change and organizational improvement

Speaker 1 in these micro-cap PE companies through more basic blocking and tackling, which we think is a less risky way to add value than upmarket where

Speaker 1 companies, again, are more complex, harder to move. And some of that low-hanging fruit's already been achieved by earlier private equity owners oftentimes.

Speaker 2 And independent sponsor is a team without a specific deal. And today there's not a lot of of capital for new funds.
They have some high-quality managers.

Speaker 2 When you approach independent sponsors, are you approaching it from the lens of, is the deal good or is the team good?

Speaker 1 We, we, we care about the deal and the sponsor. For us, it does all start with that sponsor.
That is the, that is effectively the top of our funnel.

Speaker 1 So, we have a variety of ways that we try to find new independent sponsors, whether it be through peers, through other GPs, spin-outs, basic attending of conferences, publishing thought pieces,

Speaker 1 and trying to like, we have a regimented process that we all have metrics to focus on to make sure we're mining our networks to find that next great independent sponsor.

Speaker 1 Most people in the independent sponsor universe aren't going to be a perfect fit. We are looking for people who have more traditional private equity training at good firms that are

Speaker 1 typically middle market, maybe larger than middle market, that are, that want to raise a proper fund someday, but might be taking the next year to five years to build out a track record as an independent organization, to build out the team, to prove the model, to do deal by deal along the way.

Speaker 1 And those are the types of people that we will typically start spending time with. If someone is interesting, we'll take them through our full manager underwriting process effectively.

Speaker 1 And at that point, if we approve them, then we'd consider deals with them. When a deal comes, we'll do a full deal underwriting, as opposed to just having said, hey, we underwrote the sponsor.

Speaker 1 That's great. We'll do all the deals that he or she brings us.
And so then there's another

Speaker 1 deep dive into that company, spending time with the management team, doing our own independent research on the, on the sector verticals, working, spending a lot of time with the sponsor, understanding their thesis risks, how they're going to add value to the company.

Speaker 1 We view this as a great way not only to build conviction or not in an individual deal, but we view it as a great way to build or not conviction in that sponsor to consider another deal with them.

Speaker 1 And maybe after some number of deals, to potentially anchor a fund one commitment, if we think that it is time for them to move on from being deal by deal to having a proper fund.

Speaker 2 Yeah, this funnel where you're focusing on the quality of the sponsor in order to confirm that the sponsor is indeed quality.

Speaker 2 You look at the deals to see how quality the deal flow is for that sponsor. It's kind of like you're checking both criteria, but in the order of sponsor first and deal second.

Speaker 1 That's right. We view it as this virtuous cycle of that it feeds on itself and it helps us build conviction in that manager.

Speaker 1 And all the while we have this nice curated deal funnel with these, you know, people we respect as investors, bringing us opportunities with a

Speaker 1 higher certainty of close.

Speaker 1 And then we can sort of pick and choose which of those investments that we want to participate in. And all the while sort of hopefully building greater conviction in that sponsor.

Speaker 1 Though at times, as we dig in and partner with someone longer term, we do not build that conviction. And so we may stop working with them deal by deal and certainly not advance to a fund commitment.

Speaker 2 And you mentioned that you look for metrics for independent sponsors to partner with. It's kind of a paradox.

Speaker 2 Are you looking for their track record at their previous fund or what metrics exactly are you looking at?

Speaker 1 In terms of what we look for, though,

Speaker 1 in sponsors, we're sponsors with

Speaker 1 experienced individuals, sort of a purpose-built team that aligns well with their strategy, where we think they have some sort of competitive edge

Speaker 1 in an area of expertise. And that we believe that they have strong enough sourcing capabilities, but certainly strong ability to add value to their company.
And then we do that deeper dive.

Speaker 1 A lot of the assessment with independent sponsors is a more qualitative assessment on people,

Speaker 1 one or two, oftentimes one or two people with a brand new independent sponsor. That said, it's not that different

Speaker 1 than when we might evaluate a fund one, where you don't necessarily have a deep attributable track record yet.

Speaker 1 You have to do a little bit of sleuthing because we're not looking to back independent sponsors who've never done a deal or never been a senior investor, like leading a company from beginning to end.

Speaker 1 And so while they may not have attribution, they certainly probably don't have attribution from the firm that they left. We can find out which deals that they were involved in.

Speaker 1 We can talk to, you know, the CEOs, CFOs at those companies, try to figure out what they did, what they didn't do, put together, cobble together a track record and sort of degree of attribution for their prior deal so that we can, you know, using sort of that, so that qualitative assessment as well as kind of putting together some quantitative metrics to look at an important part of our diligence process for an independent sponsor.

Speaker 2 And that's because at the previous firm, they left the firm. The previous managers might not be thrilled about their top people leaving the firm.

Speaker 2 They're not necessarily going to openly vouch for them. That's right.

Speaker 1 I mean, even if they're happy for them and are excited for their next step in their career, doing something entrepreneurial, you know, private equity firms wouldn't want to give attribution.

Speaker 1 They want to keep the attribution themselves. They have their own business to run, their own funds to raise.

Speaker 2 It's a zero-sum. Attribution is a zero-sum game.

Speaker 1 That's right.

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Speaker 2 There's so many great fund ones.

Speaker 2 There's, you know, if you look at the supply and and demand dynamics in the market right now, there's more quality managers than there is quality capital in that space.

Speaker 2 Why even go for independent sponsor deals? Why not just do fund ones?

Speaker 1 TIFF does do fund ones as well. A variety of reasons why we don't just do that, but maybe I'll just focus on one primary reason.

Speaker 1 I guess it was years ago, maybe, I guess over a decade ago at this point, when we did our first independent sponsor transaction, TIFF would look at fun ones in

Speaker 1 the lower mid-market. Though I guess the terminology was different way back then.
And we had some really fantastic successes, but there were also some mistakes.

Speaker 1 And there was a greater volatility of outcomes than I think we would ideally like.

Speaker 1 We had experience as sort of evaluating deals alongside of our lower mid-market managers, more traditional, like kind of co-investing.

Speaker 1 We had experience underwriting fun ones, the things you need to do to cobble together that track record and figure out attribution and get that qualitative assessment that's so key with earlier managers.

Speaker 1 And so, yeah, I think the independent sponsor work started as this idea of how can you make open up your universe, your investable universe for direct equity investments, as well as improve

Speaker 1 how we do our manager selection and our fund one selection, keeping the really high alpha that you can get in fund ones, but limiting the number of mistakes that you can make at fund one.

Speaker 1 And so, independent sponsor investing not only has been a great way to make money, make returns for our investors on those individual investments, but also to find the next great fund one

Speaker 1 and actually have real data points and a long relationship, really deeply knowing that partner, good and the bad, being able to dissect what was sort of good luck in an investment versus bad luck, which is very hard to do as someone evaluating a fund one who's just gotten to know this manager in the last three months or six months.

Speaker 1 It gives us a competitive advantage in underwriting those fund ones. So that's the main reason we think that,

Speaker 1 you know, fund ones are great.

Speaker 1 We will continue to do those, but we think actually doing independent sponsor work allows us to make great returns on the individual deals, but then also improve our returns when we do invest in a fund one.

Speaker 2 Why do and why invest in fund ones? Are they historically better performing than fund twos and lower middle market?

Speaker 1 Looking at the data we have, that you can generate outsized returns in fund ones, optimally sized.

Speaker 1 There's great alignment of interest.

Speaker 1 And

Speaker 1 the key investors at that organization are the key investors leading the deals.

Speaker 1 As they advance from fund two, three, four, even if they're still in the lower mid-market and they haven't moved up market, sometimes those key investors are now managers

Speaker 1 and they're not the key decision makers. They're not doing the deep work that

Speaker 1 they used to do, that they had such great success in. So fund ones, we do see great return opportunity.
That said, I think

Speaker 1 we certainly have plenty of managers we backed where the fund one, where it's fund two, where everything clicked, where they didn't didn't have to deal with some of the startup aspects of a fund one and their sourcing engine was going it was really clicking and going better and it was you know that fun two where they really accelerated so we don't think there's necessarily a magic that we have to enter at a fund one in order to generate returns in this part of the market but but we're not afraid to i guess invest in a fund one uh if we think we have have deep enough knowledge of that of that manager whether and that's that oftentimes means that these days we're we're working whether with a former independent sponsor in a fund one or a spin out from another manager that we know extremely well or that we invested with previously, as opposed to meeting someone, diligencing them for six months to a year, and then taking the plunge.

Speaker 1 We might wait a little longer to build conviction and wait to a subsequent fund.

Speaker 2 And what you're doing when you invest in an independent sponsor deal is actually incredibly difficult. You're paralleling both the diligence on a sponsor as well as the

Speaker 2 specific opportunity and sometimes a compressed timeline. Tell me about how you go about diligencing an independent sponsor time as it comes through the timeline.

Speaker 1 In a perfect world,

Speaker 1 do our sponsor diligence before they necessarily have a new deal that they're looking to raise capital for.

Speaker 1 That doesn't always work out, right?

Speaker 1 When we are able to front load the sponsor diligence and then a deal will come later, then it's not that different than a normal sponsor manager underwriting process that we would for sort of an emerging manager with Limited.

Speaker 1 Same process.

Speaker 1 It's a ton of work but you have but there's not um there's not that deal clock ticking in the background when we have a when we have a direct investment delete um a sponsor brings it to us you know

Speaker 1 either before or right after the LOI is signed we have there might be you know 60 to 90 days want to load up load heavy work up front to get to answer our key questions or at least to to figure out what's diligence threads we need to focus on for the remainder of those days and so that we can give a little more certainty so the sponsor knows like what our big questions are and what would cause us to not move forward with the investment but again like that timeline is really manageable with our team which has a good mix of people with manager selection backgrounds and direct deal backgrounds not overly hard what we have to do if there's a situation where we really are excited about a sponsor and really excited about a particular deal that they're raising capital for and we haven't finished our sponsor work we effectively create two deal teams so there's a sponsor deal team there's there's the deal deal team and then our work uh according so it so it fits in with the timeline of the deal there's lots of coordination and communication with the sponsors we do because the worst thing would be that we decide not to approve them, not to that we don't like the deal, and they're really counting us on that capital.

Speaker 1 So

Speaker 1 it is a ton of effort. It's a ton of resources.
It's a lot of work at once and a devotion of a lot of resources to do that at the same time. Luckily, we have the team that's good at it.

Speaker 1 We have pretty regimented processes in how we what we focus on in any in our diligence for whether it be sponsor or deal. And so we can get it done.

Speaker 1 Again, our preference would be to not have it, not have to dedicate two deal teams at the same time to one sponsor, but we will do it for the right sponsor and the right deals.

Speaker 2 And it's two separate teams, uh, TIFF diligencing the sponsor versus the deal.

Speaker 1 There's clearly a ton of coordination and communication, and overlap in certain sessions of diligence or meetings or things like that.

Speaker 1 Uh, uh, and so there's we need to be able to have people dedicated to digging into that company, that sector, and we need to have people who are really digging into that manager's background.

Speaker 1 And all the stuff I talked about earlier, putting together that qualitative and semi-quantitative assessment of their track record, it takes a massive amount of work.

Speaker 1 And then the deal itself, as you know, would take a, it takes a lot of work to underwrite a company that we're going to be, you know, partners in for three to six years.

Speaker 2 FIF several years ago went through an organizational change. Tell me about that organizational change and how does that affect your clients today?

Speaker 1 FIF became a public benefit company, an employee-owned company about a year and a half ago.

Speaker 1 Prior to that, it was tax-paying non-stock corporation, sort of complex legal structure with no own, actually, you know, no owner. So a sort of a a pseudo nonprofit.

Speaker 1 Not much has changed, which I think is good, right? Being a public benefit company, TIPS mission is the same mission as it was when I joined. Our focus is still the same.

Speaker 1 Our advisory board didn't change. It's these great CIOs and senior executives at these wonderful nonprofits who were the board pre-conversion and post-conversion.
And so that hasn't really changed.

Speaker 1 I think the thing that is particularly valuable about this current structure that we have is many of our peers have had equity to grant as a form of retention and long-term retention.

Speaker 1 We now have that ability. And so we only think that it will keep the team, the same team in their seats

Speaker 1 for as long as possible. Thankfully, I've been able to work with the same crew, senior crew on the private markets team for many years at this point.

Speaker 1 I think now having a pretty broad base of employee ownership allows us to feel even more confident we're going to have the same people doing the doing the work here, doing the investment work here that

Speaker 1 we did pre-conversion.

Speaker 1 What do you wish you knew before starting starting at tiff 14 years ago so many things so many things i think even lots of success investments is tumbling i'm clearly not the first person who's ever said that but it really is um and and at least for me mistakes bring me more pain than successes bring me joy um it sounds sort of depressing don't worry i like my i love my job i like my life but i i really love what we do and thankfully the successes have outweighed the mistakes but what do i what what do i wish i knew prior to starting tiff around 14 years ago i guess my answer sort of ties what I just said to a degree.

Speaker 1 I think I wish I'd better appreciated that we know a lot less about the future than any of us think.

Speaker 1 I think early on I would consider a sort of a wider range of investment opportunities, willing to take certain risks that I wouldn't now, but maybe those risks depended more heavily on a very specific future state of the world.

Speaker 1 Hey, I was confident about it. The experts I talked to were confident about it, but there were fewer paths, again, fewer paths to victory, fewer ways to win.

Speaker 1 And so you really needed to believe that you could predict the future a bit better. Thankfully, I learned fairly quickly that

Speaker 1 there are certain investments that kind of fall into a too hard bucket, at least for me. Maybe they're way out of our core expertise.

Speaker 1 Maybe they're just really hard near to impossible to really underwrite. Or they have, there's really one way that you win.
And then there's lots of states of the world where

Speaker 1 you don't do well. There's a single factor, macro factor, or trend that you're relying on.

Speaker 1 There are plenty of great investments that offer multiple ways to generate return that I think we are well positioned to underwrite.

Speaker 1 Not all of them will work, but knowing that, like, our ability to predict the future is just like everyone else is poor allows us to just be honest with ourselves about what

Speaker 1 the risks we're willing to take and the risks we're willing not to take. And

Speaker 1 I think that at the end of the day, allows us to be better underwriters and better investors and focused.

Speaker 2 Just to bring that to life,

Speaker 2 you may you might have very high conviction that let's say treasury rates will stay low or interest rates will stay low over the next decade and you start talking to people and you start building this conviction everybody has the same thesis and you build an investment portfolio based on that and of course you know we have something that happens both in 2021 and in 2022 which is basically 2021 the rates went down to zero almost unprecedented over centuries and then they shot up also kind of, which was, you know, incredibly quickly, which was, had some precedent, but also unusual.

Speaker 2 So you, you have this kind of, you have this framework into the future, this, this high certainty that's very difficult to actually have given the complex world.

Speaker 2 How do you, so let's say that you now realize that you don't have this crystal ball, even if

Speaker 2 everybody in finance shares shares your view or seen as quote unquote consensus. How do you build an anti-fragile portfolio given that you don't know what the future holds?

Speaker 1 It's a great question. So, you don't know what the future state of the world is.
I certainly know I predicted recessions when I joined TIFF.

Speaker 1 I think I predicted like four years of recession in a row that, you know, that didn't come. But at the end of the day, if you, what do we want to own?

Speaker 1 We want to own good fundamental companies with a real reason to exist that

Speaker 1 can generate return either by buying low at a cheap price and using some cheaper debt, or they can win by bringing on a CFO and tracking KPIs better, hiring the first head of sales to actually start charging up and investing.

Speaker 1 All that goes well and you can do like a little bit of an MA strategy or you can improve your systems.

Speaker 1 These are all very achievable things that a company can do with the right sponsor partner or the right investor base and with the right time horizon that will be harder. in an economic downturn.

Speaker 1 You could find yourself where, you know, something happens in the sector that company operates in and they go out of business or they default on their debt and the lenders take it.

Speaker 1 But if you put together enough a portfolio of these good companies that have multiple paths to victory and you're and you diversify appropriately by sort of by sector in particular, sometimes the regional business, but you diversify across a number of different factors and you do a good job picking those managers, picking those deals.

Speaker 1 We think over time, that is how you build that portfolio that you're still worried about downturns.

Speaker 1 You're still worried about wars in the world and oil price spiking, interest rates going all over the place, giving that floating rate debt if you have leverage.

Speaker 1 But

Speaker 1 one single thing shouldn't sink your entire portfolio because you've own equity and good businesses and you have good partners that are creating real economic value at these companies and catalyzing something, catalyzing growth or organizational change.

Speaker 2 It's almost these multiple factors that make an asset anti-fragile. There's the business itself that has to be good, has to have enough margin, which is another way of saying margin for error,

Speaker 2 margin for economic outlook and then you also want management teams that are anti-fragile meaning that could navigate different markets that make good decisions uh in even difficult markets so you want this kind of and you want to build an entire portfolio of these magical assets

Speaker 2 that survive under under every yeah

Speaker 1 economic

Speaker 1 and as you know we have a we have sort of a framework we use um to what anytime we're evaluating a company typically would be a direct deal but i think it applies to what the types of assets we'd want a fund to own or manager to own.

Speaker 1 Again, 76 lines of the framework. But again, at the high level, it's looking at the business, the sector, the deal, and the team.

Speaker 1 And again, getting to what you just said, like the business leadership position, secular moats, right to win. Leadership is often, I should say, niche leadership.

Speaker 1 Leadership is a niche market because these are small companies.

Speaker 1 And then those attractive financial characteristics around recurring or reoccurring revenue, strong margins, capital efficient, free cash flow.

Speaker 1 These aren't unique characteristics, but they're important even with smaller companies. Oftentimes we'll be some sort of niche leader or regional leader.

Speaker 1 The sectors, we want to feel like they're less cyclical or non-cyclical,

Speaker 1 where there's some tailwinds so that it is, you know, it's not just executing on the business. You have something other than taking share.

Speaker 1 And then again, the team is probably the next most important thing, if not as important as all these, whether that be the sponsor.

Speaker 1 or the management team and then having strong alignment with all the parties around the table and then clearly the deal itself.

Speaker 1 So compelling entry dynamics from our valuation perspective, as well as like a differentiated angle that you have on how you're going to make this a better company.

Speaker 1 And then, we want to see that across our entire portfolio, an asymmetric return fan where the business is good enough, the price is low enough, maybe the structure is attractive enough and is sort of you're sitting above common equity, for example, that you can protect your capital.

Speaker 1 If you run into a really bad economic environment or something unforeseen happens, you feel good about a three times multiple money base case.

Speaker 1 But there are clear ways that you that aren't pie-in-the-sky crazy ways, but they're clear ways to generate 5x plus multiple of money.

Speaker 1 Again, some of those will be wrong sometimes. Our managers or sponsors will be wrong sometimes.

Speaker 1 But if we look through at the portfolio and you feel like we have enough green lights on a lot of those characteristics that we're looking for and not a lot of reds and yellows, at the end of the day, we'll be wrong because we can't predict the future, but we think we'll be right

Speaker 1 far more than we'll be wrong. And luckily, history has proven that so far.

Speaker 2 And this conversation reminds me of this confidence paradox, which is when you start your career, you're over-indexed on confidence and under-indexed on returns.

Speaker 2 And then the older you get, your confidence goes down and your returns actually go up.

Speaker 2 And this is a great example of that: in that you're basically accumulating all this knowledge and you become very conservative by nature, but you end up doing better from a performance standpoint.

Speaker 2 And some people continue to be overconfident and don't really get the lessons. And we all know some of those.

Speaker 1 That's right.

Speaker 2 When you said that

Speaker 2 you wrongly predicted that there would be recessions,

Speaker 2 after a while, and I think a lot of the market, we had this very conversation with the CIO of Calster, Scott Chan, and he said that the market for three years had predicted a recession.

Speaker 2 Now, this year it wasn't predicting a recession, so he thought there might be a chance of a recession.

Speaker 2 When you look at that, do you at some point, do you stop predicting or are you still indexed on your own view and personal view? You just don't as heavily index?

Speaker 2 And talk to me about how you go about trying to predict the future. Is there a place for that in portfolio management?

Speaker 1 There is a place for that in portfolio management.

Speaker 1 Again, thankfully,

Speaker 1 me and my team, we get to

Speaker 1 focus on the micro to drive alpha and don't have to.

Speaker 1 And at the end of the day, we think, well, we might have some detraction because we didn't spend enough time predicting broad macro factors because that's not our specialty in any way.

Speaker 1 But we do think more and more in micro. I go back, I go back and forth because I feel like

Speaker 1 I don't believe that that i

Speaker 1 uh

Speaker 1 have an interest or an ability to

Speaker 1 predict broad macro more broad broader macro factors and even even sort of long term longer term trends in certain sectors are can be very are very hard to predict particularly with any precision

Speaker 1 it is hard to make it is hard to make these predictions i think i used to think more that there were some people who are great

Speaker 1 at predicting some of these macro factors, particularly even shorter term. I think as time has gone by,

Speaker 1 I know enough to know that there's probably someone who has a way to better predict these factors, even in

Speaker 1 the very short term. They probably have lots of computers and PhDs.

Speaker 1 I think most people try to do it and it's fun to talk about at cocktail parties or in meetings, but there's They don't have any edge to consistently predict some of these outcomes and oftentimes have selective memory.

Speaker 1 They remember the time they got it right. They don't remember the 20 times that they were wrong in their prediction.

Speaker 1 I mostly joke about my prediction of like the last of five recessions annually, but it like to a degree,

Speaker 1 and I don't think it impacted how we invested in like, again, this is way back, but in those time periods that much, but to that great a degree.

Speaker 1 It seemed like it's, for me, it is a general waste of calories and time to be, to focus on, overly focus on those factors.

Speaker 1 I think one has to be aware of what's going on, but there's only a finite amount of time in any life and in any day.

Speaker 1 And I do think a lot of people probably spend too much time ruminating on things that they'll probably, that are impossible to predict.

Speaker 2 Goes back to what you look for in managers, niche focus, right to win, competitive advantage. You're applying that to your own team.

Speaker 1 That's right. You said that better than

Speaker 1 my answer right there. So totally right.

Speaker 2 Well, Brendan, this has been a masterclass on the private markets and how foundations invest. What would you like our audience to know about you or about Tiff?

Speaker 1 Tiff is truly a special place. I actually got to know TIFF when I was at Harvard Business School.
A professor and I in my second year wrote a case on TIFF and the endowment model.

Speaker 1 And I got to spend a lot of time with people here and fell in love with the mission and the place and thought there was just some really unique investors who were impressively not afraid to be different than the rest of the world and how they executed and what they did.

Speaker 1 After business school, I went on to do something else in the private equity world.

Speaker 1 But then I fortunately stayed in touch with enough people in the TIFF orbit that I came back and it's been a great 14 years.

Speaker 1 I get to work with smart, humble, and funny individuals, care deeply about our mission, and also as most importantly, generating great investments.

Speaker 1 I'd also say that one thing that I still love about TIFF is that we are smaller than some, but certainly mighty.

Speaker 1 You know, at around 8 billion of assets and growing, we're big enough to do some exciting things to matter on the investment front, but nimble enough to focus our capital on the most attractive parts of the markets, certainly in our view.

Speaker 1 That plays to our advantage. The larger firms have billions of dollars to push out into private markets each year.
It's hard to, you know, you can't execute the types of strategies that we do.

Speaker 1 And certainly, if you tried, it won't matter in the whole scheme of your portfolio.

Speaker 1 You know, I think it's a really special organization that I've been lucky enough to know for many more years than I've worked here.

Speaker 2 It's a storied organization. Any organization that David Senson was part of, obviously, is in a league of its own and it's doing a lot of good.

Speaker 2 And how should people reach out if they'd like to chat with you?

Speaker 1 Sure. My LinkedIn, Brendan Perry, B-R-E-N-D-O-N-P-A-R-R-Y.

Speaker 3 Thanks for listening to my conversation with Brendan. If you enjoyed this episode, please share with a friend.

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