E147: Inside the Mind of a $2.4 Billion Investor w/Charlotte Zhang

What is the financial mandate for the Inetai Foundation?

What are you trying to achieve through your portfolio?

We are simply trying to generate the most attractive risk-adjusted returns.

And that is the reason why we actually have so few constraints.

We invest globally.

We don't have any asset allocation targets.

And truly, it is about trying to capture those things that I had chatted about before,

innovation and market inefficiencies, is we believe that that tends

to generate alpha over the long run. When you joined Inotai Foundation,

you were tasked with building a $2.4 billion privates program. How did you go about doing this?

We don't have an asset allocation target. And I tried to begin by aligning with the team on

what do we actually fundamentally want to have exposure to. For us, that answer was we want exceptional returns that are generated from global innovation as well as market inefficiencies.
This naturally pointed us in the direction of you're probably going to invest more in venture and buyout, although we do have some select real assets exposure as well. And then also having a bias for specialists.
We then went on to leverage our networks and I developed a forward calendar of essentially wishlist GPs that we'd like to do further diligence with. I also created a commitment budget to coordinate all of our sizing and pacing decisions.
Very curious. You said you went about building a wishlist of GPs that you'd like to access.
How did you go about building that wishlist? We started off by focusing on thematic areas that we felt tied to that innovation or market inefficiency with innovation. We felt that there was a lot of density of talent in China, as well as an incredibly large market opportunity.
Another example would be, you know, for market inefficiencies, we all know that lower mid-market businesses tend to have a lot more sub-optimized functions. And there would be opportunities to create value add by professionalizing these businesses and then became another subset of GPs that we added to the wishlist target.
And let's say now you've double-clicked, you want to do lower middle market PE. How do you go about executing that strategy? They're the four Ps.
People, philosophy, process, and performance. It starts with having a stable, very experienced team of high-caliber people with the right background of skills, expertise, and relationships to really execute on their strategy.
You also want a culture that values dissenting opinions as opposed to groupthink, and then embraces humility, especially in admitting to and learning from mistakes. The investment philosophy should be focused.
It should demonstrate some sort of nuanced or differentiated understanding of the market dynamics that actually create the opportunities they're trying to pursue. And then the characteristics that qualify for a down the fairway deal.
And then when you think about, right, how do you execute on the philosophy, there then needs to be a consistently applied investment process. This spans from, you know, how do they source? What do they dig into during diligence? How are the decisions made? How do they approach value-add initiatives? And then their discipline in doing buy-hold-sell analyses to determine when is actually the appropriate time to exit an investment.
And finally, performance is the output of cogency amongst the first three factors.

The track record should outperform relevant benchmarks across market cycles and then demonstrate both resilience as well as ability to adapt and react to changing environments. Performance, of course, shouldn't be driven by a couple of deals to the point where it's really hard to differentiate whether it was manager skill or luck.
You sometimes take years to invest into a manager and you're meeting with the manager multiple times and you're tracking them.

What exactly are you trying to ascertain from spending years on investment decision?

You have to spend sufficient time seeing where the rubber actually meets the road. In other words, it's developing context on the exceptionality of the people and then monitoring the consistency of their executional progress relative to what they articulated is their investment philosophy and process.
It takes time for me to landscape comparable strategies. It takes time to really embed myself in an ecosystem enough that people actually feel comfortable and compelled to share what really goes on versus just the polite responses.
So you're trying to see whether their philosophy translates into their behavior. Yes.
And what about during market downturns? What would you like to see managers do when there's turbulence in the market? What's a good way to handle a market downturn and what's a bad way to handle it? Oftentimes market downturns are a test of your conviction. If you have truly studied and developed a nuanced understanding of this market, you should have the conviction to deploy and to actually capture some of those dislocated entry evaluations.
But at the same time with your existing portfolio assets, there are likely to be some more challenges on the operating side. And so hopefully you have the team and capabilities in-house to be able to quickly identify what are the drivers of what's currently going wrong, and then right size kind of for those companies to get on the right trajectory.
And observing managers during downturns, I think learning agility has a high correlation with success. I want to see if they voluntarily share their mistakes and what are the reflections and what could have been done better, as well as how quickly they tend to implement feedback.
I also am very interested in observing team dynamics in purposely different circumstances and settings. Getting to meet people across different roles and seniorities also gives you a sense of if there is this strong, cohesive culture.
You're tracking managers over several years and you're getting these data points. What is the mismatch between what people say they're going to do and then they actually do through their behavior? If you were to invest with a manager that says they take a truly long-term oriented approach, but then when you observe the average time they take to bring an asset to market is like two years or so, that clearly shows to you that perhaps their definition of long-term is just a bit different from yours.
We try and look for folks who stay very disciplined and do not operate on any sort of axis of FOMO. So the idea being they know what type of deal is exactly for them.
It usually falls within a certain check size range as well. And over the course of their fund, you don't see them kind of creeping into increasingly larger check size deals, or even sometimes pursuing those that might seem off thesis, whether it be geographically or sector wise.
Those are kind of the more obvious ones that you can observe. When we were last chatting, you mentioned that if a GP has nuanced understanding of a strategy, he or she won't need to sell you.
He or she will simply need to explain the strategy. What did you mean by that? When you're learning about a particular topic, your understanding kind of goes from simple to complex back down to simple.
So that first simple is because you really just don't know very much. And then when it gets to the complexity, it's because you're actually cobbling together kind of all these like disparate facts and figures.
And how you ultimately end back at that last simple starting point is by organizing everything that you know and distilling it down into a coherent framework. The idea being if a GP has spent sufficient time and effort truly studying their market, they're able to design their strategy with the intent to capture a very specific underappreciated opportunity.
Then in talking to you, all they have to do is really tell you what that target opportunity is for them. Why is it attractive? And then why they're best positioned to invest in it.
It's simple. There's no selling.
It's just explaining. I have found that strategies that are not purpose-built based on some nuanced insight, that that's where you really require some selling.
When we were last chatting, you mentioned that many LPs are looking for fundless sponsors today. Why are LPs interested in this space? Institutional LPs.
We tend to love lower middle market buyout because it has this potential to generate attractive returns by capitalizing on market inefficiency. What you're dealing with essentially is you have less sophisticated sellers and intermediaries that equates to cheaper entry valuations.
And then there's usually a lot of low hanging fruit in terms of value creation opportunities to professionalize these sub optimized businesses. Unfortunately, what happens is the most successful lower middle market buyout firms, they quickly raise the increasingly larger funds, and then they abdicate the inefficient market that actually generated their success.
For us to find these groups early, ideally backing them from the beginning in fund one, it requires spending time with them even earlier in their life cycle of development to build that conviction. That's the reason why LPs are now flocking to focusing on fundless sponsors.
It essentially just represents this earlier phase of private equity investors who are just raising capital for opportunities in the lower market, mid-market on a deal-by-deal basis. And given how difficult the fundraising environment for emerging managers is today, I would say it is an opportune time to access the highest caliber of talent

that's probably being forced to operate in this format.

By investing in fundless sponsor deals,

are you looking to generate alpha

through those specific deals

or is it a way to get a relationship

with the fundless sponsors ahead of a fund?

Specifically chose to invest in fundless sponsors

for both its ability to generate alpha

as well as this sort of strategic systematic approach

Thank you. chose to invest in fundless sponsors for both its ability to generate alpha, as well as this sort of strategic systematic approach to then creating almost like a funnel for backing fund ones.
TIFF actually has a really great set of data that shows, you know, if you look at, call it like the top quartile cutoff for fundless sponsor deal performance versus those of lower middle market buyout. It does in fact outperform across vintages.
That being said, the dispersion of returns amongst fundless sponsors is far higher than that of lower mid market funds. And that is definitely a risk that you need to take into mind when choosing to approach this asset class.
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What's the largest fundless sponsored deal that you've seen come across your desk? Our allocations to these deals are pretty reasonably sized, just a couple of million dollars. But that being said, there are now folks who are, call it, spinning out from kind of larger, more established name brand firms who want to just operate kind of single assets at any given time.
And those can easily have equity check sizes in the hundreds of millions of dollars. I was hoping you would say Elon Musk's $97 billion offer for OpenAI.
Yes, I suppose it would be. Although I think he's got like three or four funds that would be on the hook.
Tell me about your team at Initai. There are seven folks, five on the investment side and two on the operations side.
On the investment side, we are all generalists, although people naturally gravitate towards different areas depending on their interests and passions, as well as background of experiences and expertise. In recruiting, I do think we probably did ourselves a favor by being deliberate and selecting for people with these common values of humility, intellectual curiosity, and grit, but diverse backgrounds and complementary skill sets.
So, you know, some are stronger in risk management, others private markets underwriting, and we even have someone who did directs. This really creates a team with pretty well-rounded capabilities.
There's pros and cons to having generalists versus specialists as an LP. Talk to me about the strengths and weaknesses of a generalist team.
The advantage of being a generalist team is flexibility to evaluate opportunities across asset classes, geography, sectors. You really can then pursue, right, the best risk-adjusted returns rather than being pigeonholed to any particular opportunity set.
I think it also creates a rich learning environment for team members since your day-to-day really can vary dramatically. Probably the most important aspect is in creating robust investment discussions and more folks around the table trying to question assumptions since they're not siloed and therefore actually are more equipped with context and knowledge and experience to contribute meaningfully in arriving at high quality decisions.
The disadvantage of a generalist team is, you know, the risk of being a mile wide and an inch deep on any particular area. And there can certainly be bandwidth constraints and trying to prosecute on too many things because you can actually do all of the things.
How we try and manage that internally is you start each year with planning out your commitment budget. You also set a forward calendar of what your strategic priorities are and then research topics for folks to dedicate three to six months sprints.
And then you assign leads, right, for accountability to deliver some pretty distinct results. What is the financial mandate for the Inetai Foundation? What are you trying to achieve through your portfolio? We are simply trying to generate the most attractive risk-adjusted returns.
And that is the reason why we actually have so few constraints. We invest globally.
We don't have any asset allocation targets. And truly, it is about trying to capture those things that I had chatted about before, innovation and market inefficiencies, as we believe that that tends to generate alpha over the long run.
You have a flexible mandate. How do you manage the infinite opportunities? So we're about 80% committed now.
And so, you know, really reaching that steady state where when we choose to add an additional manager idea, it'll probably be at the cost of needing to exit another partnership, a one-in, one-out. But really what we tend to lean on is that idea of trying to invest with high conviction.
We try, once we have elected to partner with a GP, we really try and lean on them as the dedicated specialists that spend so much time breathing all of the market context and being able to identify kind of the relative attractiveness of opportunity sets as compared to historic. How do you think about diversification? Diversification is important in the sense of if there are different drivers of fundamental value in your portfolio, it equips your portfolio to hopefully weather market cycles in different areas.
But I do think that sometimes diversification, if done for the sake of diversification, just creates a portfolio where any one investment is sized in a way that even if it's successful, won't really be able to drive your returns. That's really what we're trying to ward against.
And so right when I said concentrated portfolio construction, our portfolio is meant to have around 35 GP relationships across the board at steady state. And we're tracking there, we intend to stay there.
It does mean you have to make some pretty tough decisions in terms of keeping the bar really high and also being willing to say, you know, if we do believe in adding an incremental manager, you know, where in the portfolio do we believe less has that same opportunity to generate meaningful alpha. If you're not willing to kind of make these trade-offs and it's always consistently adding in in some ways you're also not forcing yourself to make those comparative decisions as to what would be a better use of capital an interesting conversation with mel williams of true bridge and he was talking about this forced ranking how sometimes the main competitor to a fund is not actually a new fund it's more of a great fund they might have a founder's fund gives them allocation to that.
So that was like a really disciplined way to look at it. We used to do that exercise while I was at Medley Partners, and I thought it really enforced a lot of discipline and also transparency because the way that different people kind of perceive certain GPs may change over time.
And it's just good to be able to naturally surface that and sync those discussions. Sometimes brand could be a lagging indicator of returns.
In other words, sometimes returns depreciate quicker than brand. Always.
And you mentioned Medley Partners. You're also at Iconic.
You're obviously at Inetai. You've sourced GPs in many different contexts.
What has been the number one way to source the best GP ideas or relationships? There's something to this like top-down approach. So if you really commit yourself to, you know, let's say for Latin America, I committed myself to kind of reading about each of the composing countries.
What were the key industries, who were the key players, spending time chatting with LPs who had been committed to the region for a long time. If you do all of that work up front, you're equipped with hopefully enough context and knowledge to then be able to engage in a more meaningful conversation the first time that you meet a GP.
And that in and of itself, I think is what kind of builds the foundation for what can feel like more of a reciprocal relationship of learning. The most talented GPs are incredibly ambitious and smart, and they're always looking for ways to get better.
And I think by trying to learn more so that you can share more, that's been something that has, I think, enhanced my ability to source some pretty interesting GPs. Are there any other LP value add? A lot of the times it's just about being like a authentic, congenial human.
At the end of the day, money is green and it can come from anywhere. But who are you actually working with on a day-day basis? It impacts your mood and kind of the, I think like the joy that you get from doing the same job.
That to me is also very important, having that personal touch of really getting to know people as people. I listened to a podcast with Sahil Bloom and he was talking about his energy calendar, which is going over your calendar and seeing which meetings gave you energy, which depleted you.
I think it's a really valuable exercise. Absolutely.
LPs tend to, we always ask the GP, you know, okay, so how are you being value add to the founders? But if you think about that sort of relationship dynamic, the way that the GP tries and provides value to their founders or management teams should actually be also mirrored in the way that we try and hopefully provide some sort of value to our GPs. But perhaps the expectation historically has just been, you know, by simply providing the capital, that is my value.
I really do think that we can do a little bit better than that. What are the best ways that LPs can provide incremental value to GPs? It parallels a lot of the same things that they're able to do.
GPs, you know, they try and hire and retain exceptional talent. And in that endeavor, you can send them relevant referrals from kind of your expanded network.
And of course, you'd be more equipped to do this. You did the landscaping exercise, kind of know where some of like the exceptional investors are, and also have a dialogue with them.
So you know, if there are certain people looking for opportunities in terms of fundraising, a lot of GPs do want to be very thoughtful and they welcome into the partnership fold and being able to kind of matchmake as to which LP institutions might have similar investment philosophies and alignment. You can make kind of more curated introductions that might shorten their fundraising exercises.
I think this is also part of the beauty of being a generalist. For example, you know, we, when we are thinking about

our biotech exposure in the portfolio, we have evaluated strategies that span kind of the private markets as well as the public markets. And if you are structured in a particular way, you might not know what your counterparts in the public markets or the private markets are doing.
Being able to kind of collect that overarching market view and then relay it back to them can actually maybe provide them with some incremental context that would help them when they're dealing with these folks as fellow stakeholders or even in better understanding why the market might behave in certain ways. I've also heard on the value add is being good thought partner, giving good feedback, getting the right amount of feedback and encouragement, and also being either quick to act on a new fund or maybe coming with ideas.
I'd like to invest in this kind of fund. I'd anchor your new fund.
If you go to a GP and you say, I want to back you in a crypto strategy, and you're that first check, that's a huge value add for managers. It really scales.
I've heard managers with tens of billions of dollars that would love those kind of LP relationships. Absolutely.
Yes. The thought partner piece, I guess, perhaps the same way that founders like saying my best VCs are simply the ones that I can call up and ask any question to.
Perhaps that's what we should also aspire to on the LP side. It's VCs to startups, LPs to VCs goes all the way down.
What would you like our audience to know about you, about In a Tie, or anything else you'd like to share? We are based in Seattle, Washington, but we're trying to fund a more racially just, socially equitable Washington state and beyond.

What was a bit unique in terms of our strategic development is in 2022, we actually launched an investment management company and then last year became SEC Registered. Now, we are an Outsource Chief Investment Office, and particularly, we want to serve

other charitable entities seeking to fund similar initiatives on the grantmaking side, trying to thoughtfully select our partners. It's such a value when an OCIO also has a discretionary bucket and they're in the business of investing, not just advising people.
And hopefully you like the access that you're able to gain in signing up to be a part of a much larger pool. Well, Charlotte, I appreciate you jumping on the podcast.
Look forward to sitting down in San Francisco or New York City very soon. That would be lovely.
I'm looking forward to that as well. Thank you, Charlotte.
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