March 21, 2025 • 41 mins
In this episode of How I Invest, I speak with Brendon Parry, Head of Private Markets, Deputy CIO, and Managing Director at TIFF Investment Management. Brendon shares insights on TIFF’s mission to serve nonprofit institutions through tailored investment solutions. He discusses the importance of private market investments, the legacy of leaders like David Swensen, and how TIFF partners with foundations to achieve long-term financial goals. Tune in for actionable strategies and valuable perspectives from a seasoned investment professional.
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Episode Transcript
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(00:01):
I think early on, I would consider a sort of awider range of investment opportunities,
willing to take certain risks that I wouldn'tnow, but maybe those risks depended more
heavily on a very specific future state of theworld.
Hey.
I was confident about it.
The experts I talked to were confident aboutit, but there were fewer again, fewer paths to
victory, fewer ways to win.
(00:22):
And so you really needed to believe that youcould predict the future a bit better.
Tell me about how David Swenson from the YaleEndowment got involved in TIFF.
TIFF has been fortunate enough to haveinvolvement of a lot of fantastic people over
the years from the nonprofit community.
It all started with MacArthur Foundation andthe Rockefeller Foundations back when TIFF was
(00:45):
founded in in 1991.
And David Swenson, a TIFF board member, hall offamer, and he was involved with TIFF in its its
very early days.
I think there there are, like, myriad reasonswhy any CIO or other senior executive typically
gets involved with TIFF, and they're typicallyCIOs or senior execs at larger nonprofits, and
they come sit on our board.
I think a fairly universal one is that theyhave a desire to serve a broad array of
(01:09):
nonprofits while at the same time getting toshare ideas and best practices with other
accomplished investors who sit around thetable.
So I had not yet joined TIFF when David was onour board, but I have been told over the years
that his his many contributions and lastingcontributions from asset allocation help,
recruiting other great board members andclients.
(01:29):
Potentially, most importantly, particularly inthose really early days, he helped TIF access
great closed managers just as we were rampingup.
And a fun fact I learned fairly recently, so Ihaven't verified this, and if I'm wrong, I
apologize, was recently told that in the firstedition of his famous pioneering portfolio
management, Swenson called out TIFF is actuallyone of a very few number of allocators or fund
(01:53):
of funds that he thought merited considerationby serious investors.
So instrumental board member in the early days.
And, thankfully, we have a great board still ofamazing CIOs and other senior execs execs at a
great list of nonprofits.
And tell me about TIF.
What is TIFF exactly?
Sure.
So TIFF TIFF's existed over thirty years toprovide investment solutions primarily to
(02:15):
nonprofit institutions.
We we really specialize as a outsourced chiefinvestment officer and specialize in private
market solutions.
When we started, again, MacArthur andRockefeller Foundations looked at the
investment landscape of the non mega nonprofitsof the day, and they saw the lack of scale, the
inability to find and access the bestinvestment opportunities, and they saw really
(02:36):
high fees for pretty bad investments.
They created TIFF to help solve each of thoseissues.
So it's our it's been our mission to partnerwith our clients closely, educate them on areas
of our investment expertise and other areas ofexpertise and create investment solutions that
help them and support them with their long termobjectives.
Most importantly, delivering what we view as isthe top investment returns consistently over
(02:59):
long periods of time.
How does TIF partner with foundations?
And tell me exactly how that's done.
At at the core of it, we are trying to deliverclient centric investment solutions crafted to
support that institution's long term missionand objectives.
Typically, large, medium to larger sizednonprofits, small nonprofits as well.
(03:20):
It's really been our mission to serve a broadarray of of clients that that, you know, could
fit with our expertise.
So, you know, what's included in that?
The first piece is investment portfolios.
That's that is core to to our client needsbased on each client's unique situation.
We believe that any institution, even if it isanother foundation of a very similar size, they
(03:40):
have their own unique needs, and we wanna makesure that we can customize to build around
that.
We try to partner on other topics outside ofinvestment as well, though investments is
really the core of it.
So many clients come to TIFF to outsource theirentire endowment, and some come to TIFF just to
manage a portion.
Those clients for endowment will be typicallycoming for all or a portion of our private
markets program.
(04:01):
As you know, me and my team, we focus deeply onseed and early stage venture, lower mid market
PE, and then direct investments, primarily sideindependent sponsors in that sort of micro cap
private equity space.
Foundations, are they essentially understaffed?
They might be too small to have all the properstaff to do these functions.
And talk to me about what you see from yourfoundation clients in terms of capabilities and
(04:25):
staffing?
It does vary, and it depends a bit on how theypartner with us.
You could have a very a much larger endowmentwith a deep team, deep back office, lots of
resources, but they're of a size that theydon't have the resources to necessarily
dedicate to the areas and private markets thatwe focus.
And so that could be a very different nonprofitthan or different client than someone who is
(04:47):
$50,000,000 or a hundred million doll They'redoing everything.
They're they're handling all the investmentreporting historically and things of that
nature, but they're also managing the financesof the of of the institution.
And so it is actually quite a large variationin in the in the resourcing that any of our
individual clients would have.
Again, TIFF one reason TIFF was founded was tosupport all sorts of different types of
(05:10):
nonprofits from the very small and maybe underresourced to ones that are a bit larger and
more sophisticated.
And so we wanna have the capabilities on theinvestment side, the advice side, and the
client management side, as well as the backoffice to support that wide range of different
type of institution.
I want to talk about model portfolios.
So if somebody came to you, let's say a closefamily member or friend was starting a
(05:35):
foundation, given kind of average liquidity andaverage foundation constraints, what would be
your model portfolio for that foundation?
What would you advise them to do?
The standard portfolio is something like 25%private markets, 40% public equities, and 20%
(05:55):
diversifying strategies, think sort of low betahedge fund portfolio as as a diversifier.
And then about, you know, something like 15% topretty traditional fixed income, think
treasuries.
The the average nonprofit's trying to obtainthrough a CPI plus five to maintain purchasing
power after inflation and withdrawals.
(06:15):
So talking about sort of an 8% target with 3%inflation.
Clearly, lots of nonprofits also wanted to growtheir corpus, not just maintain it.
And so that does require this cornerstone of ofrisk assets that could be private, public.
You need that sort of equity risk really tohave any sort of hope of of of building the
(06:35):
corpus.
And so for nonprofit with with good financialstanding, for example, moderate reliance on
endowment for annual cash, fairly routine p andl, moderate sensitivity to to cash needs for
for some sort of lockup of capital.
All this comes into play as we would thinkabout how to what what the proper asset
allocation is, and and helping that institutionmeet their objectives.
(07:01):
And TIFF really doubles down on lower middlemarket and seed in early stage VC.
Tell me about why you go after these two partsof the private markets.
In alpha, really, like, the that's the summary.
I should probably say more than just that.
But, you know, a core component in our view forlong term alpha generation, long term
outperformance, it's choice of strategy andapproach.
(07:23):
We believe that's really important togenerating alpha.
So we are focused on owning equity in goodfundamental business.
They they're smaller.
They're earlier in their life cycle.
But we're looking to capitalize oninefficiency.
So think smaller transactions, smallermanagers.
Everything we do is focused on inefficiency inthese smaller, less mature companies because
that's a fertile ground for alpha generation inour view.
(07:44):
Less competition, certainly less sophisticatedcompetition.
At our size, we can be really effective inthese areas of the market.
We think that's a key competitive advantagerelative to much larger firms putting a lot of
capital to work, and they can't focus on theseparts of the market.
So again, less competition in a massiveinvestable universe.
(08:06):
And then frankly, many levers for managers wepartner with, sponsors we partner with to
create value through strategic and operationalinvolvement with their portfolio companies.
And so we're looking for to partner withsmaller specialist managers who can drive
alpha, who could take advantage of theseopportunities in these attractive parts of the
market.
Finding and picking the right investments inlower mid market PE, early stage VC is not
(08:32):
easy.
There's clearly a much wider return dispersionin these parts of the market than when you go
upmarket.
There's risk.
It's extremely important to have tested,regimented sourcing and diligence processes
tailored to these markets.
It's also really important to have a purposebuilt team to attack these markets.
Because, again, it is a it is a differentanimal to invest.
(08:54):
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I I was speaking to the CIO of Broken Bro,which is a $4,000,000,000 OCIO, and he has his
thesis on lower middle market PE.
(10:00):
And he believed that it was less risky thanmedium and large cap PE.
Do you agree with that?
I sort of agree with that.
If you have the the the expertise and the teamto focus on that part of the market, it can be
less risky.
How private equity has gotten more and morecompetitive over the years for your paths to
(10:20):
victory than there were in the past.
As you move up market to perfection, theability to add economic value, be a growth
catalyst or an organizational change catalyst.
Is this harder with larger, more complexorganizations and companies?
Are you overly reliant on getting somewhatlucky with the cycle where you can buy lower at
attractive lever with attractive leverage termsand then the market accommodates with valuation
(10:43):
multiples expanding, then you sell and makesome money, and maybe you made the business a
little better.
But it's pretty hard to to change a largecompany in two to three years.
Companies that lower mid market PE firms orindependent sponsors might partner with,
they're smaller, more fragile companies, morecustomer concentration, key real key person
risk sometimes in the management team.
It's harder sometimes underinvested in terms ofCapEx technology.
(11:05):
So I wouldn't necessarily want to buy just apure index of lower mid market PE managers.
I do think there are a lot of ways a lot ofthings that could go wrong.
But if you have a process to find and sort ofvalidate the quality of a lower mid market
sponsor, I think at the end of the day, that isa more attractive strategy, not only from a,
like, a upside perspective, but also I thinkyou can dampen your volatility over long
(11:27):
periods of time.
Again, you have multiple paths to win in the ifyou do it well.
Talk to me about leverage.
That seems to be a lot of the returns for thelarger private equity funds.
Is that leverage not available to lower middlemarket?
And when does leverage start to be a driver ofperformance?
What size?
Certainly available in the lower mid or midmarket.
(11:49):
The quantum of debt is going to be less thanyou could get up market, and the cost will be
the cost the spread will be higher.
And so flexibility, I suppose, of that debtwouldn't be as great as you'd see in the lower
mid market, particularly today where or in thelast couple of years where debt has been a lot
more expensive.
There are more transactions we see sponsorcomes in unlevered, particularly if maybe they
(12:11):
wanna do some m and a.
So they overequitize the business, avoid thesort of more costly debt.
And then we'll work to get to a greater scale,5 to $10,000,000 of EBITDA.
Maybe that gets a little bit more to your sizequestion, where they feel like they can add on
the debt.
The company's been a bit more de risked.
They have greater flexibility because therewould be covenants to to any debt, the debt in
the lower mid market.
(12:31):
Then they can get cheaper, more flexible debtlater on.
But there's so much so much return sort ofbaked into the base case even in an over
equitized transaction that you could see yourway to really attractive returns in that
transaction.
I don't think that that dynamic exists in thelarger part of the private equity world.
You really given the prices you have to pay,you need to be able to have a substantial
(12:53):
amount of debt, the equity to to to to createthe equity value that some of those managers
are targeting.
So PIF along with other top allocators arereally focused on independent sponsors.
Why are independent sponsors so sexy today?
You know, we we we think we think they've beenbeen sexy for a decade.
So it's it it is exciting that other peopleare, starting to appreciate, that the that the
(13:19):
universe can be a really attractive place todrive returns.
Why is it why is it interesting?
The first piece is that the independent sponsoruniverse it's a way to access microcap PE that
you just you can't get even if you're focusedon lower mid market fund investments.
90% plus of deals in that independent sponsorsdo are sub $10,000,000 of EBITDA.
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Many are less than 5.
So, again, there are fewer lower mid marketfirms that will will go that small.
And so it does open up a massive universe ofopportunities that a really high quality
independent sponsor can sift through to findhidden gems.
The second piece is, you know, at least today,I mean, people don't get too, too excited about
(14:00):
dumping capital to back independent sponsors.
It is the least efficient part of the leastefficient part of the market, of the PE market,
the lower mid market.
Many of the companies independent sponsor mightback, again, too small for a typical lower mid
market PE manager.
The use of sell side bankers isn't universal.
The quality of those intermediaries are isvariable.
(14:21):
Let's say put it kindly, it's highly variable.
And then most institutional peers, even thoughthere is more interest, as you say, most
institutional peers of I of ours don't investin this market either.
You know, it's complicated and hard tonavigate.
It requires a combo of of kind of companyunderwriting and RV manager underwriting,
massive amount of time and effort.
And so it's hard to get people to devote.
(14:43):
Like, a lot of people just don't have theresources or don't wanna devote the significant
resources and time you would need to to to bein this market.
Being less efficient as the independent sponsormarket is allows for more attractive entry
prices, and over 80% of these deals are areless than seven times EBITDA.
Many are cheaper than that.
Cheap pricing, no guarantee of success by anymeans, but it is a good starting point
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oftentimes and is and provides some downsideprotection.
And then if a sponsor finds a good company, canactually create economic value, really help
build that into a better take a nice smallbusiness with a good product or service and
make it a really great, bigger business withwith that same great product or service,
there's a huge universe of of middle marketprivate equity firms to sell this company onto
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achieve significant multiple expansion.
And you have, again, lots of paths to victory,including the thing just being a catalyst for
change in organizational improvement, you know,in these in in these micro cap PE companies
through more basic blocking and tackling, whichwe think is a less risky way to add value than,
you know, upmarket where where companies,again, are more complex, harder to move, and
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some of that low hanging fruit's already beenachieved by, you know, earlier private equity
owners oftentimes.
And independent sponsor is a team team withouta specific deal.
And today, there's not a lot of capital for newfunds.
They have some high quality managers.
When you approach independent sponsors, are youapproaching it from the lens of, is the deal
good, or is the team good?
(16:10):
We we we care about the deal and the sponsor.
For us, it does all start with that sponsor.
That is that is effectively the top of ourfunnel.
So we have a variety of ways that we try tofind new independent sponsors, whether it be
through through peers, through other GPs,spinouts, basic attending of conferences,
publishing thought pieces, and trying to, likewe have a regimented process that we all have
(16:34):
metrics to focus on to to make sure we'remining our networks to find that next great
sponsor.
Most people in the independent sponsor universearen't going to be a a perfect fit.
We are looking for people who have moretraditional private equity training at good
firms that are, you know, typically middlemarket, 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
(16:58):
to build out a track record as an independentorganization, to build out the team, to prove
the model, to do deal by deal along the way.
And those are the types of people that we willtypically start spending time with.
If someone is interesting, we'll we'll takethem through our full manager underwriting
process effectively.
And at that point, if we approve them, thenwe'd consider deals with them.
When a deal comes, we'll do a full dealunderwriting as opposed to just having said,
(17:21):
hey.
We underwrote the sponsor.
That's great.
We'll do all the deals that they that that heor she brings us.
And so then there's another deeper a deep diveinto that company, spending time with
management team, doing our of our ownindependent research on the on the sector
verticals, working spending a lot of time withthe sponsor, understanding their thesis risks,
how they're gonna add value to the company.
We view this as a great way not only to buildconviction or not in an individual deal, but we
(17:45):
view it as a a great way to build notconviction in that sponsor to consider another
deal with them.
And maybe after some number of deals topotentially anchor a fund one commitment if we
think that it is time for them to move on frombeing deal by deal to having a proper fund.
Yeah.
This funnel where you're focusing on quality ofthe sponsor in order to confirm that the
(18:07):
sponsor is indeed quality.
You look at the deals to see how quality thedeal flow is for that sponsor.
It's kind of like you're checking bothcriteria, but in the order of sponsor first and
deal second.
That's right.
We view it as this virtuous cycle of that feeit feeds on itself, and it helps us build
conviction in that manager.
And all the while, we have this nice curateddeal funnel with these, you know, people we
(18:29):
respect as investors, bringing us opportunitieswith a higher certain a higher certainty of
close, and then we can sort of pick and choosewhich of those those investments that we wanna
participate in.
And all the while, sort of hopefully buildinggreater conviction in that sponsor.
Though at times at times as we dig in andpartner with someone longer term, we do not
build that conviction.
And and so we may stop working with them dealby deal and certainly not advance to a fund
(18:52):
commitment.
And you mentioned that you look for metrics forindependent sponsors to partner with.
It's kind of a paradox.
Are you looking for their track record at theirprevious fund, or what metrics exactly are you
looking at?
In terms of what we look for, though, in, youknow, in sponsors, lot you know, our sponsors
with with, you know, experienced individuals,sort of a purpose built team that aligns well
(19:12):
with their strategy, where we think they havesome sort of competitive edge tip in an in an
area of expertise, and that, you know, webelieve that they have strong enough sourcing
capabilities and but certainly strong abilityto add value to their company, then we do that
that deeper dive.
We we a lot of the assessment with independentsponsors is a more qualitative assessment on
people, one or two oftentimes one or two peoplewith a brand new independent sponsor.
(19:36):
That said, it's not that different than when wemight, you know, evaluate a fund one where
you're you don't necessarily have a deepattributable track record yet.
You have to do a little bit of sleuthingbecause we're not looking at back independent
sponsors who've never done a deal or never beena senior investor, like leading a company from
beginning to end.
And so while they may not have attribution,they certainly probably don't have attribution
(19:58):
from the firm that they left.
We can find out which deals that they wereinvolved in.
We can talk to, you know, the CEOs, CFOs atthose companies, try to figure out what they
did, what they didn't do, put together, cobbletogether a track record and sort of degree of
attribution for for their prior deal so that wecan you know, using so that so that qualitative
assessment as well as kind of putting togethersome quantitative metrics to look an important
(20:20):
part of our our diligence process for anindependent sponsor.
And that's because at the previous firm, theythey left the firm.
The previous managers might not be thrilledabout other top people leaving the firm.
They're not necessarily gonna openly vouch forthem.
That's right.
I mean, even if they're happy for them and andand excited for their next step in their
career, doing something entrepreneurial, Youknow, private equity firms wouldn't wanna give
(20:41):
attribution.
They wanna keep the attribution themselves.
They have their own business to run their ownfunds to raise.
It's a zero sum.
Attribution is a zero sum game.
That's
right.
Thank you for listening.
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There's so many great fund ones.
There's you know, if you look at the supply anddemand dynamics in the market right now,
(21:01):
there's more quality managers than there isquality capital in that space.
Why even go for independent sponsor deals?
Why not just do fund ones?
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.
And I think I guess it was years ago.
Maybe, I guess, over a decade ago at this pointwhen we did our first independent sponsor
(21:24):
transaction.
TIFF would would look at fund ones in the thethe the lower mid market.
Though, I guess, the terminology was differentway back then.
And we had some really fantastic successes, butthere are some some mistakes.
And there was a greater volatility of outcomesthan I think we would ideally like.
We had experience as sort of evaluating dealsalongside of our lower mid market managers,
(21:45):
more traditional, like, kind of co investing.
We had experience underwriting fund ones, thethings you need to do to cobble together that
track record and and figure out attribution andget to into that qualitative assessment that's
so key with earlier managers.
And so, yeah, I think the independent sponsorwork started as this idea of how can you make
open up your universe, your investable universefor direct equity investments as well as
(22:07):
improve our we do our manager selection and ourfund one selection.
Keeping the really high alpha that you can getin fund ones, but limiting the number of of
mistakes that you can make at fund one.
And so independent sponsor investing not onlyis a great has been a great way to make money,
make returns for our investors on thoseindividual investments, but also to find the
(22:29):
next great fund one and actually have real datapoints and a lot a 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 worse versus bad luck,which is very hard to do as someone evaluating
a fund one who's just gotten to know thismanager in the last three months or six months.
(22:51):
It gives us a competitive advantage inunderwriting those fund fund ones.
So that's the main reason we think that thatthat's that that you know, fund ones are great.
We will continue to do those, but we thinkactually doing independent sponsor work allows
us to make great returns on the the individualdeals, but then also improve our returns when
we do invest in a fund one.
(23:11):
Why do and why invest in fund ones?
Are they historically better performing thanfund twos and lower middle market?
Looking at the data we have that you cangenerate outsized returns in fund ones,
optimally sized.
There's great alignment of interest.
And the the the the key investors at that atthat organization are are the key investors
(23:34):
leading the deals.
So as 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,
and they're not the key decision make they'renot they're not doing the deep work that they
that that they used to do that they had suchgreat success in.
So fund ones, we do see great returnopportunity.
That said, like, I think it's it's we certainlyhave plenty of managers to be backed where the
(23:56):
fund one where it's fund two where everythingclicked, where they didn't have to deal with
some of the startup aspects of the fund one,and their sourcing engine was going was really
clicking and going better.
And it was, you know, that fund two where theyreally accelerated.
So we don't think there's necessarily a magicthat 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
(24:16):
a fund one if we think we have have deep enoughknowledge of that of that manager.
Whether and that's that oftentimes means thatthese days, we're we're working with our with
an a former independent sponsor in a fun one ora spinout from another manager that we know
extremely well or that we invested withpreviously as opposed to meeting someone,
diligencing them for six months to a year, andthen then taking the plunge.
(24:38):
We might wait a little longer to to buildconviction, and wait to a subsequent fund.
And what you're doing when you invest in anindependent sponsor deal is actually incredibly
difficult.
You're paralleling both the diligence on asponsor as well as the the specific opportunity
and sometimes a compressed timeline.
Tell me about how you go about diligencing anindependent sponsor time as it comes through
(25:02):
the timeline.
In a perfect world, do our sponsor diligencebefore they necessarily have a new deal that
they're looking to raise capital for.
That'll that's not all that doesn't always workout.
Right?
When, you know, when when we are able to frontload the sponsor diligence and then a deal will
come later, then it's not that different than anormal sponsor manager underwriting process
(25:25):
that we would for for sort of an emergingmanager with limited.
Same process.
It's a ton of work, but you have but there'snot there's not that deal clock ticking in the
background.
When we have a we have a direct investment, asponsor brings it to us either before or right
after the LOI is signed.
We have there might be sixty to ninety days.
(25:46):
We wanna heavy work up front to to get toanswer our key questions or at least to to
figure out what's diligence threads we need tofocus on for the remainder of those days and so
that we can give a little more certainty so thesponsor knows, like, what our big questions are
and what would cause us to not move forwardwith the investment.
But again, that timeline's really manageablewith our team, which has a good mix of people
with manager selection backgrounds and directdeal backgrounds and overly hard.
(26:08):
What we have to do if there's a situation wherewe really are excited about a sponsor and
really excited about a particular deal thatthey are raising capital for, and we haven't
finished our sponsor work, we effectivelycreate two deal teams.
So there's a sponsor deal team.
There's there's the deal deal team.
And then our work according so it so it fits inwith the timeline of the deal.
There's lots of coordination and communicationwith the sponsors.
(26:29):
We because the worst thing would be that wedecide not to approve them, not to that we
don't like the deal, and they're reallycounting us on that capital.
So we it is it is a ton of effort.
It's a ton of resources.
It's a lot of work at once and and a devotionof a lot of resources to do that at the same
time.
Luckily, we have the team that's good at it.
We've we've we have pretty regimented processesin how we what we focus on in any in our
(26:50):
diligence for whether it be sponsor or deal.
So we can get it done.
Again, our preference would be to to not haveit not have to dedicate two deal teams at the
same time to one sponsor, but but we will do itfor the right sponsor and the right deals.
And it's two separate teams at TIF diligencingthe sponsor versus the deal?
There's clearly a ton of coordination andcommunication and overlap in certain at
sessions of diligence or or meetings or thingslike that.
(27:13):
And so there's we we need to be able to havepeople dedicated to digging into that company,
that sector, and and we need to have people whoare really digging into that manager's
background.
All the stuff I talked about earlier, puttingtogether that qualitative and semi quantitative
assessment of their track record, it takes amassive amount of work.
And then the deal itself, as you know, wouldtake a it takes a lot of work to underwrite a
company that we're gonna be, you know, partnersin for three to six years.
(27:37):
If several years ago went through anorganizational change, tell me about that
organizational change, and how does that affectyour clients today?
If became a public benefit company, an employeeowned company about a year and a half ago.
Prior to that, it was tax paying nonstopcorporation comp sort of complex legal
structure with no own actually, you know, noowner, so a sort of a high pseudo nonprofit.
(28:01):
Not much has changed, which I think is good.
Right?
Being a public benefit company, TIP's missionis the same mission as it was when I joined.
Our focus is still the same.
Our advisory board didn't change.
It's about the c I great CIOs and seniorexecutives at these wonderful nonprofits who
were the board pre conversion and postconversion.
And so that hasn't really changed.
I think the thing that is is particularlyvaluable about our our this current structure
(28:25):
that we have is many of our peers have hadequity to grant as a form of retention and comp
long term retention.
We now have that ability.
And so we only think that it will, you know,keep the team same team in in their seats for
as, like, for as long as possible.
Thankfully, I've been able to work with the thesame crew, senior crew on the private markets
team for many years at this point.
(28:46):
I think now having a pretty broad base of ofemployee ownership allows us to feel even more
confident we're gonna have the same peopledoing the doing the work here, doing the
investment work here that we that we would wethat we did preconversion.
What do you wish you knew before starting atTIFF fourteen years ago?
So many things.
So many things.
I think even lots of success investments ishumbling.
(29:08):
I I'm clearly not the first person who's eversaid that, but it really is.
And and at least for me, mistakes bring me morepain than successes bring me joy.
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 priorto starting TIF around fourteen years ago?
(29:29):
I guess my answer sort of ties what I justdegree.
I think I wish I'd I'd better appreciated thatwe know a lot less about the future than any of
us think.
I think early on, I would consider a sort of awider range of investment opportunities,
willing to take certain risks that I wouldn'tnow, but maybe those risks depended more
heavily on a very specific future state of theworld.
(29:52):
Hey.
I was confident about it.
The experts I talked to were confident aboutit, but there were fewer again, fewer paths to
victory, fewer ways to win.
And so you really needed to believe that youcould predict the future a bit better.
You know, thankfully, I I learned fairlyquickly that that there's certain investments
that kind of fall into a too hard bucket, atleast for me.
Maybe they're way out of our core expertise.
(30:14):
Maybe they're just really hard near toimpossible to really underwrite.
Or they have there's really one way that youwin, and then there's lots of states of the
world where you you don't do well.
There's a single factor, macro factor, or trendthat you're relying on.
There are plenty of great investments thatoffer multiple ways to generate return that I
think we are well positioned to underwrite.
(30:36):
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 justbe honest with ourselves about what the risks
we're willing to take and the risks we'rewilling not to to take.
And and and I think that, at the end of theday, allows us to be better underwriters and
better investors and focused.
Just to bring that to life, you might have youmight have you might be very you might have
(31:02):
very high conviction that let's say treasuryrates will stay low, or interest rates will
stay low over the next decade, and you starttalking to people, and you start building this
conviction everybody has the same thesis, andyou build an investment portfolio based on
that, and of course you know we have somethingthat happens both in 2021 and in 2022, which is
(31:23):
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 had some precedent,
but also unusual.
So you have this kind of you have thisframework into the future, this high certainty
that's very difficult to actually have giventhe complex world.
(31:48):
How do you, so let's say that you now realizethat you don't have this crystal ball even if
everybody in finance shares shares your view orseen as, quote, unquote, consensus.
How do you build an antifragile portfolio giventhat you don't know what the future holds?
It's a great question.
So you don't know what the future state of theworld.
I certainly know I predicted recessions when Ijoined TIFF.
(32:11):
I think I predicted like four years ofrecession in a row that, you know, that didn't
that didn't come.
But at the end of the day, if you what do wewanna own?
We wanna own good fundamental companies with areal reason to exist that have that can
generate return either by buying low at a cheapprice and using some cheaper debt, or they can
win by bringing on a CFO and tracking KPIsbetter, hiring the first head of sales to
(32:35):
actually charge start charging up andinvesting.
If all that goes well, and you can you can doan like, a little bit of an m and a strategy,
or you can improve your systems.
These are all very achievable things that acompany can do with the with the right sponsor
partner or the right investor base and withwith the right time horizon.
That will be harder in an economic downturn.
You could find yourself where, you know,something happens in the sector that company
(32:58):
operates in and they go out of business or theydefault on their debt and the lenders take it.
But if you put together enough, a portfolio ofthese good companies that have multiple paths
to victory, and you're and you diversifyappropriately by sort of by sector in
particular, sometimes the regional business.
But you diversify across a number of differentfactors, and you do a good job picking those
(33:18):
managers, picking those deals.
We think, like, over time, that that is how youbuild that portfolio that you're still worried
about downturns.
You're still worried about wars in the worldand oil price spiking, interest rates going all
over the place given that it's floating ratedebt if you have if you have leverage.
But but, you know, one one single thingshouldn't sink your entire portfolio because
(33:39):
you've owned equity and good businesses, andyou have good partners that are creating real
economic value at these companies andcatalyzing something, catalyzing growth or op
or organizational change.
It's almost these multiple factors that make anasset antifragile.
There's the business itself that has to begood, has to have enough margin, which is
another way of saying margin for error, marginfor margin for economic outlook.
(34:01):
And then you also want management teams thatare antifragile, meaning that could navigate
different markets, that make good decisions ineven difficult markets.
You want this kind of and you want to build anentire portfolio of these magical assets.
Of these magical assets.
That survive under under every Yeah.
Economic outlook.
(34:21):
And as you know, we have a we have sort of a aframework we use to what anytime we're
evaluating a company, typically, it be a directdeal, but I think it applies to what the types
of assets we'd wanna fund to own or manage toown.
Again, 76 lines of the framework.
But but, again, at at the high level, let'slook at the business, the sector, the deal, and
the team.
And, again, getting to what you just said,like, the business leadership position, secular
(34:44):
moats, right to win, leadership is often, Ishould say, niche leader leadership is a niche
market because these are small companies.
And then those attractive financialcharacteristics around recurring or reoccurring
revenue, strong margins, capital efficient,free cash flow.
These aren't unique characteristics, butthey're important even with smaller companies.
There oftentimes will be some sort of nicheleader or regional leader.
The sectors we wanna feel like they're lesscyclical or noncyclical, there where there's
(35:09):
some tailwinds so that it is you know, it's notjust executing the business.
You have something other than taking share.
And then, again, the team is probably the nextmost important thing, if not as important as
all these, whether that be the sponsor or themanagement team, and and then having strong
alignment with all the parties around thetable, and then clearly the deal itself.
So compelling entry dynamics from a valuationperspective as well as, like, a differentiated
(35:31):
angle that you have on how you're gonna makethis a better company.
And then we wanna see that across our entireportfolio, an asymmetric return fan where the
business is good enough, the price is lowenough, maybe the structure is attractive
enough, is sort of you're sitting above commonequity, for example, that you can protect your
capital.
If you run into a really bad economicenvironment or something unforeseen happens,
(35:51):
you feel good about a three times multiplemoney base case, but there are clear ways that
aren't pie in the sky crazy ways, but there areclear ways to generate five x plus multiple of
money.
Again, some of those will be wrong sometimes.
Our manager our managers or sponsors will bewrong sometimes.
But if we look through at the portfolio and wefeel like we're have enough green lights on a
(36:12):
lot of those characteristics that we're lookingfor and not a lot of reds and yellows, at the
end of the day, we'll be wrong because we can'tpredict the future, but we think we'll be right
far more than we'll be wrong.
And luckily, history has proven that so far.
And this conversation reminds me of thisconfidence paradox, which is when you start
your career, you're over indexed on confidenceand under indexed on returns.
(36:33):
And then the older you get, your confidencegoes down and your returns actually go up.
This this is a great example of that in thatyou're basically accumulating all this
knowledge, and you become very conservative bynature, but you end up doing better from a
performance standpoint.
And some people continue to be overconfidentand and don't really get the lessons, and we
(36:53):
all know some of those.
That's right.
When you said that you you wrongly predictedthat there would be recessions, After a while,
and I think a lot of the market, we had thisvery conversation with the CIO of CalSTRS,
Scott Chan, and he said that the market forthree years had predicted a recession.
Now this year wasn't predicting a recession, sohe thought there might be a chance of
(37:15):
recession.
When you look at that, do you at some point doyou stop predicting, or are you still index on
your own view and personal view?
You just don't as heavily index?
And talk to me about how you go about trying topredict the future.
Is there a place for that in portfoliomanagement?
There is a place for that in port in portfoliomanagement.
(37:37):
Again, my thankfully, my me and my team, we getto focus on the focus on the micro to drive
alpha and don't have to and at the end of theday, we think, well, we might get have some
detraction because we didn't spend enough timepredicting broad macro factors because that's
not our specialty in any way.
But we think the we do think more more inmicro.
I go back I go back and forth because I feellike I don't believe I don't believe that that
(38:01):
I have an interest or an ability to predictbroad macro more broad broader macro factors.
And even even sort of long term longer termtrends in certain sectors are can be very are
very hard to predict, particularly with anyprecision.
(38:21):
It is hard to make it is hard to make thesepredictions.
I think I used to think more that there weresome people who were great at predicting some
of these macro factors, even even shorter term.
I think as time has gone by, I I'm there I knowenough to know that there's probably someone
who has a way to better predict these factors,even in in the very short term.
(38:44):
They probably have lots of computers and PhDs.
I think most people try to do it, and it's funto talk about at cocktail parties or in
meetings, but they there's they don't have anyedge to consistently predict some of these
outcomes and oftentimes have selective memory.
They remember the time they got it right.
They don't remember the 20 times that they werewrong in their prediction.
I mostly joke about my prediction of, like, thelast five recessions annually.
(39:08):
But it like, to a degree, I I and it I don'tthink it impacted how we invested in like,
again, this is way back, but in those timeperiods that much.
But to to to that greater degree, it it seemedlike it it's for me, it is a general waste of
calories and time to be to focus on overlyfocus on those factors.
I think one has to be aware of what's going on,but there's only a finite amount of time in any
(39:32):
life and in any day.
And I do think a lot of people probably spendtoo much time ruminating on things that they'll
probably that that are impossible to predict.
Goes back to what you look for in managers,niche focus, right to win, competitive
advantage.
You you're applying that to your own team.
That's right.
You said that better than than I than my answerright there.
So totally right.
Well, Brendan, this has been a masterclass onthe private markets and how foundations invest.
(39:56):
What would you like our audience to know aboutyou or about TIFF?
TIFF TIFF is truly a special special place.
I actually got to know TIFF when I was atHarvard Business School.
A professor and I in my second year wrote acase on TIFF and the endowment model.
And I got to spend a lot of time with peoplehere and fell in love with mission and the
place and thought there was just some reallyunique investors who were oppressively not
afraid to be different than the rest of theworld in how in how they executed and what they
(40:19):
did.
After business school, I went on to dosomething else in in the private equity world,
But then I fortunately stayed in touch withenough people in the TIFF orbit that I was came
back, and it's been a great fourteen years.
I get to work with smart, humble, and funnyindividuals, care deeply about our mission, and
also as most importantly, generating greatinvestments.
I'd also say that one thing that I still loveabout TIFF is that we are smaller than some,
(40:43):
but certainly mighty.
You know, at around 8,000,000,000 of assets andgrowing, we're we're big enough to to do some
exciting things to matter on the investmentfront, but but nimble enough to focus our
capital on on on the most attractive parts ofthe markets, certainly in our view.
That plays to our advantage.
The larger firms have billions of dollars topush out into private markets each year.
(41:05):
It's hard to you know, you can't execute thesetypes of strategies that that that we do and
have it.
And, certainly, if you try, it won't matter inthe whole scheme of your portfolio.
And I think it's a it's a really specialorganization that I've been lucky enough to
know for many more years than I've worked here.
It's a storied organization.
Any organization that Davidson was part of,obviously, is in a league of its own, and it's
(41:26):
doing a lot of good.
And how should people reach out if they'd liketo chat with you?
Sure.
My LinkedIn, Brendan Perry, b r e n d o n p a rr y.
Thanks for listening to my conversation withBrendan.
If you enjoyed this episode, please share witha friend.
This helps us grow and also provides the bestfeedback when we review the episode's
analytics.
Thank you for your support.
I think early on, I would consider a sort of awider range of investment opportunities,
willing to take certain risks that I wouldn'tnow, but maybe those risks depended more
heavily on a very specific future state of theworld.
Hey.
I was confident about it.
The experts I talked to were confident aboutit, but there were fewer again, fewer paths to
victory, fewer ways to win.
(00:22):
And so you really needed to believe that youcould predict the future a bit better.
Tell me about how David Swenson from the YaleEndowment got involved in TIFF.
TIFF has been fortunate enough to haveinvolvement of a lot of fantastic people over
the years from the nonprofit community.
It all started with MacArthur Foundation andthe Rockefeller Foundations back when TIFF was
(00:45):
founded in in 1991.
And David Swenson, a TIFF board member, hall offamer, and he was involved with TIFF in its its
very early days.
I think there there are, like, myriad reasonswhy any CIO or other senior executive typically
gets involved with TIFF, and they're typicallyCIOs or senior execs at larger nonprofits, and
they come sit on our board.
I think a fairly universal one is that theyhave a desire to serve a broad array of
(01:09):
nonprofits while at the same time getting toshare ideas and best practices with other
accomplished investors who sit around thetable.
So I had not yet joined TIFF when David was onour board, but I have been told over the years
that his his many contributions and lastingcontributions from asset allocation help,
recruiting other great board members andclients.
(01:29):
Potentially, most importantly, particularly inthose really early days, he helped TIF access
great closed managers just as we were rampingup.
And a fun fact I learned fairly recently, so Ihaven't verified this, and if I'm wrong, I
apologize, was recently told that in the firstedition of his famous pioneering portfolio
management, Swenson called out TIFF is actuallyone of a very few number of allocators or fund
(01:53):
of funds that he thought merited considerationby serious investors.
So instrumental board member in the early days.
And, thankfully, we have a great board still ofamazing CIOs and other senior execs execs at a
great list of nonprofits.
And tell me about TIF.
What is TIFF exactly?
Sure.
So TIFF TIFF's existed over thirty years toprovide investment solutions primarily to
(02:15):
nonprofit institutions.
We we really specialize as a outsourced chiefinvestment officer and specialize in private
market solutions.
When we started, again, MacArthur andRockefeller Foundations looked at the
investment landscape of the non mega nonprofitsof the day, and they saw the lack of scale, the
inability to find and access the bestinvestment opportunities, and they saw really
(02:36):
high fees for pretty bad investments.
They created TIFF to help solve each of thoseissues.
So it's our it's been our mission to partnerwith our clients closely, educate them on areas
of our investment expertise and other areas ofexpertise and create investment solutions that
help them and support them with their long termobjectives.
Most importantly, delivering what we view as isthe top investment returns consistently over
(02:59):
long periods of time.
How does TIF partner with foundations?
And tell me exactly how that's done.
At at the core of it, we are trying to deliverclient centric investment solutions crafted to
support that institution's long term missionand objectives.
Typically, large, medium to larger sizednonprofits, small nonprofits as well.
(03:20):
It's really been our mission to serve a broadarray of of clients that that, you know, could
fit with our expertise.
So, you know, what's included in that?
The first piece is investment portfolios.
That's that is core to to our client needsbased on each client's unique situation.
We believe that any institution, even if it isanother foundation of a very similar size, they
(03:40):
have their own unique needs, and we wanna makesure that we can customize to build around
that.
We try to partner on other topics outside ofinvestment as well, though investments is
really the core of it.
So many clients come to TIFF to outsource theirentire endowment, and some come to TIFF just to
manage a portion.
Those clients for endowment will be typicallycoming for all or a portion of our private
markets program.
(04:01):
As you know, me and my team, we focus deeply onseed and early stage venture, lower mid market
PE, and then direct investments, primarily sideindependent sponsors in that sort of micro cap
private equity space.
Foundations, are they essentially understaffed?
They might be too small to have all the properstaff to do these functions.
And talk to me about what you see from yourfoundation clients in terms of capabilities and
(04:25):
staffing?
It does vary, and it depends a bit on how theypartner with us.
You could have a very a much larger endowmentwith a deep team, deep back office, lots of
resources, but they're of a size that theydon't have the resources to necessarily
dedicate to the areas and private markets thatwe focus.
And so that could be a very different nonprofitthan or different client than someone who is
(04:47):
$50,000,000 or a hundred million doll They'redoing everything.
They're they're handling all the investmentreporting historically and things of that
nature, but they're also managing the financesof the of of the institution.
And so it is actually quite a large variationin in the in the resourcing that any of our
individual clients would have.
Again, TIFF one reason TIFF was founded was tosupport all sorts of different types of
(05:10):
nonprofits from the very small and maybe underresourced to ones that are a bit larger and
more sophisticated.
And so we wanna have the capabilities on theinvestment side, the advice side, and the
client management side, as well as the backoffice to support that wide range of different
type of institution.
I want to talk about model portfolios.
So if somebody came to you, let's say a closefamily member or friend was starting a
(05:35):
foundation, given kind of average liquidity andaverage foundation constraints, what would be
your model portfolio for that foundation?
What would you advise them to do?
The standard portfolio is something like 25%private markets, 40% public equities, and 20%
(05:55):
diversifying strategies, think sort of low betahedge fund portfolio as as a diversifier.
And then about, you know, something like 15% topretty traditional fixed income, think
treasuries.
The the average nonprofit's trying to obtainthrough a CPI plus five to maintain purchasing
power after inflation and withdrawals.
(06:15):
So talking about sort of an 8% target with 3%inflation.
Clearly, lots of nonprofits also wanted to growtheir corpus, not just maintain it.
And so that does require this cornerstone of ofrisk assets that could be private, public.
You need that sort of equity risk really tohave any sort of hope of of of building the
(06:35):
corpus.
And so for nonprofit with with good financialstanding, for example, moderate reliance on
endowment for annual cash, fairly routine p andl, moderate sensitivity to to cash needs for
for some sort of lockup of capital.
All this comes into play as we would thinkabout how to what what the proper asset
allocation is, and and helping that institutionmeet their objectives.
(07:01):
And TIFF really doubles down on lower middlemarket and seed in early stage VC.
Tell me about why you go after these two partsof the private markets.
In alpha, really, like, the that's the summary.
I should probably say more than just that.
But, you know, a core component in our view forlong term alpha generation, long term
outperformance, it's choice of strategy andapproach.
(07:23):
We believe that's really important togenerating alpha.
So we are focused on owning equity in goodfundamental business.
They they're smaller.
They're earlier in their life cycle.
But we're looking to capitalize oninefficiency.
So think smaller transactions, smallermanagers.
Everything we do is focused on inefficiency inthese smaller, less mature companies because
that's a fertile ground for alpha generation inour view.
(07:44):
Less competition, certainly less sophisticatedcompetition.
At our size, we can be really effective inthese areas of the market.
We think that's a key competitive advantagerelative to much larger firms putting a lot of
capital to work, and they can't focus on theseparts of the market.
So again, less competition in a massiveinvestable universe.
(08:06):
And then frankly, many levers for managers wepartner with, sponsors we partner with to
create value through strategic and operationalinvolvement with their portfolio companies.
And so we're looking for to partner withsmaller specialist managers who can drive
alpha, who could take advantage of theseopportunities in these attractive parts of the
market.
Finding and picking the right investments inlower mid market PE, early stage VC is not
(08:32):
easy.
There's clearly a much wider return dispersionin these parts of the market than when you go
upmarket.
There's risk.
It's extremely important to have tested,regimented sourcing and diligence processes
tailored to these markets.
It's also really important to have a purposebuilt team to attack these markets.
Because, again, it is a it is a differentanimal to invest.
(08:54):
Be really focused here versus be morediversified across all parts of the markets or
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I I was speaking to the CIO of Broken Bro,which is a $4,000,000,000 OCIO, and he has his
thesis on lower middle market PE.
(10:00):
And he believed that it was less risky thanmedium and large cap PE.
Do you agree with that?
I sort of agree with that.
If you have the the the expertise and the teamto focus on that part of the market, it can be
less risky.
How private equity has gotten more and morecompetitive over the years for your paths to
(10:20):
victory than there were in the past.
As you move up market to perfection, theability to add economic value, be a growth
catalyst or an organizational change catalyst.
Is this harder with larger, more complexorganizations and companies?
Are you overly reliant on getting somewhatlucky with the cycle where you can buy lower at
attractive lever with attractive leverage termsand then the market accommodates with valuation
(10:43):
multiples expanding, then you sell and makesome money, and maybe you made the business a
little better.
But it's pretty hard to to change a largecompany in two to three years.
Companies that lower mid market PE firms orindependent sponsors might partner with,
they're smaller, more fragile companies, morecustomer concentration, key real key person
risk sometimes in the management team.
It's harder sometimes underinvested in terms ofCapEx technology.
(11:05):
So I wouldn't necessarily want to buy just apure index of lower mid market PE managers.
I do think there are a lot of ways a lot ofthings that could go wrong.
But if you have a process to find and sort ofvalidate the quality of a lower mid market
sponsor, I think at the end of the day, that isa more attractive strategy, not only from a,
like, a upside perspective, but also I thinkyou can dampen your volatility over long
(11:27):
periods of time.
Again, you have multiple paths to win in the ifyou do it well.
Talk to me about leverage.
That seems to be a lot of the returns for thelarger private equity funds.
Is that leverage not available to lower middlemarket?
And when does leverage start to be a driver ofperformance?
What size?
Certainly available in the lower mid or midmarket.
(11:49):
The quantum of debt is going to be less thanyou could get up market, and the cost will be
the cost the spread will be higher.
And so flexibility, I suppose, of that debtwouldn't be as great as you'd see in the lower
mid market, particularly today where or in thelast couple of years where debt has been a lot
more expensive.
There are more transactions we see sponsorcomes in unlevered, particularly if maybe they
(12:11):
wanna do some m and a.
So they overequitize the business, avoid thesort of more costly debt.
And then we'll work to get to a greater scale,5 to $10,000,000 of EBITDA.
Maybe that gets a little bit more to your sizequestion, where they feel like they can add on
the debt.
The company's been a bit more de risked.
They have greater flexibility because therewould be covenants to to any debt, the debt in
the lower mid market.
(12:31):
Then they can get cheaper, more flexible debtlater on.
But there's so much so much return sort ofbaked into the base case even in an over
equitized transaction that you could see yourway to really attractive returns in that
transaction.
I don't think that that dynamic exists in thelarger part of the private equity world.
You really given the prices you have to pay,you need to be able to have a substantial
(12:53):
amount of debt, the equity to to to to createthe equity value that some of those managers
are targeting.
So PIF along with other top allocators arereally focused on independent sponsors.
Why are independent sponsors so sexy today?
You know, we we we think we think they've beenbeen sexy for a decade.
So it's it it is exciting that other peopleare, starting to appreciate, that the that the
(13:19):
universe can be a really attractive place todrive returns.
Why is it why is it interesting?
The first piece is that the independent sponsoruniverse it's a way to access microcap PE that
you just you can't get even if you're focusedon lower mid market fund investments.
90% plus of deals in that independent sponsorsdo are sub $10,000,000 of EBITDA.
(13:40):
Many are less than 5.
So, again, there are fewer lower mid marketfirms that will will go that small.
And so it does open up a massive universe ofopportunities that a really high quality
independent sponsor can sift through to findhidden gems.
The second piece is, you know, at least today,I mean, people don't get too, too excited about
(14:00):
dumping capital to back independent sponsors.
It is the least efficient part of the leastefficient part of the market, of the PE market,
the lower mid market.
Many of the companies independent sponsor mightback, again, too small for a typical lower mid
market PE manager.
The use of sell side bankers isn't universal.
The quality of those intermediaries are isvariable.
(14:21):
Let's say put it kindly, it's highly variable.
And then most institutional peers, even thoughthere is more interest, as you say, most
institutional peers of I of ours don't investin this market either.
You know, it's complicated and hard tonavigate.
It requires a combo of of kind of companyunderwriting and RV manager underwriting,
massive amount of time and effort.
And so it's hard to get people to devote.
(14:43):
Like, a lot of people just don't have theresources or don't wanna devote the significant
resources and time you would need to to to bein this market.
Being less efficient as the independent sponsormarket is allows for more attractive entry
prices, and over 80% of these deals are areless than seven times EBITDA.
Many are cheaper than that.
Cheap pricing, no guarantee of success by anymeans, but it is a good starting point
(15:04):
oftentimes and is and provides some downsideprotection.
And then if a sponsor finds a good company, canactually create economic value, really help
build that into a better take a nice smallbusiness with a good product or service and
make it a really great, bigger business withwith that same great product or service,
there's a huge universe of of middle marketprivate equity firms to sell this company onto
(15:26):
achieve significant multiple expansion.
And you have, again, lots of paths to victory,including the thing just being a catalyst for
change in organizational improvement, you know,in these in in these micro cap PE companies
through more basic blocking and tackling, whichwe think is a less risky way to add value than,
you know, upmarket where where companies,again, are more complex, harder to move, and
(15:49):
some of that low hanging fruit's already beenachieved by, you know, earlier private equity
owners oftentimes.
And independent sponsor is a team team withouta specific deal.
And today, there's not a lot of capital for newfunds.
They have some high quality managers.
When you approach independent sponsors, are youapproaching it from the lens of, is the deal
good, or is the team good?
(16:10):
We we we care about the deal and the sponsor.
For us, it does all start with that sponsor.
That is that is effectively the top of ourfunnel.
So we have a variety of ways that we try tofind new independent sponsors, whether it be
through through peers, through other GPs,spinouts, basic attending of conferences,
publishing thought pieces, and trying to, likewe have a regimented process that we all have
(16:34):
metrics to focus on to to make sure we'remining our networks to find that next great
sponsor.
Most people in the independent sponsor universearen't going to be a a perfect fit.
We are looking for people who have moretraditional private equity training at good
firms that are, you know, typically middlemarket, 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
(16:58):
to build out a track record as an independentorganization, to build out the team, to prove
the model, to do deal by deal along the way.
And those are the types of people that we willtypically start spending time with.
If someone is interesting, we'll we'll takethem through our full manager underwriting
process effectively.
And at that point, if we approve them, thenwe'd consider deals with them.
When a deal comes, we'll do a full dealunderwriting as opposed to just having said,
(17:21):
hey.
We underwrote the sponsor.
That's great.
We'll do all the deals that they that that heor she brings us.
And so then there's another deeper a deep diveinto that company, spending time with
management team, doing our of our ownindependent research on the on the sector
verticals, working spending a lot of time withthe sponsor, understanding their thesis risks,
how they're gonna add value to the company.
We view this as a great way not only to buildconviction or not in an individual deal, but we
(17:45):
view it as a a great way to build notconviction in that sponsor to consider another
deal with them.
And maybe after some number of deals topotentially anchor a fund one commitment if we
think that it is time for them to move on frombeing deal by deal to having a proper fund.
Yeah.
This funnel where you're focusing on quality ofthe sponsor in order to confirm that the
(18:07):
sponsor is indeed quality.
You look at the deals to see how quality thedeal flow is for that sponsor.
It's kind of like you're checking bothcriteria, but in the order of sponsor first and
deal second.
That's right.
We view it as this virtuous cycle of that feeit feeds on itself, and it helps us build
conviction in that manager.
And all the while, we have this nice curateddeal funnel with these, you know, people we
(18:29):
respect as investors, bringing us opportunitieswith a higher certain a higher certainty of
close, and then we can sort of pick and choosewhich of those those investments that we wanna
participate in.
And all the while, sort of hopefully buildinggreater conviction in that sponsor.
Though at times at times as we dig in andpartner with someone longer term, we do not
build that conviction.
And and so we may stop working with them dealby deal and certainly not advance to a fund
(18:52):
commitment.
And you mentioned that you look for metrics forindependent sponsors to partner with.
It's kind of a paradox.
Are you looking for their track record at theirprevious fund, or what metrics exactly are you
looking at?
In terms of what we look for, though, in, youknow, in sponsors, lot you know, our sponsors
with with, you know, experienced individuals,sort of a purpose built team that aligns well
(19:12):
with their strategy, where we think they havesome sort of competitive edge tip in an in an
area of expertise, and that, you know, webelieve that they have strong enough sourcing
capabilities and but certainly strong abilityto add value to their company, then we do that
that deeper dive.
We we a lot of the assessment with independentsponsors is a more qualitative assessment on
people, one or two oftentimes one or two peoplewith a brand new independent sponsor.
(19:36):
That said, it's not that different than when wemight, you know, evaluate a fund one where
you're you don't necessarily have a deepattributable track record yet.
You have to do a little bit of sleuthingbecause we're not looking at back independent
sponsors who've never done a deal or never beena senior investor, like leading a company from
beginning to end.
And so while they may not have attribution,they certainly probably don't have attribution
(19:58):
from the firm that they left.
We can find out which deals that they wereinvolved in.
We can talk to, you know, the CEOs, CFOs atthose companies, try to figure out what they
did, what they didn't do, put together, cobbletogether a track record and sort of degree of
attribution for for their prior deal so that wecan you know, using so that so that qualitative
assessment as well as kind of putting togethersome quantitative metrics to look an important
(20:20):
part of our our diligence process for anindependent sponsor.
And that's because at the previous firm, theythey left the firm.
The previous managers might not be thrilledabout other top people leaving the firm.
They're not necessarily gonna openly vouch forthem.
That's right.
I mean, even if they're happy for them and andand excited for their next step in their
career, doing something entrepreneurial, Youknow, private equity firms wouldn't wanna give
(20:41):
attribution.
They wanna keep the attribution themselves.
They have their own business to run their ownfunds to raise.
It's a zero sum.
Attribution is a zero sum game.
That's
right.
Thank you for listening.
To join our community and to make sure you donot miss any future episodes, please click the
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There's so many great fund ones.
There's you know, if you look at the supply anddemand dynamics in the market right now,
(21:01):
there's more quality managers than there isquality capital in that space.
Why even go for independent sponsor deals?
Why not just do fund ones?
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.
And I think I guess it was years ago.
Maybe, I guess, over a decade ago at this pointwhen we did our first independent sponsor
(21:24):
transaction.
TIFF would would look at fund ones in the thethe the lower mid market.
Though, I guess, the terminology was differentway back then.
And we had some really fantastic successes, butthere are some some mistakes.
And there was a greater volatility of outcomesthan I think we would ideally like.
We had experience as sort of evaluating dealsalongside of our lower mid market managers,
(21:45):
more traditional, like, kind of co investing.
We had experience underwriting fund ones, thethings you need to do to cobble together that
track record and and figure out attribution andget to into that qualitative assessment that's
so key with earlier managers.
And so, yeah, I think the independent sponsorwork started as this idea of how can you make
open up your universe, your investable universefor direct equity investments as well as
(22:07):
improve our we do our manager selection and ourfund one selection.
Keeping the really high alpha that you can getin fund ones, but limiting the number of of
mistakes that you can make at fund one.
And so independent sponsor investing not onlyis a great has been a great way to make money,
make returns for our investors on thoseindividual investments, but also to find the
(22:29):
next great fund one and actually have real datapoints and a lot a 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 worse versus bad luck,which is very hard to do as someone evaluating
a fund one who's just gotten to know thismanager in the last three months or six months.
(22:51):
It gives us a competitive advantage inunderwriting those fund fund ones.
So that's the main reason we think that thatthat's that that you know, fund ones are great.
We will continue to do those, but we thinkactually doing independent sponsor work allows
us to make great returns on the the individualdeals, but then also improve our returns when
we do invest in a fund one.
(23:11):
Why do and why invest in fund ones?
Are they historically better performing thanfund twos and lower middle market?
Looking at the data we have that you cangenerate outsized returns in fund ones,
optimally sized.
There's great alignment of interest.
And the the the the key investors at that atthat organization are are the key investors
(23:34):
leading the deals.
So as 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,
and they're not the key decision make they'renot they're not doing the deep work that they
that that they used to do that they had suchgreat success in.
So fund ones, we do see great returnopportunity.
That said, like, I think it's it's we certainlyhave plenty of managers to be backed where the
(23:56):
fund one where it's fund two where everythingclicked, where they didn't have to deal with
some of the startup aspects of the fund one,and their sourcing engine was going was really
clicking and going better.
And it was, you know, that fund two where theyreally accelerated.
So we don't think there's necessarily a magicthat 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
(24:16):
a fund one if we think we have have deep enoughknowledge of that of that manager.
Whether and that's that oftentimes means thatthese days, we're we're working with our with
an a former independent sponsor in a fun one ora spinout from another manager that we know
extremely well or that we invested withpreviously as opposed to meeting someone,
diligencing them for six months to a year, andthen then taking the plunge.
(24:38):
We might wait a little longer to to buildconviction, and wait to a subsequent fund.
And what you're doing when you invest in anindependent sponsor deal is actually incredibly
difficult.
You're paralleling both the diligence on asponsor as well as the the specific opportunity
and sometimes a compressed timeline.
Tell me about how you go about diligencing anindependent sponsor time as it comes through
(25:02):
the timeline.
In a perfect world, do our sponsor diligencebefore they necessarily have a new deal that
they're looking to raise capital for.
That'll that's not all that doesn't always workout.
Right?
When, you know, when when we are able to frontload the sponsor diligence and then a deal will
come later, then it's not that different than anormal sponsor manager underwriting process
(25:25):
that we would for for sort of an emergingmanager with limited.
Same process.
It's a ton of work, but you have but there'snot there's not that deal clock ticking in the
background.
When we have a we have a direct investment, asponsor brings it to us either before or right
after the LOI is signed.
We have there might be sixty to ninety days.
(25:46):
We wanna heavy work up front to to get toanswer our key questions or at least to to
figure out what's diligence threads we need tofocus on for the remainder of those days and so
that we can give a little more certainty so thesponsor knows, like, what our big questions are
and what would cause us to not move forwardwith the investment.
But again, that timeline's really manageablewith our team, which has a good mix of people
with manager selection backgrounds and directdeal backgrounds and overly hard.
(26:08):
What we have to do if there's a situation wherewe really are excited about a sponsor and
really excited about a particular deal thatthey are raising capital for, and we haven't
finished our sponsor work, we effectivelycreate two deal teams.
So there's a sponsor deal team.
There's there's the deal deal team.
And then our work according so it so it fits inwith the timeline of the deal.
There's lots of coordination and communicationwith the sponsors.
(26:29):
We because the worst thing would be that wedecide not to approve them, not to that we
don't like the deal, and they're reallycounting us on that capital.
So we it is it is a ton of effort.
It's a ton of resources.
It's a lot of work at once and and a devotionof a lot of resources to do that at the same
time.
Luckily, we have the team that's good at it.
We've we've we have pretty regimented processesin how we what we focus on in any in our
(26:50):
diligence for whether it be sponsor or deal.
So we can get it done.
Again, our preference would be to to not haveit not have to dedicate two deal teams at the
same time to one sponsor, but but we will do itfor the right sponsor and the right deals.
And it's two separate teams at TIF diligencingthe sponsor versus the deal?
There's clearly a ton of coordination andcommunication and overlap in certain at
sessions of diligence or or meetings or thingslike that.
(27:13):
And so there's we we need to be able to havepeople dedicated to digging into that company,
that sector, and and we need to have people whoare really digging into that manager's
background.
All the stuff I talked about earlier, puttingtogether that qualitative and semi quantitative
assessment of their track record, it takes amassive amount of work.
And then the deal itself, as you know, wouldtake a it takes a lot of work to underwrite a
company that we're gonna be, you know, partnersin for three to six years.
(27:37):
If several years ago went through anorganizational change, tell me about that
organizational change, and how does that affectyour clients today?
If became a public benefit company, an employeeowned company about a year and a half ago.
Prior to that, it was tax paying nonstopcorporation comp sort of complex legal
structure with no own actually, you know, noowner, so a sort of a high pseudo nonprofit.
(28:01):
Not much has changed, which I think is good.
Right?
Being a public benefit company, TIP's missionis the same mission as it was when I joined.
Our focus is still the same.
Our advisory board didn't change.
It's about the c I great CIOs and seniorexecutives at these wonderful nonprofits who
were the board pre conversion and postconversion.
And so that hasn't really changed.
I think the thing that is is particularlyvaluable about our our this current structure
(28:25):
that we have is many of our peers have hadequity to grant as a form of retention and comp
long term retention.
We now have that ability.
And so we only think that it will, you know,keep the team same team in in their seats for
as, like, for as long as possible.
Thankfully, I've been able to work with the thesame crew, senior crew on the private markets
team for many years at this point.
(28:46):
I think now having a pretty broad base of ofemployee ownership allows us to feel even more
confident we're gonna have the same peopledoing the doing the work here, doing the
investment work here that we that we would wethat we did preconversion.
What do you wish you knew before starting atTIFF fourteen years ago?
So many things.
So many things.
I think even lots of success investments ishumbling.
(29:08):
I I'm clearly not the first person who's eversaid that, but it really is.
And and at least for me, mistakes bring me morepain than successes bring me joy.
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 priorto starting TIF around fourteen years ago?
(29:29):
I guess my answer sort of ties what I justdegree.
I think I wish I'd I'd better appreciated thatwe know a lot less about the future than any of
us think.
I think early on, I would consider a sort of awider range of investment opportunities,
willing to take certain risks that I wouldn'tnow, but maybe those risks depended more
heavily on a very specific future state of theworld.
(29:52):
Hey.
I was confident about it.
The experts I talked to were confident aboutit, but there were fewer again, fewer paths to
victory, fewer ways to win.
And so you really needed to believe that youcould predict the future a bit better.
You know, thankfully, I I learned fairlyquickly that that there's certain investments
that kind of fall into a too hard bucket, atleast for me.
Maybe they're way out of our core expertise.
(30:14):
Maybe they're just really hard near toimpossible to really underwrite.
Or they have there's really one way that youwin, and then there's lots of states of the
world where you you don't do well.
There's a single factor, macro factor, or trendthat you're relying on.
There are plenty of great investments thatoffer multiple ways to generate return that I
think we are well positioned to underwrite.
(30:36):
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 justbe honest with ourselves about what the risks
we're willing to take and the risks we'rewilling not to to take.
And and and I think that, at the end of theday, allows us to be better underwriters and
better investors and focused.
Just to bring that to life, you might have youmight have you might be very you might have
(31:02):
very high conviction that let's say treasuryrates will stay low, or interest rates will
stay low over the next decade, and you starttalking to people, and you start building this
conviction everybody has the same thesis, andyou build an investment portfolio based on
that, and of course you know we have somethingthat happens both in 2021 and in 2022, which is
(31:23):
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 had some precedent,
but also unusual.
So you have this kind of you have thisframework into the future, this high certainty
that's very difficult to actually have giventhe complex world.
(31:48):
How do you, so let's say that you now realizethat you don't have this crystal ball even if
everybody in finance shares shares your view orseen as, quote, unquote, consensus.
How do you build an antifragile portfolio giventhat you don't know what the future holds?
It's a great question.
So you don't know what the future state of theworld.
I certainly know I predicted recessions when Ijoined TIFF.
(32:11):
I think I predicted like four years ofrecession in a row that, you know, that didn't
that didn't come.
But at the end of the day, if you what do wewanna own?
We wanna own good fundamental companies with areal reason to exist that have that can
generate return either by buying low at a cheapprice and using some cheaper debt, or they can
win by bringing on a CFO and tracking KPIsbetter, hiring the first head of sales to
(32:35):
actually charge start charging up andinvesting.
If all that goes well, and you can you can doan like, a little bit of an m and a strategy,
or you can improve your systems.
These are all very achievable things that acompany can do with the with the right sponsor
partner or the right investor base and withwith the right time horizon.
That will be harder in an economic downturn.
You could find yourself where, you know,something happens in the sector that company
(32:58):
operates in and they go out of business or theydefault on their debt and the lenders take it.
But if you put together enough, a portfolio ofthese good companies that have multiple paths
to victory, and you're and you diversifyappropriately by sort of by sector in
particular, sometimes the regional business.
But you diversify across a number of differentfactors, and you do a good job picking those
(33:18):
managers, picking those deals.
We think, like, over time, that that is how youbuild that portfolio that you're still worried
about downturns.
You're still worried about wars in the worldand oil price spiking, interest rates going all
over the place given that it's floating ratedebt if you have if you have leverage.
But but, you know, one one single thingshouldn't sink your entire portfolio because
(33:39):
you've owned equity and good businesses, andyou have good partners that are creating real
economic value at these companies andcatalyzing something, catalyzing growth or op
or organizational change.
It's almost these multiple factors that make anasset antifragile.
There's the business itself that has to begood, has to have enough margin, which is
another way of saying margin for error, marginfor margin for economic outlook.
(34:01):
And then you also want management teams thatare antifragile, meaning that could navigate
different markets, that make good decisions ineven difficult markets.
You want this kind of and you want to build anentire portfolio of these magical assets.
Of these magical assets.
That survive under under every Yeah.
Economic outlook.
(34:21):
And as you know, we have a we have sort of a aframework we use to what anytime we're
evaluating a company, typically, it be a directdeal, but I think it applies to what the types
of assets we'd wanna fund to own or manage toown.
Again, 76 lines of the framework.
But but, again, at at the high level, let'slook at the business, the sector, the deal, and
the team.
And, again, getting to what you just said,like, the business leadership position, secular
(34:44):
moats, right to win, leadership is often, Ishould say, niche leader leadership is a niche
market because these are small companies.
And then those attractive financialcharacteristics around recurring or reoccurring
revenue, strong margins, capital efficient,free cash flow.
These aren't unique characteristics, butthey're important even with smaller companies.
There oftentimes will be some sort of nicheleader or regional leader.
The sectors we wanna feel like they're lesscyclical or noncyclical, there where there's
(35:09):
some tailwinds so that it is you know, it's notjust executing the business.
You have something other than taking share.
And then, again, the team is probably the nextmost important thing, if not as important as
all these, whether that be the sponsor or themanagement team, and and then having strong
alignment with all the parties around thetable, and then clearly the deal itself.
So compelling entry dynamics from a valuationperspective as well as, like, a differentiated
(35:31):
angle that you have on how you're gonna makethis a better company.
And then we wanna see that across our entireportfolio, an asymmetric return fan where the
business is good enough, the price is lowenough, maybe the structure is attractive
enough, is sort of you're sitting above commonequity, for example, that you can protect your
capital.
If you run into a really bad economicenvironment or something unforeseen happens,
(35:51):
you feel good about a three times multiplemoney base case, but there are clear ways that
aren't pie in the sky crazy ways, but there areclear ways to generate five x plus multiple of
money.
Again, some of those will be wrong sometimes.
Our manager our managers or sponsors will bewrong sometimes.
But if we look through at the portfolio and wefeel like we're have enough green lights on a
(36:12):
lot of those characteristics that we're lookingfor and not a lot of reds and yellows, at the
end of the day, we'll be wrong because we can'tpredict the future, but we think we'll be right
far more than we'll be wrong.
And luckily, history has proven that so far.
And this conversation reminds me of thisconfidence paradox, which is when you start
your career, you're over indexed on confidenceand under indexed on returns.
(36:33):
And then the older you get, your confidencegoes down and your returns actually go up.
This this is a great example of that in thatyou're basically accumulating all this
knowledge, and you become very conservative bynature, but you end up doing better from a
performance standpoint.
And some people continue to be overconfidentand and don't really get the lessons, and we
(36:53):
all know some of those.
That's right.
When you said that you you wrongly predictedthat there would be recessions, After a while,
and I think a lot of the market, we had thisvery conversation with the CIO of CalSTRS,
Scott Chan, and he said that the market forthree years had predicted a recession.
Now this year wasn't predicting a recession, sohe thought there might be a chance of
(37:15):
recession.
When you look at that, do you at some point doyou stop predicting, or are you still index on
your own view and personal view?
You just don't as heavily index?
And talk to me about how you go about trying topredict the future.
Is there a place for that in portfoliomanagement?
There is a place for that in port in portfoliomanagement.
(37:37):
Again, my thankfully, my me and my team, we getto focus on the focus on the micro to drive
alpha and don't have to and at the end of theday, we think, well, we might get have some
detraction because we didn't spend enough timepredicting broad macro factors because that's
not our specialty in any way.
But we think the we do think more more inmicro.
I go back I go back and forth because I feellike I don't believe I don't believe that that
(38:01):
I have an interest or an ability to predictbroad macro more broad broader macro factors.
And even even sort of long term longer termtrends in certain sectors are can be very are
very hard to predict, particularly with anyprecision.
(38:21):
It is hard to make it is hard to make thesepredictions.
I think I used to think more that there weresome people who were great at predicting some
of these macro factors, even even shorter term.
I think as time has gone by, I I'm there I knowenough to know that there's probably someone
who has a way to better predict these factors,even in in the very short term.
(38:44):
They probably have lots of computers and PhDs.
I think most people try to do it, and it's funto talk about at cocktail parties or in
meetings, but they there's they don't have anyedge to consistently predict some of these
outcomes and oftentimes have selective memory.
They remember the time they got it right.
They don't remember the 20 times that they werewrong in their prediction.
I mostly joke about my prediction of, like, thelast five recessions annually.
(39:08):
But it like, to a degree, I I and it I don'tthink it impacted how we invested in like,
again, this is way back, but in those timeperiods that much.
But to to to that greater degree, it it seemedlike it it's for me, it is a general waste of
calories and time to be to focus on overlyfocus on those factors.
I think one has to be aware of what's going on,but there's only a finite amount of time in any
(39:32):
life and in any day.
And I do think a lot of people probably spendtoo much time ruminating on things that they'll
probably that that are impossible to predict.
Goes back to what you look for in managers,niche focus, right to win, competitive
advantage.
You you're applying that to your own team.
That's right.
You said that better than than I than my answerright there.
So totally right.
Well, Brendan, this has been a masterclass onthe private markets and how foundations invest.
(39:56):
What would you like our audience to know aboutyou or about TIFF?
TIFF TIFF is truly a special special place.
I actually got to know TIFF when I was atHarvard Business School.
A professor and I in my second year wrote acase on TIFF and the endowment model.
And I got to spend a lot of time with peoplehere and fell in love with mission and the
place and thought there was just some reallyunique investors who were oppressively not
afraid to be different than the rest of theworld in how in how they executed and what they
(40:19):
did.
After business school, I went on to dosomething else in in the private equity world,
But then I fortunately stayed in touch withenough people in the TIFF orbit that I was came
back, and it's been a great fourteen years.
I get to work with smart, humble, and funnyindividuals, care deeply about our mission, and
also as most importantly, generating greatinvestments.
I'd also say that one thing that I still loveabout TIFF is that we are smaller than some,
(40:43):
but certainly mighty.
You know, at around 8,000,000,000 of assets andgrowing, we're we're big enough to to do some
exciting things to matter on the investmentfront, but but nimble enough to focus our
capital on on on the most attractive parts ofthe markets, certainly in our view.
That plays to our advantage.
The larger firms have billions of dollars topush out into private markets each year.
(41:05):
It's hard to you know, you can't execute thesetypes of strategies that that that we do and
have it.
And, certainly, if you try, it won't matter inthe whole scheme of your portfolio.
And I think it's a it's a really specialorganization that I've been lucky enough to
know for many more years than I've worked here.
It's a storied organization.
Any organization that Davidson was part of,obviously, is in a league of its own, and it's
(41:26):
doing a lot of good.
And how should people reach out if they'd liketo chat with you?
Sure.
My LinkedIn, Brendan Perry, b r e n d o n p a rr y.
Thanks for listening to my conversation withBrendan.
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