April 11, 2025 • 43 mins
Paul Chai’s journey from first-generation immigrant to Chief Investment Officer of a $1 billion endowment is anything but conventional. In this episode, we unpack how he transitioned from aerospace engineering to managing capital, his approach to investing in “outsiders,” and the delicate balance of taking risk in hedge funds, GP stakes, and tactical trades like TALF 2.0. Paul shares how Kansas State University's endowment supports the school’s mission, why they invest in lower middle market buyouts and small hedge funds, and how they find and evaluate emerging managers.
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(00:00):
I've always felt that I've been an outsider forfor the most of my life.
(00:03):
Being new to this country, being somebody whohad transitioned from career to career
positions throughout my my my life.
I've been an engineer.
I've been a consultant.
Consultant, and then coming into the familyoffice and as somebody who came into the
Endowment Foundation space without a whole lotof pedigree.
You're going after a manager where you'remeaningful to them, where it's really a two
(00:26):
sided street.
Why does that matter?
For us, it like you said, it's a two waystreet.
So what we can contribute when our GPs aresuccessful, we are in turn also benefiting from
their strong performance and become successful.
For six months of placing on a trade, TALF twopoint o investment generated a 8% return.
That's roughly four times of the 2% return, Iguess, The US aggregate index for for bonds
(00:52):
during the same period.
Do you have a very unique background for chiefinvestment officer?
Tell me about your background.
Thank you so much again for having me on today,David.
It's a real honor to be here.
I'm a first generation immigrant from Taiwan.
My mom brought me and my brother to The US whenI was 14 with very little English ability.
(01:13):
I eventually graduated from MIT with a degreein mechanical engineering.
After college, I worked in the aerospaceindustry as an engineer and the semiconductor
industry as a consultant.
I spent twelve years in the family office,gaining invaluable investment experience.
In 2018, I saw an incredible opportunity tojoin the Kansas State University Foundation's
investment team.
(01:33):
And when our longtime CIO, Lois Cox, retired in2023, I had the privilege of stepping into her
role.
So you are a first generation immigrant likemyself.
In what ways was being first generation anadvantage and which way was it a disadvantage?
I've always felt that I've been an outsider forthe most of my life.
Being new to this country, being somebody whohad transitioned from career to career
(01:59):
positions throughout my life.
I've been an engineer, I've been a consultant,and then coming into the family office and
somebody who came into the Endowment Foundationspace without a whole lot of pedigree.
So this is something that I find to be both adisadvantage and an advantage.
The advantage being that I can be moreadaptable.
(02:20):
I can gain comfort in my environment.
I've learned to really try to open myself up bysharing my own personal life to people who may
be less familiar with my background.
That's one way for me to also get them to openup to me and to to learn about their culture
and their backgrounds.
So I I do find that to be an advantage for meto build connections with people in different
(02:44):
backgrounds.
Silicon Valley is the ultimate place where theultimate outsiders become the ultimate
insiders, whether it's Peter Thiel, Elon Musk,countless others.
When you look at top GPs or people that you'reinvesting in, do you also find that there's
this theme where some of the top managers areoutsiders?
Two.
I I find that to be incredibly a motivatingfactor.
(03:06):
Being an outsider motivate you to try to workhard because you know that you don't you're not
given that endowment in some way.
You are not given the chance to fail multipletimes.
When you think about any emerging manager,anybody who's coming into a space who's a
newcomer, who's an outsider, most people don'tgive you a lot of chance to fail.
(03:29):
When you think about the asset managementindustry, it's very easy to sometimes see a,
for example, whether it's a diverse manager ora first time manager, they will not be getting
the same treatment as somebody who may havealready had a track record, may have failed in
their fund, but they are given the chance torestart.
But for somebody who's a first timer, you canvery well have a large drawdown and then you'll
(03:55):
be out of the space.
The deeper I go with the top general partnersto top entrepreneurs, there is a dark aspect to
it in that the very same things that make themthe most successful are oftentimes rooted, at
least initially, from insecurities, from notbeing enough, from being an outsider.
It has them do these, you would say inefficientthings of spending hundred hours a week once
(04:20):
they're already billionaires and just alwaysstriving to prove themselves and to be better.
Some of them are able to channel that darkenergy into a lighter energy.
How do I change the world?
You look at Elon.
How do we make human species multi dismultiplanetary?
You look at Blake Scholl.
How do we make travel more accessible?
(04:41):
But a lot are still stuck in this dark aspect.
Talk to me about how you suss out themotivation in your managers.
Think about alignment of interest.
I think about the person, their makeup, whatthey are representing, what kind of community
are they coming from, and what role do theyplay in that community?
What's their aspiration and goal in their life?
(05:04):
And that's where I focus.
And that fit is very hard to find.
And in many ways, it's almost like dating.
You're trying to find your ideal mate and youhave to go through many hoops in order to find
that ideal fit.
For us, it's oftentimes a multitude of things,from the person's motivation, the alignment of
(05:25):
interest, to the vision for the strategy, towhether it's actually a fit to the rest of the
investments in our portfolio.
Let me tell you about a conference I'm veryexcited about, Alpha on the Delta, which is
coming up in late April during Jazz Fest in NewOrleans.
Unlike some of the larger conferences, Alpha onthe Delta is limited to 150 allocators and 30
niche managers on an invite only basis.
(05:45):
It's an authentic and different kind of eventwith some really great people.
If you'd like to learn more and request aninvite, visit www.howiinvestdelta.com.
That's www.h0wiinvestdelta.com.
I hope to see you there.
I learned in my career when you start out, youget really excited about these big names.
(06:10):
Harvard Management Company.
Of course, I love Harvard, but Harvard has thethe pick of the litter in terms of which fund
they want it.
So it ends up being, in some ways, unlessyou're one of these mega funds, a one-sided
relationship where you really benefit a lotfrom Harvard, but Harvard may may not benefit
as much.
What you're saying is you're picking based onyour, endowment size, which is roughly
(06:30):
1,200,000,000.0.
You're going after a manager where you'remeaningful to them, where it's really a two
sided street.
Why does that matter?
I'm sure you care about getting the co invest,getting information, getting meeting times with
the GPs.
Tell me about why it's so important for you toactually also have value for the GPs.
Like you said, it's a it's a two way street.
(06:51):
So what we can contribute when we our GPs aresuccessful, we are in turn also benefiting from
their strong performance and become successful.
So that's where this is a two way partnership.
We want our GPs to be successful, but we alsoare mindful of the size of their opportunity
set, so we don't want them to grow too big.
(07:12):
There's always a delicate balance of thinkingand envisioning their future with them and
thinking about what's their optimal size, andbut at the same time, helping them if they can
go to a larger size to have more stabilitywithin their organization.
We will do our best to help refer to other likeminded allocators to help them grow.
(07:34):
I wanna double click on something that you saidearlier.
You said we have 40 to 50 managers.
They represent one to a couple of percentagesin the portfolio.
Obviously, not every manager you're you'reallocating, the same amount.
Just to play devil's advocate, why is it soimportant?
Let's say one of those managers blows up.
Obviously, it's not what you want, but why doesthat affect your portfolio so dramatically?
(07:55):
Because we have less number of managers.
Each manager would take a more meaningfulposition within the book, and that that's where
we have managers.
When we are allocating or consideringallocation to a prospective fund manager, we
always think from the perspective of we onlyhave five people, how many managers can we
comfortably establish a close relationship andwork with over the long term.
(08:18):
And that's where the 40 to 50 managers in ourportfolio becomes a sweet spot.
That's where we feel we can adequately coverthe investment opportunity sets within our
portfolio relatively well, fulfill ourfiduciary responsibilities by knowing our
investments, knowing the risks, and also at thesame time, having enough bandwidth and manpower
(08:41):
to establish that close relationship with ourfund managers.
So that's where when you have only 40 to 50positions, the position size from anywhere
between a percent to 10% of our portfolio.
If you have a manager that fails, one for 1%position or even a 10% position, that's a lot
(09:01):
more material than, for example, a largerportfolio with three, four hundred positions
and fund managers that you can tolerate animpact of point 3% to point 4% as opposed to,
for us, if it's a failure of a manager, thatcan be a 1% or above impact to us.
At Kansas State, you guys make these tacticalinvestments going back to 2020 when you made
(09:25):
your first tactical investment.
Tell me about that trade, and how do you usetactical investments in your portfolio?
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Sure.
So in 2020, market dislocations created uniqueopportunities, and TALF two point zero was one
(10:13):
of them.
It's a government initiative designed tostabilize credit markets by providing low cost
leverage on asset backed securities.
We knew that this wasn't an undiscovered tradebecause Telf one point zero, right after the
great financial crisis of two thousand andeight, had delivered outsized returns for
several fund managers.
So this time, we certainly expected competitionto be fierce for this opportunity set.
(10:37):
Instead of jumping in blindly, we partneredwith a Kansas based pharma manager that
anticipated the crowding effect.
They were prepared to move fast, identify thebest opportunities, and deploy capital
efficiently.
We took up a substantial portion of the SPVthey set up, allowing us to gain meaningful
exposures without the operational complexitiesof direct participation.
(10:59):
By allocating a sizable portion of our corebond portfolio to this tactical opportunity, we
turned the short term market dislocation into acompelling source of alpha, which really set
the stage for our tactical investment approachmoving forward.
Double click on the trade.
And what trade did you make in 2020?
We partnered with this fund manager thatinvested into investment grade asset backed
(11:21):
securities, so the RMBS, CMBS securitiesthrough the TALF two point zero program where
the government offered non recourse loans atlow interest rate for the fund managers to
invest in the space in order for them torejuvenate and stimulate the credit market to
ensure that we don't have a run on the bank inthe credit market when 2020 happened.
(11:46):
This was a measure that the federal governmenthas established post re financial crisis.
So in this case, we knew that the TALF twopoint zero program is going to offer credit
facilities.
But what happened in 2020 was also unique inthat you had a sharp market downturn in March
(12:06):
2020.
And then right away, within a couple of months,the market had a very strong bounce back.
So that opportunity window was very short.
The amount of securities that qualify for Telftwo point zero at the valuation that makes
sense for fund manager were limited.
So this was a case where partnering with asmaller fund manager that was nimble, that was
(12:28):
able to quickly act and deploy capitalefficiently into a smaller opportunity set
really make a difference.
Many of our peers were also interested in thisopportunity.
But in terms of execution, many of themstruggle with bureaucratic hurdles.
They have to wait for their board to approvethe trade.
(12:49):
And some of them partner with larger managersthat were not able to efficiently deploy
capital because once you find out theopportunity size smaller than you think, you
are not able to call as much capital as youwould expect to deliver that investment
outcome.
So I I would say the ability to be nimble andto be able to execute fast, what what's the
difference maker for us?
I spoke to Scott Chan, CIO of CalSTRS, and theyhad this prepared mind waiting for a
(13:14):
dislocation, what they would do, and that's whythey were able to take advantage of that
opportunity.
Talk to me about how you put yourself in aposition to execute.
You know, it's one thing to have the idea, buthow do you corral the resources, and how do you
make sure that you're ready to take advantageof a dislocation when it occurs?
There's one investing category that'soutperformed major US and world stock markets
(13:36):
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(13:58):
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One of our superpowers, I I would say, has todo with the the trust and the relationship with
(14:19):
our board and the asset management committee.
Our asset management committee has theoversight of what we do, but our team was given
full discretion over management selection aswell as making the investments necessary as
long as we fit within the top down strategicasset allocation framework.
So this is where we are able to have theability to be nimble.
(14:41):
We can take advantage of tactical marketopportunities and dislocations based on what we
are seeing in the near term.
That has been a source of alpha for us by beingable to take calculated, thoughtful approach to
deliver returns in a risk man risk managed wayto help us, generate a differentiated return
(15:03):
from our target benchmark.
What kind of returns were you able to realizewith TALF two point o, and how significant was
this trade?
So over six months of placing on a trade,Health two point o investment generated a 8%
return.
That's roughly four times of the 2% return ofThe US aggregate index for for bonds during the
same period.
(15:23):
For fixed income portfolio in a low yieldingworld back in 2020, that's a material
outperformance for us, especially when we areconsidering this is allocation for our
liquidity bucket, which is essentiallyinvestment grade core bonds at a low yielding
type of environment that we had back then.
Considering the low risk nature of the trade,the leverage provided by TALF combined with
(15:46):
disciplined asset allocation created a higherreturn, low volatility opportunity that was
hard to replicate elsewhere in the bond marketat the time.
And it also reinforced our belief that tacticalopportunities when we executed thoughtfully can
enhance returns without taking excessive risk.
It's a good example of being strategic thereand agile, and how that can turn a short term
(16:10):
dislocation into long
I was just speaking to Cliff Asness of AQR, andhe believes that investors systematically are
either underleveraged or overleveraged.
And one of the places that they're underleveraged is their fixed income portfolio.
He believes they should be much smaller, butwith higher leverage.
What do you think about that?
And how do you think about leverage in yourportfolio in general?
We don't take a lot of leverage within parts ofour portfolio.
(16:33):
There's inherent leverage within our portfolio,we have currently about 65% of the portfolio
participating in what we call growth.
So that's a growth bucket that participates inpublic and private equity.
And most of these are 100% loan positions onthe public equity side.
And in the private equity side, we also monitorthe level of leverage carried by our general
(16:58):
partners.
The amount of leverage that's taking us alittle bit higher within our portfolio comes
from the diversified part of our portfolio andspecifically coming from the hedge fund
portfolio, which makes up about 12% ofportfolio today.
And that's where we are tactical.
We do monitor the leverage for our fundmanagers, but it's a smaller portion of our
(17:23):
portfolio.
So typically, leverage impact can be limited.
Having coming from a family office in the pastwhere we manage a highly leveraged fund of
hedge funds portfolio back in 02/2008 andliving through the times of the great financial
crisis when the portfolio has to be locked updue to essentially all of our funding in the
(17:47):
portfolio having restricted liquidity access totheir positions.
We certainly have learned the lesson or for mepersonally, I've learned the lesson that
leverage is a double edged sword.
Can enhance returns in good times, but in badtimes, that's when you can have your headed to
you handed to you when when your loss can beamplified and you're losing multiples of of
(18:10):
your equity.
Percent of your portfolio is in diversifiers,which is hedge fund like strategies.
I think it's probably the closest to a blackbox in the endowment world where it's very
secretive, many different strategies.
Unpack that box for me and tell me about whatsome of these diversifier strategies are.
Because the the biggest portion of ourportfolio or 65% of that is in global growth in
(18:34):
public and private equity, diversifiers arereally seeing and positioned to help dampen the
the volatility of the equity market because itcan be very volatile at times.
This is really designed to smooth out theright.
We tend to invest in strategies with returndrivers that are less correlated to stocks such
as hedge funds, real assets, and alternativecredit.
(18:55):
So private credit are really all part of this27% diversifiers pool.
I think the 27%, twelve % are in hedge funds atthe moment.
For our hedge funds portfolio, it's again aconcentrated portfolio of six positions.
So each position take up 1% to 2% of totalallocation.
I would say about 40% of the current hedge fundportfolio are in more tactical arbitrage quant
(19:21):
related strategies that are seen somewhat as ablack box in certain ways, while the rest of
the portfolio are in other diversifiedstrategies.
When we are evaluating hedge funds, we alwayslook at the broader correlation to the rest of
the portfolio, liquidity of these strategies.
And we also focus on, again, some of the otherthings I talked about earlier, who the manager
(19:46):
is, what do they represent, what's theiralignment, what's their aspiration in managing
the firm and the strategy and try to identifythe a good fit to to the portfolio based on
correlation to the rest of the book, liquiditythey can deliver.
And and also, we we always shoot for strategiesthat that can at least give us a 8% long term
(20:06):
annualized return that that would reach our ourlong term investment return target.
There's almost like these three concentriccircles of diversification.
There's within the fund.
You don't want the fund to blow up.
Then you don't want your diversifiers to behighly correlated to your other diversifies,
which is the second circle.
And then all of that has to be contextualizedwithin the overall Kansas State portfolio.
(20:30):
How do you measure that and how do you knowthat you're diversified as an overall
portfolio?
We do look at our correlations against thebroader traditional stock bond index over time.
We try to think about our portfolio in thecontext of upside and downside captures in
various market conditions.
When, for example, the equity market is up100%.
(20:53):
What and what's our upside capture to to equityrisk in general?
And we also look at various levers, forexample, looking at interest rate volatility,
looking at the the value of valuation of USdollar fluctuation compared to to other
currencies, looking at inflation levels andtrying to analyze the sensitivity of our
(21:15):
portfolio return to each of these levers.
So those are those are ways for us to to thinkabout how resilient and how all weatherproof is
our portfolio in in various environments.
How often do you run this diversificationexercise?
And talk to me about how you manage whetheryour portfolio is diversified.
We look at our portfolio continuously, but butI would say every quarter, at the end of the
(21:37):
quarters are a time for us to at least look atthe composition of our liquid portfolio because
most of our liquid funds have a liquidity ofmonthly or at least a quarterly and better
liquidity.
That's how we are managing the liquidity of ourportfolio to meet distribution needs and other
operational expense needs for our institution.
(22:00):
So at the end of each quarter, our team usuallydoes an exercise where we will take all of our
liquid managers and divide it up among our teammembers for every member to do a re
underwriting of that strategy to essentiallywrite a commentary of the fund manager, and we
will gather again.
We we typically will also assign a devil'sadvocate for each of the the fund for for the
(22:24):
person to to get into a debate.
This is a way for us to really make sure thatwe are really thinking both the good and the
bad of each of our fund managers in theportfolio today.
So that first first part is where we arelooking at individual fund managers and how do
they fit within the portfolio based on how theydid over this past quarter, any material
changes to when we underwrote the strategy.
(22:45):
And second part is also we have quarterlyreview meetings with our board and our
committee.
And that's where we also take the portfolio asa whole and look at upside, downside, overall
diversification, benefits and correlationnumbers and other metrics against our
benchmark, against the various asset classbenchmarks to really get a sense of if we are
(23:06):
seeing a different scenario, if we are seeing ahistorically stressed scenario, how would our
portfolio do, and how does that compare to theprior quarter?
Couple of great nuggets to unpack there.
One is this is not an academic exercise you doonce a quarter.
You're actually evaluating primary your liquidstrategies because those are the strategies
that you could take some action on.
So if you decide, if you make a decision, youcould actually divest from one manager, or
(23:31):
invest in another manager.
Secondly, I think the one of the biggest biasesin asset management is that you need a reason
not to re up with somebody, versus a reason tocontinue to re up.
If you think about it from first principles,you should be underwriting it just like Kansas
State does, in that why am I in this manager?
If I had it all over again today to make thatdecision to re underwrite, would I make that
(23:52):
same decision again?
I think that's a rare discipline, and of coursethe devil's advocate, I love that.
I'm a big fan of devil's advocate.
We oftentimes within our firm, we come up to adecision, now we say, as a next step we say,
now let's kill it.
What is the best way to kill this idea, thisstrategy, this hire?
I think it's a really useful and undervaluedpro Tell me about the three investment
(24:15):
categories that you divide your strategy into.
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Yeah.
So we're not too different from, most of ourendowment peers in structuring the portfolio
into growth, diversifiers, and liquidity.
Each of the buckets play a critical role inbalancing risk return stability.
(24:36):
So within growth, this includes public andprivate equity.
Our primary engine for long term returns comesfrom growth.
So we aim to invest in the best opportunitiesacross global economy, knowing that while
markets don't move in a straight line,disciplined exposures to growth assets is
essential for compounding wealth over time.
As for diversifiers, since I mentioned equitymarkets can be volatile, bucket is designed to
(25:01):
smooth out the right.
We invest in strategies with return driversthat are less correlated to stocks and to
provide stability and enhance risk adjustedreturns.
Finally, liquidity bucket ensures we alwayshave the cash flow needed to support K State's
mission.
It consists of the highest quality creditassets, prioritizing capital preservation,
(25:23):
liquidity so we can reliably fund scholarships,faculty salaries, and campus initiatives.
And you have these three investment categories.
Tell me about what target return are you tryingto get on the entire portfolio.
Sure.
So when we are thinking about our targetreturn, it's designed to ensure long term
sustainability of the endowment, and it needsto cover three key components.
(25:46):
First, annual distribution of 4.3% currentlyover the average market value of our endowment
over the last three years.
And this is a portion where we distribute eachyear to support scholarships, faculty, and key
campus initiatives.
And then secondly, we have to cover our feesand expenses, including investment management
(26:07):
costs, operational expenses, and support feesfor to to help support our fundraising efforts
to grow the endowment.
And that currently adds up to be roughly 1.5 ayear of the endowment's market value.
And lastly, to maintain our endowment'spurchasing power over time, we need to keep up
with the rising cost of education and campusneeds.
(26:28):
So we have to keep up with long term inflationnumbers.
There's always a little bit of a trickyexercise to determine what's the appropriate
inflation number to use in this case.
For our institution, we choose to have a 2%long term inflation target in line with what
the Fed is targeting, but it's something thatcontinuously monitor.
(26:50):
So every year, we have an exercise of reviewinginvestment policy statement to think about is
this target returns still the right way to togo about based on whether we are going to
maintain that 4.3% distribution, whether we'regoing to charge the same amount of management
fee across the foundation and what thatinflation assumption is.
This is an annual exercise that we do based onthe changing market environment.
(27:14):
But once you add them up, today's long termtarget return is about 7.8%.
Hitting those number isn't just enough.
So this is where we try to exceed it whilemanaging risk effectively.
Our job is to construct a portfolio that notonly meets the target but goes in a way that
provides stability and resilience throughdifferent market cycles.
(27:36):
So so let's say you sit with your investmentcommittee in 2026 and you decide you want to
increase your return.
What are some of the levers you could pull inorder to increase Kansas State's return?
There are several levers that we havehistorically pulled to enhance our returns
compared to our benchmark while managing therisk effectively.
We do have the flexibility within approvedrebalancing ranges to place an overweight or
(28:00):
underweight to certain asset classes based onour market conditions.
So this does allow us to be more opportunisticwhile staying disciplined.
So for example, if we do need to increaseexpected returns, we can tactically increase
the allocation to growth, to equity positionswhen situation calls for it.
Secondly, we also are somewhat different inthat we do invest beyond traditional
(28:24):
categories.
So even though we have a top down strategicasset allocation framework, there are some high
return strategies that don't fit neatly into aconventional asset class bucket.
For example, if you think about convertiblearbitrage strategies, niche equity strategies
like a sector specialist or a countryspecialist, reinsurance strategies or or a GP
(28:46):
stake strategies, they don't necessarily fitfit neatly into an equity or credit or a hedge
fund bucket.
So that that's where we try to be flexible andwe find creative ways to to incorporate them.
And then lastly, we try to take tacticalopportunities when dislocations arrive arise.
(29:09):
So like the TALF two point o trade we talkedabout earlier, we can act quickly to to capture
excess returns that that wouldn't typicallybeing be available in a static asset allocation
model.
So these are all different things that we do,but, ultimately, our goal is to balance risk
and and return while being nimble enough totake advantage to unique opportunities that fit
(29:32):
within our governance framework.
So you could either rebalance.
So you have your growth, your diversified, yourliquidity.
You could rebalance a little bit more ongrowth, which essentially makes it a little
slightly less diversified or slightly lessliquid, but a higher return.
You could do investments into things like GPstakes, reinsurance, or you could prepare kind
of for these idiosyncratic trades like the TALFtwo point zero.
(29:55):
On the TALF two point zero, without giving awaythe secret sauce, how are you preparing
yourself for the next TALF two point o trade?
So how do you go about scouring the market andthe managers for the next great trade?
We don't.
We we wait for them to emerge themselves, andsometimes when situations arise, you do see
these dislocations.
We are certainly not macro economists from ourteam, and we don't profess to know the market
(30:20):
better than the fund managers that we haveinvestments with.
This is where we do partner with our fundmanagers.
We rely on their expertise to identify thesedislocation opportunities for us and notify us
when these type of situations arise.
And that's where we will then the team takestime and takes our energy and resources to
(30:42):
underwrite these dislocation opportunities tobuild confidence and build convictions so so
that, when we do decide that this is anopportunity that makes a lot of sense, we will
act very quickly and try to be nimble to toallocate a part of the portfolio that can make
a meaningful impact to performance.
You mentioned GP stakes, which is a hotindustry.
It's 6 roughly 60,000,000,000 AUM.
(31:04):
It's innovating rapidly.
How have you thought historically about theevergreen nature of GP stakes deals and that
they don't typically have a ten year fund life?
And how do you incorporate that into theendowment strategy?
It's it's been there's been a lot of growthwithin the space, and you have managers within
different spectrums of GP stake depending onthe type of strategy, of GPs.
(31:25):
They they they would invest ownership stakes inversus the size of the the fund managers that
GP stake investors will will put in.
From from our standpoint, it's a space that wehave not taken a lot of idiosyncratic risk per
se.
We we have partnered with the the biggest GPstake managers in the market essentially
focusing on the the trophy the the the trophyassets that of fund managers because for us, we
(31:52):
are really thinking about it as a way for us todeliver high cash on cash yields coming from
the stability of the largest fund managers andGPs out there that have continuously being able
to grow their asset size and deliver arelatively safe return for for their LPs.
So these are the the larger GPs that that haveseen the the largest growth in in their asset
(32:16):
size.
And we we do feel there's some stability to howthey are managed and taking GP stakes within
those fund managers allow us to be able todiversify our portfolio in some ways.
Because when we think about our private equityportfolio at our size, we tend to partner with
smaller, lower middle market buyout type ofstrategies and and managers at a smaller size
(32:43):
by doing GP stake in our portfolio in thetrophy largest asset managers in some way that
diversifies away from our exposure to smallermanagers, and we get to participate in the
growth of the larger asset management firms aswell.
In many ways, that's a trifecta.
You have your growth because the MOICs arepretty attractive in GP stakes even for these
(33:03):
mature trophy assets.
You have your liquidity.
It starts to go liquid with the first quarterbecause you're getting a percentage of the
management fees.
And then I would argue it's also diversifiedbecause management fees are contractual.
So even if a fund's not doing great, they'restill ten years of management fees.
Right.
So so there is a durability of the the return,and that that's another part that plays in our
(33:26):
interest.
We we don't see it as a equity investment.
We don't see it as a credit investment, but butit's really components of both where if the GPs
continue to grow their assets, they willcontinue to see a higher share of growth in
their performance fees.
And that performance fee along with GPs owninvestment in their funds would deliver
(33:47):
outperformance on top of kind of what youmentioned about the regular cash flows coming
from the management fees.
Part of the way that Kansas State has been ableto sustain the returns that you guys have
sustained is by going lower middle market,going into the smaller managers and where where
there's more alpha.
Firstly, there's also obviously blow up riskfor smaller fund managers.
(34:09):
How do you manage that, and why are you notmore concerned about your small managers
blowing up?
Grow going concern is certainly an additionalrisk that's higher with smaller, less
established fund managers.
So we don't we are we're somewhat constrainedfrom investing and seeding day one day one
funds as a result of our smaller team and ourlack of bandwidth to to really take on high
(34:32):
conviction kind of day one fund positions.
So in in this case, we tend to partner withfund managers that's already relatively more
established in in some ways.
Only the the only difference being that theyare size smaller.
So they they are in a smaller AUM asset undermanagement size where they may be in the
(34:53):
inflection point of growth where we seesomething in them.
We we feel that this is a a partner that thatwe can work with to, grow alongside them.
So as if we are selecting our fund managersthoughtfully and and, correctly, our fund
managers should do very well over the longterm.
And in turn, we can grow to be a bigger partnerwith them, and and we can also grow alongside
(35:16):
them.
You guys also invest into small hedge funds.
Tell me about how you invest in small hedgefunds, and isn't that extremely risky?
And tell me how you manage the risk on smallerhedge fund strategies.
So our current portfolio, I would say we haveprobably a third of our portfolio in funds that
are sub a billion dollars.
(35:38):
And but with that said, these these funds arestill somewhere between 500 or or 250 on the
smaller side to maybe $800,000,000 And that'swhere we are not going with the smallest of the
fund managers for obvious reasons, because weare trying to make meaningful allocations
within our portfolio at 1% plus.
(35:59):
And for a billion dollar portfolio, that'sroughly a $10,000,000 investment.
And the other thing is we don't want to be morethan 10% of the overall investment of fund
manager.
That's also seen by us as risk factor.
So that's where that limits the floor of sizeof managers that we can invest into a hundred
(36:22):
million dollars and more.
So that that's where we do invest in smallerfund managers in kind of a from the perspective
of a larger institutional investors perspectivewhere they they may tend to focus more on hedge
funds that's over a billion dollars in AUM.
But then these are not ultra small managersthat that have going concerns.
What we try to do is we we try to have acontinuous dialogue with our our fund managers
(36:47):
to really understand the growth trajectory ofof their organization as a whole.
Some of these fund managers may have a subbillion dollar hedge fund in their firm, but
the overall firm is supported with multipleproducts and overall firm AUM is still over a
billion dollars, and there's still somestability.
It's just a more niche strategy that takesadvantage of a more fragmented or less
(37:11):
efficient market opportunity.
And and those are things that that usually wecan we can get pretty comfortable with.
And it's intuitive to me why smaller buyoutstrategies or maybe smaller venture would lead
to higher returns.
In hedge funds, it would seem that the largerhedge funds have more resources for risk
management, for the top quant traders, for thetop macro traders.
(37:33):
Why is small beautiful when it comes to hedgefunds?
There are there are strategies where larger ismore beautiful, and then there are strategies
where smaller is beautiful.
So when you think about even the pot pot shops,like the the millenniums of the world or the
the citadels of the world, their asset size ofmultiple billion dollars require them to
(37:54):
identify portfolio management teams that canmanage an asset size of a billion dollars or
more for them to be able to efficiently deploytheir resources.
So they are not necessarily looking for smallerfund managers that's only seeing an opportunity
set of say $500,000,000 to $800,000,000 Sothat's where there are things that make where
(38:20):
the larger the scale you are, the better youare.
You can have world class risk managementcapabilities.
You can have better reporting capabilities andtransparency provided to the investors as a
larger investment firm.
But then there are also investmentopportunities where it may be less accessible
by the largest of the institutional investors.
(38:40):
But these are equally compelling opportunitysets.
Being a mid sized endowment such as ours, oneof the differentiator for us is to be able to
participate in this investment opportunity setsand even further make it a more meaningful
position so that it actually drives a biggerpart of our return than what you can do for a
(39:01):
much larger institutional investor.
Tell me about your buyout strategy.
What is Kansas State's buyout strategy?
So our buyout strategy is tailored to leverageour position and size.
Historically, we focused on the lower middlemarket buyout space.
This market is more fragmented and lessefficient, offering niche opportunities that
(39:23):
larger buyout funds often overlook.
In some ways, they are also many of the exitsfrom our lower middle market, buyout managers
becomes the buying targets for the middlemarket and the larger buyout managers.
So there is a natural ecosystem out there whereexit environment can be relatively healthy when
(39:45):
the larger funds are doing well.
And additionally, we we've also strategicallytargeted less traffic regions away from the
coasts.
This has to do partly because we are located inthe Midwest.
We tend to feel, have a more of a comfort towork with managers who are based out here in
our region.
(40:05):
And also we do feel that there's a little bitof a crowding, where across the nation and
across most of the institutional investorspace, there seems to be more of a focus on
managers based in the East Coast or the WestCoast.
So for from our standpoint, by partnering withbiomanagers from the Midwest, the South, the
Great Lakes region, we have actually been ableto tap into unique opportunity sets that have
(40:30):
delivered performance numbers equivalent, ifnot exceeding that of the managers.
Tell me about your venture strategy.
How do you look to invest in venture?
Sure.
So our venture strategy is all about gainingaccess to the best founders.
And given our small team, we cannot underwritea large number of funds.
So we focus on building a diversified yetconcentrated portfolio.
(40:52):
So we strategically select six to seven ventureGPs who each have a unique approach to
accessing, to tackle the challenge of accessingtop tier founders and opportunity sets.
So we have a few of our GPs are somewhat seenby us as a regional champion.
We have some other GPs within our portfolio whoare thought leaders in specific sectors such as
(41:19):
healthcare, biotech, in AI.
And that's where these sectors where sometimesthe regional champions may not be able to
identify promising new trends and technologiesthat's emerging.
You need people with sector specialspecialization.
You need domain expertise for for the theinvestors to be able to tackle and and, for
(41:43):
example, even syndicate companies to to be ableto realize a specific investment theme.
This is probably one of the harder space for usto invest since we we don't really have the
bandwidth to underwrite many many different GPsand this is where it's the most diverse space
with the most amount of ideas and people comingin with wow idea every single day.
(42:07):
There's always something that's reallyinteresting, but we just have to be extremely
selective in constructing our portfolio.
What would you like our listeners to know aboutKansas State in your endowment?
For me, the the mission to support KansasState's mission is very personal.
I wouldn't be where I am today without othersinvesting in me.
So now I have the privilege of managing casedays endowment to ensure that more students,
(42:34):
especially the students with that that's comingfrom humble beginnings, a lot of the students
who are in rural Kansas who don't have thataccess to educational opportunities that can
change their life.
If I can support play a part into supportingthem to get the same educational opportunities
I did, that that will be something that's veryfulfilling for me.
(42:56):
Our school has very much a blue collarmentality.
Most of our donors are not the wealthiestdonors compared to some of the other elite
colleges, but they are extremely loyal.
We are constantly ranked among the top with thehappiest students on campus with the the most
loyal and most passionate alumni base acrossthe country, and that's something that that's
(43:21):
really meaningful for us.
Thanks for listening to my conversation withPaul.
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've always felt that I've been an outsider forfor the most of my life.
(00:03):
Being new to this country, being somebody whohad transitioned from career to career
positions throughout my my my life.
I've been an engineer.
I've been a consultant.
Consultant, and then coming into the familyoffice and as somebody who came into the
Endowment Foundation space without a whole lotof pedigree.
You're going after a manager where you'remeaningful to them, where it's really a two
(00:26):
sided street.
Why does that matter?
For us, it like you said, it's a two waystreet.
So what we can contribute when our GPs aresuccessful, we are in turn also benefiting from
their strong performance and become successful.
For six months of placing on a trade, TALF twopoint o investment generated a 8% return.
That's roughly four times of the 2% return, Iguess, The US aggregate index for for bonds
(00:52):
during the same period.
Do you have a very unique background for chiefinvestment officer?
Tell me about your background.
Thank you so much again for having me on today,David.
It's a real honor to be here.
I'm a first generation immigrant from Taiwan.
My mom brought me and my brother to The US whenI was 14 with very little English ability.
(01:13):
I eventually graduated from MIT with a degreein mechanical engineering.
After college, I worked in the aerospaceindustry as an engineer and the semiconductor
industry as a consultant.
I spent twelve years in the family office,gaining invaluable investment experience.
In 2018, I saw an incredible opportunity tojoin the Kansas State University Foundation's
investment team.
(01:33):
And when our longtime CIO, Lois Cox, retired in2023, I had the privilege of stepping into her
role.
So you are a first generation immigrant likemyself.
In what ways was being first generation anadvantage and which way was it a disadvantage?
I've always felt that I've been an outsider forthe most of my life.
Being new to this country, being somebody whohad transitioned from career to career
(01:59):
positions throughout my life.
I've been an engineer, I've been a consultant,and then coming into the family office and
somebody who came into the Endowment Foundationspace without a whole lot of pedigree.
So this is something that I find to be both adisadvantage and an advantage.
The advantage being that I can be moreadaptable.
(02:20):
I can gain comfort in my environment.
I've learned to really try to open myself up bysharing my own personal life to people who may
be less familiar with my background.
That's one way for me to also get them to openup to me and to to learn about their culture
and their backgrounds.
So I I do find that to be an advantage for meto build connections with people in different
(02:44):
backgrounds.
Silicon Valley is the ultimate place where theultimate outsiders become the ultimate
insiders, whether it's Peter Thiel, Elon Musk,countless others.
When you look at top GPs or people that you'reinvesting in, do you also find that there's
this theme where some of the top managers areoutsiders?
Two.
I I find that to be incredibly a motivatingfactor.
(03:06):
Being an outsider motivate you to try to workhard because you know that you don't you're not
given that endowment in some way.
You are not given the chance to fail multipletimes.
When you think about any emerging manager,anybody who's coming into a space who's a
newcomer, who's an outsider, most people don'tgive you a lot of chance to fail.
(03:29):
When you think about the asset managementindustry, it's very easy to sometimes see a,
for example, whether it's a diverse manager ora first time manager, they will not be getting
the same treatment as somebody who may havealready had a track record, may have failed in
their fund, but they are given the chance torestart.
But for somebody who's a first timer, you canvery well have a large drawdown and then you'll
(03:55):
be out of the space.
The deeper I go with the top general partnersto top entrepreneurs, there is a dark aspect to
it in that the very same things that make themthe most successful are oftentimes rooted, at
least initially, from insecurities, from notbeing enough, from being an outsider.
It has them do these, you would say inefficientthings of spending hundred hours a week once
(04:20):
they're already billionaires and just alwaysstriving to prove themselves and to be better.
Some of them are able to channel that darkenergy into a lighter energy.
How do I change the world?
You look at Elon.
How do we make human species multi dismultiplanetary?
You look at Blake Scholl.
How do we make travel more accessible?
(04:41):
But a lot are still stuck in this dark aspect.
Talk to me about how you suss out themotivation in your managers.
Think about alignment of interest.
I think about the person, their makeup, whatthey are representing, what kind of community
are they coming from, and what role do theyplay in that community?
What's their aspiration and goal in their life?
(05:04):
And that's where I focus.
And that fit is very hard to find.
And in many ways, it's almost like dating.
You're trying to find your ideal mate and youhave to go through many hoops in order to find
that ideal fit.
For us, it's oftentimes a multitude of things,from the person's motivation, the alignment of
(05:25):
interest, to the vision for the strategy, towhether it's actually a fit to the rest of the
investments in our portfolio.
Let me tell you about a conference I'm veryexcited about, Alpha on the Delta, which is
coming up in late April during Jazz Fest in NewOrleans.
Unlike some of the larger conferences, Alpha onthe Delta is limited to 150 allocators and 30
niche managers on an invite only basis.
(05:45):
It's an authentic and different kind of eventwith some really great people.
If you'd like to learn more and request aninvite, visit www.howiinvestdelta.com.
That's www.h0wiinvestdelta.com.
I hope to see you there.
I learned in my career when you start out, youget really excited about these big names.
(06:10):
Harvard Management Company.
Of course, I love Harvard, but Harvard has thethe pick of the litter in terms of which fund
they want it.
So it ends up being, in some ways, unlessyou're one of these mega funds, a one-sided
relationship where you really benefit a lotfrom Harvard, but Harvard may may not benefit
as much.
What you're saying is you're picking based onyour, endowment size, which is roughly
(06:30):
1,200,000,000.0.
You're going after a manager where you'remeaningful to them, where it's really a two
sided street.
Why does that matter?
I'm sure you care about getting the co invest,getting information, getting meeting times with
the GPs.
Tell me about why it's so important for you toactually also have value for the GPs.
Like you said, it's a it's a two way street.
(06:51):
So what we can contribute when we our GPs aresuccessful, we are in turn also benefiting from
their strong performance and become successful.
So that's where this is a two way partnership.
We want our GPs to be successful, but we alsoare mindful of the size of their opportunity
set, so we don't want them to grow too big.
(07:12):
There's always a delicate balance of thinkingand envisioning their future with them and
thinking about what's their optimal size, andbut at the same time, helping them if they can
go to a larger size to have more stabilitywithin their organization.
We will do our best to help refer to other likeminded allocators to help them grow.
(07:34):
I wanna double click on something that you saidearlier.
You said we have 40 to 50 managers.
They represent one to a couple of percentagesin the portfolio.
Obviously, not every manager you're you'reallocating, the same amount.
Just to play devil's advocate, why is it soimportant?
Let's say one of those managers blows up.
Obviously, it's not what you want, but why doesthat affect your portfolio so dramatically?
(07:55):
Because we have less number of managers.
Each manager would take a more meaningfulposition within the book, and that that's where
we have managers.
When we are allocating or consideringallocation to a prospective fund manager, we
always think from the perspective of we onlyhave five people, how many managers can we
comfortably establish a close relationship andwork with over the long term.
(08:18):
And that's where the 40 to 50 managers in ourportfolio becomes a sweet spot.
That's where we feel we can adequately coverthe investment opportunity sets within our
portfolio relatively well, fulfill ourfiduciary responsibilities by knowing our
investments, knowing the risks, and also at thesame time, having enough bandwidth and manpower
(08:41):
to establish that close relationship with ourfund managers.
So that's where when you have only 40 to 50positions, the position size from anywhere
between a percent to 10% of our portfolio.
If you have a manager that fails, one for 1%position or even a 10% position, that's a lot
(09:01):
more material than, for example, a largerportfolio with three, four hundred positions
and fund managers that you can tolerate animpact of point 3% to point 4% as opposed to,
for us, if it's a failure of a manager, thatcan be a 1% or above impact to us.
At Kansas State, you guys make these tacticalinvestments going back to 2020 when you made
(09:25):
your first tactical investment.
Tell me about that trade, and how do you usetactical investments in your portfolio?
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Sure.
So in 2020, market dislocations created uniqueopportunities, and TALF two point zero was one
(10:13):
of them.
It's a government initiative designed tostabilize credit markets by providing low cost
leverage on asset backed securities.
We knew that this wasn't an undiscovered tradebecause Telf one point zero, right after the
great financial crisis of two thousand andeight, had delivered outsized returns for
several fund managers.
So this time, we certainly expected competitionto be fierce for this opportunity set.
(10:37):
Instead of jumping in blindly, we partneredwith a Kansas based pharma manager that
anticipated the crowding effect.
They were prepared to move fast, identify thebest opportunities, and deploy capital
efficiently.
We took up a substantial portion of the SPVthey set up, allowing us to gain meaningful
exposures without the operational complexitiesof direct participation.
(10:59):
By allocating a sizable portion of our corebond portfolio to this tactical opportunity, we
turned the short term market dislocation into acompelling source of alpha, which really set
the stage for our tactical investment approachmoving forward.
Double click on the trade.
And what trade did you make in 2020?
We partnered with this fund manager thatinvested into investment grade asset backed
(11:21):
securities, so the RMBS, CMBS securitiesthrough the TALF two point zero program where
the government offered non recourse loans atlow interest rate for the fund managers to
invest in the space in order for them torejuvenate and stimulate the credit market to
ensure that we don't have a run on the bank inthe credit market when 2020 happened.
(11:46):
This was a measure that the federal governmenthas established post re financial crisis.
So in this case, we knew that the TALF twopoint zero program is going to offer credit
facilities.
But what happened in 2020 was also unique inthat you had a sharp market downturn in March
(12:06):
2020.
And then right away, within a couple of months,the market had a very strong bounce back.
So that opportunity window was very short.
The amount of securities that qualify for Telftwo point zero at the valuation that makes
sense for fund manager were limited.
So this was a case where partnering with asmaller fund manager that was nimble, that was
(12:28):
able to quickly act and deploy capitalefficiently into a smaller opportunity set
really make a difference.
Many of our peers were also interested in thisopportunity.
But in terms of execution, many of themstruggle with bureaucratic hurdles.
They have to wait for their board to approvethe trade.
(12:49):
And some of them partner with larger managersthat were not able to efficiently deploy
capital because once you find out theopportunity size smaller than you think, you
are not able to call as much capital as youwould expect to deliver that investment
outcome.
So I I would say the ability to be nimble andto be able to execute fast, what what's the
difference maker for us?
I spoke to Scott Chan, CIO of CalSTRS, and theyhad this prepared mind waiting for a
(13:14):
dislocation, what they would do, and that's whythey were able to take advantage of that
opportunity.
Talk to me about how you put yourself in aposition to execute.
You know, it's one thing to have the idea, buthow do you corral the resources, and how do you
make sure that you're ready to take advantageof a dislocation when it occurs?
There's one investing category that'soutperformed major US and world stock markets
(13:36):
over the past three years, privateinfrastructure.
Private infrastructure is expected to doubleover the next ten years with the continued
development of AI, increased demand for powergeneration, and the modernization of supply
chains.
This asset had previously only been availableto large institutional investors, but now you
can invest in it exclusively through Republic'spartnership with Hamilton Lane, whose co CEO
(13:58):
Eric Hirsch I previously had on the podcast.
Visit Republic.com/hlpif.
Again, that's www.republic.com/hlpif to investtoday.
One of our superpowers, I I would say, has todo with the the trust and the relationship with
(14:19):
our board and the asset management committee.
Our asset management committee has theoversight of what we do, but our team was given
full discretion over management selection aswell as making the investments necessary as
long as we fit within the top down strategicasset allocation framework.
So this is where we are able to have theability to be nimble.
(14:41):
We can take advantage of tactical marketopportunities and dislocations based on what we
are seeing in the near term.
That has been a source of alpha for us by beingable to take calculated, thoughtful approach to
deliver returns in a risk man risk managed wayto help us, generate a differentiated return
(15:03):
from our target benchmark.
What kind of returns were you able to realizewith TALF two point o, and how significant was
this trade?
So over six months of placing on a trade,Health two point o investment generated a 8%
return.
That's roughly four times of the 2% return ofThe US aggregate index for for bonds during the
same period.
(15:23):
For fixed income portfolio in a low yieldingworld back in 2020, that's a material
outperformance for us, especially when we areconsidering this is allocation for our
liquidity bucket, which is essentiallyinvestment grade core bonds at a low yielding
type of environment that we had back then.
Considering the low risk nature of the trade,the leverage provided by TALF combined with
(15:46):
disciplined asset allocation created a higherreturn, low volatility opportunity that was
hard to replicate elsewhere in the bond marketat the time.
And it also reinforced our belief that tacticalopportunities when we executed thoughtfully can
enhance returns without taking excessive risk.
It's a good example of being strategic thereand agile, and how that can turn a short term
(16:10):
dislocation into long
I was just speaking to Cliff Asness of AQR, andhe believes that investors systematically are
either underleveraged or overleveraged.
And one of the places that they're underleveraged is their fixed income portfolio.
He believes they should be much smaller, butwith higher leverage.
What do you think about that?
And how do you think about leverage in yourportfolio in general?
We don't take a lot of leverage within parts ofour portfolio.
(16:33):
There's inherent leverage within our portfolio,we have currently about 65% of the portfolio
participating in what we call growth.
So that's a growth bucket that participates inpublic and private equity.
And most of these are 100% loan positions onthe public equity side.
And in the private equity side, we also monitorthe level of leverage carried by our general
(16:58):
partners.
The amount of leverage that's taking us alittle bit higher within our portfolio comes
from the diversified part of our portfolio andspecifically coming from the hedge fund
portfolio, which makes up about 12% ofportfolio today.
And that's where we are tactical.
We do monitor the leverage for our fundmanagers, but it's a smaller portion of our
(17:23):
portfolio.
So typically, leverage impact can be limited.
Having coming from a family office in the pastwhere we manage a highly leveraged fund of
hedge funds portfolio back in 02/2008 andliving through the times of the great financial
crisis when the portfolio has to be locked updue to essentially all of our funding in the
(17:47):
portfolio having restricted liquidity access totheir positions.
We certainly have learned the lesson or for mepersonally, I've learned the lesson that
leverage is a double edged sword.
Can enhance returns in good times, but in badtimes, that's when you can have your headed to
you handed to you when when your loss can beamplified and you're losing multiples of of
(18:10):
your equity.
Percent of your portfolio is in diversifiers,which is hedge fund like strategies.
I think it's probably the closest to a blackbox in the endowment world where it's very
secretive, many different strategies.
Unpack that box for me and tell me about whatsome of these diversifier strategies are.
Because the the biggest portion of ourportfolio or 65% of that is in global growth in
(18:34):
public and private equity, diversifiers arereally seeing and positioned to help dampen the
the volatility of the equity market because itcan be very volatile at times.
This is really designed to smooth out theright.
We tend to invest in strategies with returndrivers that are less correlated to stocks such
as hedge funds, real assets, and alternativecredit.
(18:55):
So private credit are really all part of this27% diversifiers pool.
I think the 27%, twelve % are in hedge funds atthe moment.
For our hedge funds portfolio, it's again aconcentrated portfolio of six positions.
So each position take up 1% to 2% of totalallocation.
I would say about 40% of the current hedge fundportfolio are in more tactical arbitrage quant
(19:21):
related strategies that are seen somewhat as ablack box in certain ways, while the rest of
the portfolio are in other diversifiedstrategies.
When we are evaluating hedge funds, we alwayslook at the broader correlation to the rest of
the portfolio, liquidity of these strategies.
And we also focus on, again, some of the otherthings I talked about earlier, who the manager
(19:46):
is, what do they represent, what's theiralignment, what's their aspiration in managing
the firm and the strategy and try to identifythe a good fit to to the portfolio based on
correlation to the rest of the book, liquiditythey can deliver.
And and also, we we always shoot for strategiesthat that can at least give us a 8% long term
(20:06):
annualized return that that would reach our ourlong term investment return target.
There's almost like these three concentriccircles of diversification.
There's within the fund.
You don't want the fund to blow up.
Then you don't want your diversifiers to behighly correlated to your other diversifies,
which is the second circle.
And then all of that has to be contextualizedwithin the overall Kansas State portfolio.
(20:30):
How do you measure that and how do you knowthat you're diversified as an overall
portfolio?
We do look at our correlations against thebroader traditional stock bond index over time.
We try to think about our portfolio in thecontext of upside and downside captures in
various market conditions.
When, for example, the equity market is up100%.
(20:53):
What and what's our upside capture to to equityrisk in general?
And we also look at various levers, forexample, looking at interest rate volatility,
looking at the the value of valuation of USdollar fluctuation compared to to other
currencies, looking at inflation levels andtrying to analyze the sensitivity of our
(21:15):
portfolio return to each of these levers.
So those are those are ways for us to to thinkabout how resilient and how all weatherproof is
our portfolio in in various environments.
How often do you run this diversificationexercise?
And talk to me about how you manage whetheryour portfolio is diversified.
We look at our portfolio continuously, but butI would say every quarter, at the end of the
(21:37):
quarters are a time for us to at least look atthe composition of our liquid portfolio because
most of our liquid funds have a liquidity ofmonthly or at least a quarterly and better
liquidity.
That's how we are managing the liquidity of ourportfolio to meet distribution needs and other
operational expense needs for our institution.
(22:00):
So at the end of each quarter, our team usuallydoes an exercise where we will take all of our
liquid managers and divide it up among our teammembers for every member to do a re
underwriting of that strategy to essentiallywrite a commentary of the fund manager, and we
will gather again.
We we typically will also assign a devil'sadvocate for each of the the fund for for the
(22:24):
person to to get into a debate.
This is a way for us to really make sure thatwe are really thinking both the good and the
bad of each of our fund managers in theportfolio today.
So that first first part is where we arelooking at individual fund managers and how do
they fit within the portfolio based on how theydid over this past quarter, any material
changes to when we underwrote the strategy.
(22:45):
And second part is also we have quarterlyreview meetings with our board and our
committee.
And that's where we also take the portfolio asa whole and look at upside, downside, overall
diversification, benefits and correlationnumbers and other metrics against our
benchmark, against the various asset classbenchmarks to really get a sense of if we are
(23:06):
seeing a different scenario, if we are seeing ahistorically stressed scenario, how would our
portfolio do, and how does that compare to theprior quarter?
Couple of great nuggets to unpack there.
One is this is not an academic exercise you doonce a quarter.
You're actually evaluating primary your liquidstrategies because those are the strategies
that you could take some action on.
So if you decide, if you make a decision, youcould actually divest from one manager, or
(23:31):
invest in another manager.
Secondly, I think the one of the biggest biasesin asset management is that you need a reason
not to re up with somebody, versus a reason tocontinue to re up.
If you think about it from first principles,you should be underwriting it just like Kansas
State does, in that why am I in this manager?
If I had it all over again today to make thatdecision to re underwrite, would I make that
(23:52):
same decision again?
I think that's a rare discipline, and of coursethe devil's advocate, I love that.
I'm a big fan of devil's advocate.
We oftentimes within our firm, we come up to adecision, now we say, as a next step we say,
now let's kill it.
What is the best way to kill this idea, thisstrategy, this hire?
I think it's a really useful and undervaluedpro Tell me about the three investment
(24:15):
categories that you divide your strategy into.
Thank you for listening.
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Yeah.
So we're not too different from, most of ourendowment peers in structuring the portfolio
into growth, diversifiers, and liquidity.
Each of the buckets play a critical role inbalancing risk return stability.
(24:36):
So within growth, this includes public andprivate equity.
Our primary engine for long term returns comesfrom growth.
So we aim to invest in the best opportunitiesacross global economy, knowing that while
markets don't move in a straight line,disciplined exposures to growth assets is
essential for compounding wealth over time.
As for diversifiers, since I mentioned equitymarkets can be volatile, bucket is designed to
(25:01):
smooth out the right.
We invest in strategies with return driversthat are less correlated to stocks and to
provide stability and enhance risk adjustedreturns.
Finally, liquidity bucket ensures we alwayshave the cash flow needed to support K State's
mission.
It consists of the highest quality creditassets, prioritizing capital preservation,
(25:23):
liquidity so we can reliably fund scholarships,faculty salaries, and campus initiatives.
And you have these three investment categories.
Tell me about what target return are you tryingto get on the entire portfolio.
Sure.
So when we are thinking about our targetreturn, it's designed to ensure long term
sustainability of the endowment, and it needsto cover three key components.
(25:46):
First, annual distribution of 4.3% currentlyover the average market value of our endowment
over the last three years.
And this is a portion where we distribute eachyear to support scholarships, faculty, and key
campus initiatives.
And then secondly, we have to cover our feesand expenses, including investment management
(26:07):
costs, operational expenses, and support feesfor to to help support our fundraising efforts
to grow the endowment.
And that currently adds up to be roughly 1.5 ayear of the endowment's market value.
And lastly, to maintain our endowment'spurchasing power over time, we need to keep up
with the rising cost of education and campusneeds.
(26:28):
So we have to keep up with long term inflationnumbers.
There's always a little bit of a trickyexercise to determine what's the appropriate
inflation number to use in this case.
For our institution, we choose to have a 2%long term inflation target in line with what
the Fed is targeting, but it's something thatcontinuously monitor.
(26:50):
So every year, we have an exercise of reviewinginvestment policy statement to think about is
this target returns still the right way to togo about based on whether we are going to
maintain that 4.3% distribution, whether we'regoing to charge the same amount of management
fee across the foundation and what thatinflation assumption is.
This is an annual exercise that we do based onthe changing market environment.
(27:14):
But once you add them up, today's long termtarget return is about 7.8%.
Hitting those number isn't just enough.
So this is where we try to exceed it whilemanaging risk effectively.
Our job is to construct a portfolio that notonly meets the target but goes in a way that
provides stability and resilience throughdifferent market cycles.
(27:36):
So so let's say you sit with your investmentcommittee in 2026 and you decide you want to
increase your return.
What are some of the levers you could pull inorder to increase Kansas State's return?
There are several levers that we havehistorically pulled to enhance our returns
compared to our benchmark while managing therisk effectively.
We do have the flexibility within approvedrebalancing ranges to place an overweight or
(28:00):
underweight to certain asset classes based onour market conditions.
So this does allow us to be more opportunisticwhile staying disciplined.
So for example, if we do need to increaseexpected returns, we can tactically increase
the allocation to growth, to equity positionswhen situation calls for it.
Secondly, we also are somewhat different inthat we do invest beyond traditional
(28:24):
categories.
So even though we have a top down strategicasset allocation framework, there are some high
return strategies that don't fit neatly into aconventional asset class bucket.
For example, if you think about convertiblearbitrage strategies, niche equity strategies
like a sector specialist or a countryspecialist, reinsurance strategies or or a GP
(28:46):
stake strategies, they don't necessarily fitfit neatly into an equity or credit or a hedge
fund bucket.
So that that's where we try to be flexible andwe find creative ways to to incorporate them.
And then lastly, we try to take tacticalopportunities when dislocations arrive arise.
(29:09):
So like the TALF two point o trade we talkedabout earlier, we can act quickly to to capture
excess returns that that wouldn't typicallybeing be available in a static asset allocation
model.
So these are all different things that we do,but, ultimately, our goal is to balance risk
and and return while being nimble enough totake advantage to unique opportunities that fit
(29:32):
within our governance framework.
So you could either rebalance.
So you have your growth, your diversified, yourliquidity.
You could rebalance a little bit more ongrowth, which essentially makes it a little
slightly less diversified or slightly lessliquid, but a higher return.
You could do investments into things like GPstakes, reinsurance, or you could prepare kind
of for these idiosyncratic trades like the TALFtwo point zero.
(29:55):
On the TALF two point zero, without giving awaythe secret sauce, how are you preparing
yourself for the next TALF two point o trade?
So how do you go about scouring the market andthe managers for the next great trade?
We don't.
We we wait for them to emerge themselves, andsometimes when situations arise, you do see
these dislocations.
We are certainly not macro economists from ourteam, and we don't profess to know the market
(30:20):
better than the fund managers that we haveinvestments with.
This is where we do partner with our fundmanagers.
We rely on their expertise to identify thesedislocation opportunities for us and notify us
when these type of situations arise.
And that's where we will then the team takestime and takes our energy and resources to
(30:42):
underwrite these dislocation opportunities tobuild confidence and build convictions so so
that, when we do decide that this is anopportunity that makes a lot of sense, we will
act very quickly and try to be nimble to toallocate a part of the portfolio that can make
a meaningful impact to performance.
You mentioned GP stakes, which is a hotindustry.
It's 6 roughly 60,000,000,000 AUM.
(31:04):
It's innovating rapidly.
How have you thought historically about theevergreen nature of GP stakes deals and that
they don't typically have a ten year fund life?
And how do you incorporate that into theendowment strategy?
It's it's been there's been a lot of growthwithin the space, and you have managers within
different spectrums of GP stake depending onthe type of strategy, of GPs.
(31:25):
They they they would invest ownership stakes inversus the size of the the fund managers that
GP stake investors will will put in.
From from our standpoint, it's a space that wehave not taken a lot of idiosyncratic risk per
se.
We we have partnered with the the biggest GPstake managers in the market essentially
focusing on the the trophy the the the trophyassets that of fund managers because for us, we
(31:52):
are really thinking about it as a way for us todeliver high cash on cash yields coming from
the stability of the largest fund managers andGPs out there that have continuously being able
to grow their asset size and deliver arelatively safe return for for their LPs.
So these are the the larger GPs that that haveseen the the largest growth in in their asset
(32:16):
size.
And we we do feel there's some stability to howthey are managed and taking GP stakes within
those fund managers allow us to be able todiversify our portfolio in some ways.
Because when we think about our private equityportfolio at our size, we tend to partner with
smaller, lower middle market buyout type ofstrategies and and managers at a smaller size
(32:43):
by doing GP stake in our portfolio in thetrophy largest asset managers in some way that
diversifies away from our exposure to smallermanagers, and we get to participate in the
growth of the larger asset management firms aswell.
In many ways, that's a trifecta.
You have your growth because the MOICs arepretty attractive in GP stakes even for these
(33:03):
mature trophy assets.
You have your liquidity.
It starts to go liquid with the first quarterbecause you're getting a percentage of the
management fees.
And then I would argue it's also diversifiedbecause management fees are contractual.
So even if a fund's not doing great, they'restill ten years of management fees.
Right.
So so there is a durability of the the return,and that that's another part that plays in our
(33:26):
interest.
We we don't see it as a equity investment.
We don't see it as a credit investment, but butit's really components of both where if the GPs
continue to grow their assets, they willcontinue to see a higher share of growth in
their performance fees.
And that performance fee along with GPs owninvestment in their funds would deliver
(33:47):
outperformance on top of kind of what youmentioned about the regular cash flows coming
from the management fees.
Part of the way that Kansas State has been ableto sustain the returns that you guys have
sustained is by going lower middle market,going into the smaller managers and where where
there's more alpha.
Firstly, there's also obviously blow up riskfor smaller fund managers.
(34:09):
How do you manage that, and why are you notmore concerned about your small managers
blowing up?
Grow going concern is certainly an additionalrisk that's higher with smaller, less
established fund managers.
So we don't we are we're somewhat constrainedfrom investing and seeding day one day one
funds as a result of our smaller team and ourlack of bandwidth to to really take on high
(34:32):
conviction kind of day one fund positions.
So in in this case, we tend to partner withfund managers that's already relatively more
established in in some ways.
Only the the only difference being that theyare size smaller.
So they they are in a smaller AUM asset undermanagement size where they may be in the
(34:53):
inflection point of growth where we seesomething in them.
We we feel that this is a a partner that thatwe can work with to, grow alongside them.
So as if we are selecting our fund managersthoughtfully and and, correctly, our fund
managers should do very well over the longterm.
And in turn, we can grow to be a bigger partnerwith them, and and we can also grow alongside
(35:16):
them.
You guys also invest into small hedge funds.
Tell me about how you invest in small hedgefunds, and isn't that extremely risky?
And tell me how you manage the risk on smallerhedge fund strategies.
So our current portfolio, I would say we haveprobably a third of our portfolio in funds that
are sub a billion dollars.
(35:38):
And but with that said, these these funds arestill somewhere between 500 or or 250 on the
smaller side to maybe $800,000,000 And that'swhere we are not going with the smallest of the
fund managers for obvious reasons, because weare trying to make meaningful allocations
within our portfolio at 1% plus.
(35:59):
And for a billion dollar portfolio, that'sroughly a $10,000,000 investment.
And the other thing is we don't want to be morethan 10% of the overall investment of fund
manager.
That's also seen by us as risk factor.
So that's where that limits the floor of sizeof managers that we can invest into a hundred
(36:22):
million dollars and more.
So that that's where we do invest in smallerfund managers in kind of a from the perspective
of a larger institutional investors perspectivewhere they they may tend to focus more on hedge
funds that's over a billion dollars in AUM.
But then these are not ultra small managersthat that have going concerns.
What we try to do is we we try to have acontinuous dialogue with our our fund managers
(36:47):
to really understand the growth trajectory ofof their organization as a whole.
Some of these fund managers may have a subbillion dollar hedge fund in their firm, but
the overall firm is supported with multipleproducts and overall firm AUM is still over a
billion dollars, and there's still somestability.
It's just a more niche strategy that takesadvantage of a more fragmented or less
(37:11):
efficient market opportunity.
And and those are things that that usually wecan we can get pretty comfortable with.
And it's intuitive to me why smaller buyoutstrategies or maybe smaller venture would lead
to higher returns.
In hedge funds, it would seem that the largerhedge funds have more resources for risk
management, for the top quant traders, for thetop macro traders.
(37:33):
Why is small beautiful when it comes to hedgefunds?
There are there are strategies where larger ismore beautiful, and then there are strategies
where smaller is beautiful.
So when you think about even the pot pot shops,like the the millenniums of the world or the
the citadels of the world, their asset size ofmultiple billion dollars require them to
(37:54):
identify portfolio management teams that canmanage an asset size of a billion dollars or
more for them to be able to efficiently deploytheir resources.
So they are not necessarily looking for smallerfund managers that's only seeing an opportunity
set of say $500,000,000 to $800,000,000 Sothat's where there are things that make where
(38:20):
the larger the scale you are, the better youare.
You can have world class risk managementcapabilities.
You can have better reporting capabilities andtransparency provided to the investors as a
larger investment firm.
But then there are also investmentopportunities where it may be less accessible
by the largest of the institutional investors.
(38:40):
But these are equally compelling opportunitysets.
Being a mid sized endowment such as ours, oneof the differentiator for us is to be able to
participate in this investment opportunity setsand even further make it a more meaningful
position so that it actually drives a biggerpart of our return than what you can do for a
(39:01):
much larger institutional investor.
Tell me about your buyout strategy.
What is Kansas State's buyout strategy?
So our buyout strategy is tailored to leverageour position and size.
Historically, we focused on the lower middlemarket buyout space.
This market is more fragmented and lessefficient, offering niche opportunities that
(39:23):
larger buyout funds often overlook.
In some ways, they are also many of the exitsfrom our lower middle market, buyout managers
becomes the buying targets for the middlemarket and the larger buyout managers.
So there is a natural ecosystem out there whereexit environment can be relatively healthy when
(39:45):
the larger funds are doing well.
And additionally, we we've also strategicallytargeted less traffic regions away from the
coasts.
This has to do partly because we are located inthe Midwest.
We tend to feel, have a more of a comfort towork with managers who are based out here in
our region.
(40:05):
And also we do feel that there's a little bitof a crowding, where across the nation and
across most of the institutional investorspace, there seems to be more of a focus on
managers based in the East Coast or the WestCoast.
So for from our standpoint, by partnering withbiomanagers from the Midwest, the South, the
Great Lakes region, we have actually been ableto tap into unique opportunity sets that have
(40:30):
delivered performance numbers equivalent, ifnot exceeding that of the managers.
Tell me about your venture strategy.
How do you look to invest in venture?
Sure.
So our venture strategy is all about gainingaccess to the best founders.
And given our small team, we cannot underwritea large number of funds.
So we focus on building a diversified yetconcentrated portfolio.
(40:52):
So we strategically select six to seven ventureGPs who each have a unique approach to
accessing, to tackle the challenge of accessingtop tier founders and opportunity sets.
So we have a few of our GPs are somewhat seenby us as a regional champion.
We have some other GPs within our portfolio whoare thought leaders in specific sectors such as
(41:19):
healthcare, biotech, in AI.
And that's where these sectors where sometimesthe regional champions may not be able to
identify promising new trends and technologiesthat's emerging.
You need people with sector specialspecialization.
You need domain expertise for for the theinvestors to be able to tackle and and, for
(41:43):
example, even syndicate companies to to be ableto realize a specific investment theme.
This is probably one of the harder space for usto invest since we we don't really have the
bandwidth to underwrite many many different GPsand this is where it's the most diverse space
with the most amount of ideas and people comingin with wow idea every single day.
(42:07):
There's always something that's reallyinteresting, but we just have to be extremely
selective in constructing our portfolio.
What would you like our listeners to know aboutKansas State in your endowment?
For me, the the mission to support KansasState's mission is very personal.
I wouldn't be where I am today without othersinvesting in me.
So now I have the privilege of managing casedays endowment to ensure that more students,
(42:34):
especially the students with that that's comingfrom humble beginnings, a lot of the students
who are in rural Kansas who don't have thataccess to educational opportunities that can
change their life.
If I can support play a part into supportingthem to get the same educational opportunities
I did, that that will be something that's veryfulfilling for me.
(42:56):
Our school has very much a blue collarmentality.
Most of our donors are not the wealthiestdonors compared to some of the other elite
colleges, but they are extremely loyal.
We are constantly ranked among the top with thehappiest students on campus with the the most
loyal and most passionate alumni base acrossthe country, and that's something that that's
(43:21):
really meaningful for us.
Thanks for listening to my conversation withPaul.
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