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

Jim Bethea oversees $1.7 billion at the University of Iowa’s endowment—and he does it with a team of just five people. In this episode, we cover how Jim thinks about asset allocation, governance, manager selection, and why Iowa has decided to specialize in certain asset classes like lower middle market private equity. This conversation is full of nuance, clarity, and hard-earned lessons that every allocator, GP, and fund manager will benefit from. Jim pulls back the curtain on how small teams can still invest in niche, high-performing funds, how to manage investment committee dynamics, and why more isn't always better when it comes to diversification.

Episode Transcript

(00:00):
When we're talking with folks about whetherit's lower middle market buyer, we're doing it

(00:04):
to trade ideas.
Everybody's trying to judge, do I think theother person's smart?
Right?
Am I gonna come back to them if I hear thatthey're in some other asset class to see if
whatever school or whatever foundation,whatever is is smart enough and and thinks like
we do.
Probably not smart enough, more things like wedo.
Our incentives aligned is probably a better wayto think about it.

(00:25):
But, you know, dealing with committees, dealingwith budgeting, things, and that leads to
conversations not just about investments,things like that, staffing.
You know, the big 10 CIOs get together.
It's more than just the big 10, but we we gettogether so we can have these idea trading
sessions about this work for me, this work foryou, and how can we build on that.

(00:45):
What are the pros and cons of managing$1,700,000,000?
The the the pros is that we're small enoughthat we can do small and interesting funds.
So flexibility is the biggest pro that a smallfund has.
We're also generalists.
So everyone has a view of all asset classes,and it sets the team up to be specialists in

(01:06):
any asset class if they wanna go on from here.
And it's also easier to transition to a CIOrole.
From a con perspective, a small team, we havelimited resources.
So we can't always do everything that we wouldlike just from a financial standpoint, but all
also investments too.
It's a it's a limited bandwidth that we have.
And, you know, being a generalist is also acon.

(01:27):
You know, we can't get as deep as specialistscan, but we you know, we're a mile wide and an
inch deep rather than a mile deep and an inchwide.
One of the challenges that your endowment hasand a lot of endowments have is picking its
shots, picking which opportunities to evendiligence, let alone invest to double click on
and to diligence?

(01:48):
I think it starts with, is there an interest init?
And so you look and see, is this interesting?
Do we think we have some edge to this?
Or or can we even understand There's a lot ofreally cool investments that you could do that
you have no idea at the end of the day whatthose funds are doing.
And so if you can't understand what they'redoing or explain them to somebody that maybe

(02:09):
isn't an investment professional, maybe it'sjust a little bit too nichey for for what we
wanna do.
And and a really quick way to figure outsomething's interesting or not is returns.
If it doesn't hit the return threshold that weneed, we're not gonna spend any time there.
Essentially, if what you're saying is true, butit doesn't even hit our return threshold,

(02:29):
doesn't really matter.
Like, I'll use farmland as an example becausewe're in Iowa.
Farmland's great investment potentially.
It's very diversified, but single digit IRRsjust are not interesting to us.
As generalist investors, you have thisinteresting problem of you could invest in in
anything.
How do you choose a new asset class to get upto speed to?

(02:51):
The the first thing we'll do is is kinda talkto the team will talk to each other and see,
like, who do we know that's in this assetclass?
And then we'll reach out to those folks and andask them, you know, what what is it what do you
like about the asset class?
What do you dislike about the asset class?
Who's smart in the asset class from a GPcommunity or maybe even other LPs.

(03:11):
And what's really good about the LP communityis is we're all trying to learn from each
other, and nobody's really gonna say, like,hey.
This is something really niche for us, andwe're not gonna talk to you about it.
I I think it's kinda the opposite.
If if if you express to somebody, we thinkyou're an expert in this asset class, teach us,
they're you know, that kinda feeds into theirego, and they really wanna help us get up to

(03:31):
speed.
And we've done that in in in some privatecredit spaces where people will tell us, hey.
This is a great asset class.
Here's why we invest in it.
And that might not be why we, as an endowment,would invest in a pension fund, invest
differently than an endowment even if we'reinvesting in the same thing.
Obviously, everybody wants returns, butstability of returns might be more interesting

(03:55):
for a pension fund where we need to hit highreturns, and and maybe that stability isn't as
important to us because we get stabilityelsewhere.
And also how they're investing.
You know, maybe somebody's doing privatecredit, but they're doing it direct, and that
they're they're underwriting the the credits,not not the fund, not a company.
You know, they're underwriting the companycredit, not the fund credit.

(04:16):
So you're taking out that layer of fees, maybethat gets them to a return that they want to.
But we don't have the resources to do that samething, so we're not gonna be able to invest the
same way.
One of the interesting things that I've comecome across is this information bartering.
So as you get more information on a specificspace, that information itself that you've

(04:36):
gotten from different parties becomes an asset.
And now you could feed that information, thoseinsights back to other individuals in the asset
class in return for more information.
And do you think about things that way?
It's not transactional that this is a quid proquo necessarily, but but, you know, definitely,
when we're talking with folks about whetherit's lower middle market buyout or VC or what

(04:58):
what have you, we're doing it to trade ideas.
Everybody's trying to judge, do I think theother person's smart?
Right?
Am I gonna come back to them if I hear thatthey're in some other asset class to see if,
you know, whatever school or whateverfoundation, whatever is is smart enough and and
thinks like we do.

(05:18):
Probably not smart enough, but but more thingslike we do.
Are are our incentives aligned is probably abetter way to think about it?
And that leads to, you know, conversations notjust about investments, but, you know, dealing
with committees, dealing with budgeting,resources, things like that, staffing.
You know, the big 10 CIOs get together.
It's more than just the big 10, but we we gettogether so we can kind of have these idea

(05:42):
trading sessions about, you know, this workedfor me, this worked for you, and how can we
build on that.
The interesting thing about endowments, whilewe all compete Nacubo says we all compete
against each other in athletic, you know,conferences say we compete against each other
there, but we really don't.
The way that we solve a problem at Iowa isdifferent than the way any other school solves

(06:04):
the problem.
We all have generally the same return targets.
You know, it's probably seven to 9%.
It's a big range, but that's that's generallywhere everybody is.
But you've got other constraints, like, youknow, how much of the operating budget is that
foundation?
How much new gifts are you taking in?
All these things are are nuance differencesthat greatly affect our ability to take risk,

(06:28):
but there's no great database that says, like,who are our peers?
You know, our peers are similar sized publicschools, but that doesn't really tell me that
what they're doing is different.
There's schools that are 40% venture, andthere's schools that are 40% private credit.
I don't think we could be either one of those.
And so, you know, that governance structuredictates a lot of how you how you invest, what

(06:53):
your network is.
There's a lot of variables other than yoursize, your athletic conference that really tell
you how, an an allocator thinks about risk.
On the transactional nature or lack oftransactional nature in relationships, one of
the standards that we hold ourselves atWeisford Capital to is we make sure that every

(07:14):
phone call that we have with somebody, they aresomehow better off, whether it's more insights,
whether we make an introduction.
And that's how we know that the relationship issustainable versus us just kind of pinging
somebody to get some information just forourselves.
That's a good way to think about it.
If it's somebody's checking on a fund we're inand and and we're, you know, on that recommend

(07:34):
you know, that list of of resources to talk to,We'll we'll talk to them about we invested in
this fund for this specific reason.
You might invest in a in a different fund for adifferent you know, if we're being a reference
for a fund and we're doing a reference call,we're trying to hey.
This is an area that we're looking at.
This is an area we think we're good.
If you ever have any questions in this area,you know, feel free to reach out to us.

(07:56):
And you're trading that information as well of,like, okay.
Put in the back of your head, if you wannalearn about private credit, talk to this this
organization.
If you wanna learn about something else, talkto another organization.
So we're definitely doing that and and tryingto make each other smarter along the way.
You mentioned something very sexy, governance,something that everybody gets really excited
about.

(08:17):
But in seriousness, it is when you look at theacademic literature, governance, especially in
pension funds, is almost one to one correlatedwith returns.
So talk to me about governance.
What is the best practices for governance?
I it differs a little bit by the organization.
And so, like, it it it's what is theorganization comfortable with from a governance

(08:40):
construct.
Right?
Like, you know, maybe you've got a committeethat wants to meet with every investment
manager, And maybe you've got another committeethat like, hey.
We don't even wanna talk about managers.
You, as a team, just go do it.
Come back to us.
Talk to us about the big issues.
Talk to us about allocation.
Talk to us about resources, things like that.
So it's really the organization, what they'recomfortable with.

(09:01):
The you know, the the variability of that is.
What's helpful is that everybody's on the samepage and that the governance doesn't change
from, you know, one quarter to the next or onechair to the next.
You know, the target return doesn't changebecause you have a new CIO or your or or a new
board member, committee member.
And so making sure that everybody understandswhat are each other's roles.

(09:23):
What's the role of the committee?
What is the role of staff?
Do you use any third party consultants?
What is their role?
You know, what what is everybody for and geteverybody to agree to that?
And, really, what you need above all that issomebody to hold all all those stakeholders
accountable.
Right?
If if a committee says we don't wanna be we asa committee don't wanna be involved in the

(09:44):
manager selection decisions.
Okay.
That's fine.
But if you then have a committee member thatcomes on as, like, I really wanna dive into
manager selection discussions during themeeting, somebody and it's it's usually gonna
have to be another committee member.
It's if staff has to do it, it's prettyawkward.
But if you have somebody come in and say, okay.
That's not what our role is.

(10:05):
Our role is is oversight.
Our role is asset allocation.
That's really helpful to everybody involved, sothat everybody kinda knows what their role is.
I've had many asset allocators say this onething, is essentially IC should not be involved
in manager selection.
They should be involved in asset selection andasset allocation strategy.
If you wanted to steal a man the reason why theIC would be involved in manager selection, what

(10:29):
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(11:12):
It kinda depends on what you're meaning bymanager selection.
Right?
You know, one end of the spectrum is we have tobring the manager the name, and and they're not
meeting with the manager.
We're bringing the name.
And then the other one is we, as a committee,wanna meet with every manager and make the
determination.
We'll we'll take staff's recommendation, but weultimately determine that.
We get hundreds of emails a week.

(11:34):
We talk with hundreds of managers in a year,and and we have myself, I've met with thousands
of managers over my twenty year career.
And so you have this knowledge of what good andbad is, whereas maybe as a as a part time
committee member, you don't.
Right?
You have a subset of what that knowledge is.
You see the tip of the spear.

(11:55):
Like, you see the best ideas that your staff isbringing to you, but you're not seeing the 99%
of the ideas that don't even make it to thatlevel.
And it's harder to discern good from bad if ifyou take the top 5% of any asset class.
Right?
Like, some of those are gonna be you're gonnalike some of those better than the others, but
they're all top 5%.

(12:16):
It's kinda like a very specific low LakeWobegon situation.
And and maybe you like one better than theother, but it doesn't mean the other one's bad.
Right?
We can look at the universe, and then we bringa specific manager.
You know, you don't always wanna have two orthree managers doing the same thing.
Right?
You you get closer to beta if you do that.
And so what I've seen sometimes when I was aconsultant, what we would see is, you know, you

(12:40):
always bring three managers to the finals.
Right?
And and then what would sometimes happen is twoget hired.
Like, they would ask us as a consultant, like,who do you like?
And we say, we like manager a.
And they say, we like manager b.
Let's hire them both.
You're closer to beta now.
And at some point, if you keep doing that andyou slice it up enough, like, you're just beta.
You're just expensive beta at that point.

(13:00):
It's a little bit different in private marketsbecause it's not a zero sum game.
But at the end of the day, if you think aboutVC, right, you end up hiring, you know, a a
hundred VC managers.
You're just closer to median, and and you'redecreasing that outlier event's effect on your
portfolio.
And so you gotta kinda think about thatportfolio construction a little bit when you

(13:23):
select these managers.
I I've seen this with committees where, youknow, they they they very much wanna make a
decision on that, and it's it's trying to getthem to understand, like, it is just the tip of
the spear that you're seeing.
And the other thing about that too is there'sthings wrong with every single manager out
there.
There's no you know, make there might be acouple out there where it's like, okay.

(13:46):
This is just a no brainer.
Citadel and Sequoia.
Right?
You're never gonna turn those down.
Beyond that, the other tens of thousands of offunds and managers out there, I can find a flaw
in all of them.
I can actually find flaws in in those two aswell.
It's just in everything, you're overlookingsome of these flaws because you think the
return potential is is better than the flaws.

(14:09):
Reminds me of this decision by committee.
Sometimes whoever's just loudest is is the onethat that gets listened to.
In other words, every fund has pros and cons,but whoever just had a cup of coffee and wants
to interject on a specific manager pro and conseems to be the one that outweighs the other
committee members.
The other thing too on that would be the firstvoice.
Right?
If the first voice is pro or con, committeesand not all committees, but but I would say

(14:35):
most committees are conflict adverse, andparticularly larger committees.
Like, if you wanna have more conflict in acommittee, it's gotta be three people.
Like, the the more people you add beyond that.
So if you got a 30 person committee, there'sgonna be no conflict in that.
Whoever says the first thing, that's probablygonna go.
You know, that's one thing about building acommittee that that people have to think about

(14:57):
is, you know, you you want some discussion.
Right?
When me or my team presents to the committee,we're not saying that we're right.
We're just saying that this is what we thinkand asking them for feedback, whether it's on a
manager or whether it's on asset allocation.
You're you're doing that for feedback.
Both of our opinions are of equal value.
Right?
Like, if it's if it's the committee's opinionthat matters more, then we just need to listen.

(15:20):
You know?
It's I don't know if you need staff at thatpoint.
Right?
Staff's opinion matters more than thecommittee.
You don't really need that committee.
Right?
And so, like, they they both need to be there,but they need to be of equal importance.
If if one is more equal than the other or moreimportant than the other, then then it's not
gonna be good for one of those two.
It's it's usually that the committee is moreimportant than staff.

(15:43):
I don't know if there's ever you know, maybemaybe David Swenson at Yale has he was more
important than than his committee, but probablynot because there's a lot of heavy hitters, I'm
guessing, the Yale investment committee.
So the committee members actually driveselection more than the staff?
When I was a consultant, I've seen that whereit's the committee's decision.
I've heard stories from other CIOs where it's,you know, we we we bring a manager in and its

(16:04):
staff makes that decision and says, hire thismanager, and they say, no.
We're gonna hire a different manager.
And so, that only lasts so long becauseeventually your staff's gonna say, why are we
doing this?
And they're gonna go look for a job somewhereelse.
I talk with my peers of, like, we're trying tofigure those things out.
And if somebody has a problem with that, we're,okay.
Here's how you might think about that, andhere's how you might kind of drive that change.

(16:28):
One of the means in asset allocation is thatthe incentives are not quite right.
You have CIOs with very high bases and,sometimes no carrier, no upside, and you also
have committee members with similar constructs.
Talk to me about the incentives when it comesto committee members and staff and how you
would improve it if you could.

(16:48):
For the most part, I many members are they'renot getting paid.
Right?
And so, you know, this is kind of a part timejob for them.
And they're from I'm I'm on various boards andstuff, and and I I don't want anything to do
with, like, the day to day management of itbecause I just don't know enough about it.
Right?
So their incentives are more, let's make themfeel good because they're probably donors.

(17:11):
It kinda depends.
Like, an endowment is different than afoundation like MacArthur, which probably isn't
raising new money.
Right?
And so those there's different incentives thatthat our committee might have to their
committee.
You know, make sure that they're happy becausethey're donors.
We're gonna ask them for money later on Mhmm.
Or now.
And for staff, it's you wanna make sure thatthey're not taking crazy risk because of short

(17:33):
term incentives.
And I would say that 99% of endowment staffthat is that has some level of variable comp
short term.
It's one in three years.
Main reason for that is because most peopledon't stick around for for more than five or
certainly not ten.
Very very few are are are tenured.
I've been here fifteen years, and there's justa handful of folks that have been around in

(17:54):
their organization for that long.
So you wanna make sure that the incentives arealigned and that you can't game the incentives.
And that's why, like, when I talk to my peersabout what their incentive comp, it is, like,
crazy difficult to to kinda articulate what itis.
And the reason why is so that you can't gameit.
Right?
If it's a you know, if it's, like, one yearversus peers, I'm just gonna take a ton of,

(18:16):
like, short term risk.
I'm gonna do a lot of secondaries.
I'm gonna do probably do more VC than buyoutbecause buyout holds valuations for a year?
And maybe my committee knows that.
Maybe they don't.
There's an information asymmetry.
Right?
Like, we know more about what's going on in thefunds and how they value their their underlying
companies than the committee does.

(18:38):
You you could kinda game that if you if youwanted to.
And so you you're trying to design an incentiveplan that can't be gamed, but it's difficult to
do sometimes.
I have heard that there's a tendency to favorcertain asset classes over other ones because
of their markup policies.
Seems like an easy fix for that would createsome kind of earn out even if that person left

(18:58):
the organization.
They would not get paid until DPI, for example.
So what you'll what you'd see to mitigate thatwould be, okay.
You're gonna earn this comp on, like, one inthree years, but we're gonna pay it to you over
three years.
So you have to stick around.
Right?
So so if we figure this out in year five, then,you know, you don't get it.

(19:19):
Or what you see sometimes too is you have to behere three years before you even get any
incentive comp.
So we have to see what kind of investor youare.
And if you are kinda gaming the system for someof this stuff, like, the CIO would see it.
Right?
And so then the CIO would have a conversationwith with the staff members like, hey.
This isn't really how we invest.

(19:40):
I don't know how often this stuff happens, but,like, I could see, like, if, you know, if you
if you tell me the incentive plan, I couldprobably tell you a way that that I could game
it.
It's a it's a never ending game theory.
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(20:27):
Yeah.
And and then the other thing too about it is,like, how much how much how much dollars are we
talking about?
If it's, you know, the CIO bonuses are, like,75 to a % of their salary.
And so, like, I can see why people would wouldgame that.
If it's, like, $10, I don't think people aregonna spend too much time gaming that.

(20:50):
I just sat down with Cliff Asness, Co Founderof AQR, and he sits on a lot of ICs.
And one of the things that he said, one of hisbig pet peeves is how committees focus on the
bottom performers.
So they'll focus on the two worst performingfunds.
And there's a couple inherent problems withthat.
One is you probably should be talking to yourtop performers, making sure that you could get

(21:14):
more allocation, build a relationship withthem.
And the second one is the low performers,especially in something like the hedge fund
worlds, might be these diversifying assets thathit every five, ten years that have very high
asymmetry on the upside but perform poorly onthe downside.
How should committees think about where theyfocus their attention in terms of portfolios?

(21:36):
That's where you kinda get in this governancetoo.
It's like, you know, what is the committee'srole?
Is it to understand what's going on in thoselow or high performers?
Or is it, hey.
This this asset class, private equity or orhedge funds, is that asset class performing the
way we think it should perform?
And, staff, are you concerned about any of thehigher low performers in there?

(21:57):
You you you're absolutely right, and Eclipse'sright.
Like, I don't get a lot of questions about thefunds that have outperformed what we thought,
you know, the the the base underwriting case.
Right?
But those are the ones where, you know, if it'sa hedge fund more than private equity fund, you
have to think about, like, they're probablytaking more risk than they than they're telling
you that they're taking.

(22:17):
Right?
They're if they're consistently doing somethingthat you don't think is is possible, then it's
probably taking more risk.
But you you know, you're generally, you're okaywith it because the returns are really good.
But, like, we've we've actually, over theyears, have cut some of those top performers
because we just think they're taking too muchrisk.
It's gonna bite them at some point, and let'sget out before that happens.

(22:40):
But you're absolutely correct that, like Iremember this when I was a consultant.
Like, we would show, like, kind of the trafficreport of, like, red light, green light,
yellow, like, who's who's not in compliancewith the returns, who's outperforming, and
who's okay.
And it was always the red funds.
The funds that are underperforming, that's whowe wanna spend a ton of time on.
And and Cliff has experienced this.

(23:01):
Right?
Going into into 2021 when value was gettingcrushed, he was he was probably red light in in
almost every strategy that he had and probablyevery client that he had.
And guess what happened if you redeem from themin in December of twenty twenty one?
A lot of those funds were up 20%, and and hejust got a lifetime achievement award last

(23:24):
year.
And, like, you don't get that for badperformance.
That's when you have to kind of look at that.
Like, is is this fund doing what we hired themto?
Because there's cyclicality to anything.
Maybe not private equity because that's beencyclically positive for for a lifetime, but but
any type of hedge fund strategy, any type oflong only strategy, like, it goes in and out of

(23:44):
favor.
And if you like a a a manager, if you thinkthey're really good and they're out of favor,
that's when you should be making thoseallocations.
And and you're absolutely right.
Like, when that manager is outperforming, youneed to have those conversations with them.
Like, can we get a if it's a private fund, canwe get a larger allocation?
Citadel's closed.
Right?
So you can't really get in to that flagshipfund that they have.

(24:06):
They're returning capital.
And so you're you are fighting, like, hey.
Don't return as much capital.
And so you're, hey.
Great job.
Pat them on the back, all that stuff.
Part of that is also essentially a failure ofthe CIO and staff to really educate the IC.
This is the role of this asset.
This is the role of that asset.
These are the ups and downs.
There's a famous case study, a pension fundthat owned a diversified for like a decade and

(24:31):
it was losing a couple percentage points.
And then the staff, the year that it actuallyhit, I think it would have returned something
like a hundred x, of capital.
They decided to take take off the trade becausenobody really knew why they were they had this
losing asset.
So I think education is a big part as well.
I've been I've been thinking about what youwere saying about this reversion to the mean

(24:51):
where you're a consultant, you, you presentthree managers and they would choose two
managers.
The opposite of that is also very interesting.
I spoke to Mel Williams, this, they have thisforced ranking system.
Their biggest competitor is actually more oftheir winners.
They're like, we want more founders fund.
We want more Sequoia.
I think there's not enough of that.
It's like, how do we further push our advantagewithin our portfolio versus bringing in a new

(25:15):
manager and some would say deworsifying the,the portfolio instead of diversifying the
portfolio.
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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We've we've used that term here, and I thinkit's it's gaining more traction.
I think there is a definite push amongallocators to have higher concentration in in

(25:38):
their outperform.
Like, I want fewer line items than than moreline items, which fifteen years ago, I think
the you know, pre GFC, definitely, it was,let's have a thousand funds in our portfolio
rather than 10 funds in your portfolio.
Alpha's really hard to find.
And if you can find it, size it appropriately.

(25:59):
Now there is the flip side of that where if youonly have, you know, five funds in your
portfolio, then something blows up at one ofthose funds.
You you're you're kinda screwed.
As a CIO is if one of my staff members isunderwriting that and that person leaves, do I
have the ability to maintain that relationship,or does that relationship go with that staff

(26:24):
member?
I think you see that maybe sometimes in theventure community where, you know, if Sequoia
doesn't know who I am, and I'm like, hey.
Let, you know, let me try and get maintain thatallocation.
They might say no.
Like, the allocation is with somebody else, notthe organization.
That's a concern is, like, if if you build thatsuper concentrated book, if something goes

(26:45):
wrong with one of those managers, then it'sgonna be a wild ride.
And so that gets into that education process.
Like, look.
We think this is this is a really good alphasource, alpha engine, but maybe it isn't one
day, and is everybody okay with that?
And so we've set concentration limits with someof our managers where if if somebody's above

(27:06):
5%, it's not that we can't invest.
It's just that we go back to the committee andsay, hey.
These guys are over 5%.
And so they're raising another fund.
Are we okay with that?
And everybody has to kind of agree to thatspecific thing because while I might be okay
with it as a CIO, a committee member or anotherstakeholder might not be.

(27:27):
And so that is very idiosyncratic to ourorganization.
Somebody else might say 30%.
You know?
And so it just kinda depends on what that is.
If what I find is if the relationship is over alonger time period.
So if you're in Sequoia's first fund, if thatconcentration today is, like, 20%, you're okay
with it.
But but I don't think many people would say,even even Sequoia, we're gonna go 20% into

(27:51):
Sequoia today because you just don't have thathistory that some of those other folks do.
Alpha's hard to find.
Right?
So we're gonna make larger commitments thansome of our peers in this space.
If I hear that, you know, Michigan's in a fund,like, I'll look and see, like, how big is that
allocation that they're in there.
Like, that may might mean a lot to mycommittee.

(28:12):
But when we find out, like, okay.
This is, we're in it at 1%, and they're in at10 basis points.
It doesn't matter as much to them as it mightto us even if that 10 basis point position is,
like, three times the size of our our position.
And so just because some other university or orendowment or pension, whatever, is in a fund,

(28:32):
it doesn't really mean much because, you know,there's there's other pools that a lot of these
funds have too.
And so maybe it's not the endowment pool, maybeit's the cash pool, maybe it's some other pool.
And and the resources and and returnconsiderations of those pools are different.
You know, we we might have that relationshipwith that organization reach out and say, hey.
Why'd you do this?
And they can tell us.

(28:53):
When we first started doing privateinvestments, we would have these conversations
like, okay.
Yale's in this.
Somebody somebody at Harvard's in this,whatever.
Somebody's in this university that you know andrespect.
But we would still have to review the legaldocuments.
Like, there's all this stuff that you have todo.
You just can't assume that because one of theseschools is in there, they're negotiating the,

(29:15):
you know, the same side letters that you are,and they're thinking about it the same way you
are.
Even though these are really well respectedschools, what they're trying to accomplish from
it might be different than what you're tryingto accomplish from it, so you have to think
about that.
Oftentimes, these very large pools, they wantco invest or they want other factors that are
not directly related to fund performance, corefund performance.

(29:35):
Absolutely.
We we find with family offices, they will theywill do a fund not because they really like the
fund, but because they want co invest.
And and they're comped on co invest.
Okay.
I get that.
But, like, that doesn't necessarily mean thatthey will have the same diligence that we will.
And we've seen that with with with some familyoffices when they're like, oh, we did an hour

(29:58):
phone call, but we we had done some co investwith them.
And so we did the fund because we, you know, wewe met them through the co invest.
We're just doing it because we kinda have to.
We have to check that box, but we really justwant the co invest stuff.
And and it's a different that's a differentrationale, right, because you can opt in or out
of the co invest.
And so if you make some kind of de minimisinvestment in the funds so you get these large

(30:21):
co invests, then, you know, that that's just adifferent ballgame than what than what we're
trying to play.
I'm curious.
You sit on other committees.
Do you find that the size of the investment orthe concentration in the portfolio is
positively correlated with the fund's ultimateperformance?
I never really thought about it that way.

(30:43):
I think what you find like, I'm on smallboards.
Right?
So it's not like we're, you know, managing abillion dollars.
I think what you find is they just defersmaller committees.
They just defer to whatever adviser is in theroom.
Like, they they generally don't have somebodywith an investment background on the committee
or on the board.

(31:04):
And so, hey.
We've got this adviser for twenty years.
We work with them.
We just listen to them.
And so it's difficult from my seat when I comein.
I'm like, well, I don't really agree witheverything they're saying.
It's kinda like you don't wanna be that personthat just disagrees, it it you kinda take the
conversation offline.
Like, help me understand why you're trying toinvest in whatever it is and just kinda get

(31:28):
that rationale.
I think something like real assets is a greatexample where, people invest in real assets
because they think it's an inflation hedge.
Like, okay.
Most of the time, we're not in inflationaryenvironments.
So you invest in this asset because at somepoint in the future, we might be in an
inflationary environment, and that asset'ssupposed to perform well.

(31:52):
But what's it doing in the eighty, ninety,whatever percent of the time that we're not in
an inflationary environment?
We're just trying to diversify.
Like, what are you trying to diversify from?
Equity risk generally because every endowment,you know, has predominant equity risk.
And what happens when equities are down orcredits are tight and and all correlations go

(32:14):
to one.
Right?
Everything all these diversifying assets cantrade like equities.
And so what are you really trying to get fromthat?
I think, you know, trying to understand, like,why people are doing things is is really
helpful, and maybe they're doing it, you know,just because they wanna diversify.
And a lot of the studies about diversificationare like, we're gonna take a sixty forty

(32:37):
portfolio.
We're gonna add 10% of some asset, and thatasset shows diversifying qualities.
Right?
Okay.
But at 10%.
Right?
And so now when you take that and look, hey.
We're gonna make it 1%.
We're gonna make it 2%.
Maybe it's not as diversified.
I'll have conversations like, okay.
You know, take this up to 10%.
Like, oh, that's too risky.
It's like, well, the study that you're basingthis whole thesis on diversification had it at

(33:01):
10%.
You find with a lot of these things that arediversifying away from equities, everybody puts
them in the portfolio too small a size for themto actually be diversifying from the do
anything for returns when you do have maybethose inflationary time periods.
You end up with the diversification that youmentioned.
Like, that that's kinda where that comes fromis, like, you just slice this pie up into a

(33:27):
million pieces and you're you're beta.
Is that not the incentive of consultants toprovide beta to their portfolios?
Essentially, they get paid on how much assetsthey manage.
If they could get a 20% return one year andit's 5% return next year, it's not going to
look as good as an 8% every year, and they havethis kind of incentive to smooth out returns

(33:48):
and deliver beta to their clients.
I think it's right.
I think they what they try and do is educatefolks about you want a diversified portfolio,
and it's really difficult to find alpha in allthose diversified pieces, so you need somebody
to help you do that, and that's where theconsultant comes in.

(34:10):
At the end of the day, what you could figureout is, like, do you really want alpha, or is
beta good enough?
And then does that beta actually provide whatyou what you want?
And I I think we found in in certainly duringCOVID nineteen in the GFC, a lot of things that
were diversifying were not at that time period.
Right?
So when you need things to be diversifying,they're not.

(34:32):
But it is kind of easier to say, look, you youknow, you you have we have four asset classes,
but you have 10 asset classes, you're morediversified.
Right?
And it's like, you know, is private equitydiversifying from public equity?
It's all equity.
Right?
And so, like, you can divide this up in manydifferent ways, but I don't know if it makes
your portfolio any more diversified becauseyou're doing that.

(34:55):
It's kinda like fifteen, twenty years ago whenI was doing mutual fund working on mutual fund,
doing manager selection.
There's a Morningstar style box.
Right?
Like like that three by three matrix, and youneed to be in all of these asset you know, all
the different equity buckets to be diversified.
It's like the reality is they're all the same.
Right?
There there's very few markets where growth isup and value's down.

(35:21):
You know, you'll see that where growth mightoutperform value, but it's not like growth is
gonna be up 20% and value's gonna be down 20%.
That's pretty rare.
And so you're really just over diversifying,and it turns out that, like, what is growth is
also value, and, like, that's not just somebinary construct.
You know, it's it's a little bit greater thanthat.
And so you you end up with a portfolio that'soverdiversified.

(35:46):
It can make you feel good.
It's hard to imagine a world where you justhave a bunch of beta, and you you get to the
return target that you need.
If that if you actually believe that that'sgonna happen, then you don't need like, manager
selection in that world doesn't matter.
And I know, like, there's the Brinson studythat says manager selection doesn't matter.

(36:07):
I will say that they chose, like, the threeasset classes where manager selection matters
the least, public equities, core bonds, andcash.
Think you're gonna win based on your underlyingholdings of your cash position.
Right?
And so as you introduce these asset classesthat have more dispersion, VC with the highest
dispersion rate, manager selection absolutelymatters.
It absolutely matters what companies you own inthose asset classes.

(36:30):
But if you didn't believe that, then you wouldsay, we're gonna get we're gonna shoot for
median return, and we're gonna shoot for medianasset allocation and hope for the best.
I think what would happen if you did that isyou would almost always underperform.
Like, no like, nobody's target is the medianasset allocation.

(36:50):
It's just the outcome, not the goal.
And so if you if you did have that as yourgoal, the median asset allocation, you're
probably gonna underperform, probably moreoften than not.
And and so then you get into the managerselection piece of it, and it's just really,
really hard to invest in some of these assetclasses if all you're trying to do is meet.

(37:12):
I don't think you should do anythingalternative if all you're trying to do is, hey.
That meet median return looks good because it'sgonna be a wild ride.
And what's gonna happen kinda like what Cliffwas talking about, when you're underperforming,
that's when you're gonna be like, hey.
Well, it's not re up in this not just manager,but asset class anymore.
And I think people that were kinda thinkingabout that maybe in venture, because they were

(37:36):
over allocated, those folks are stillinvesting.
Right?
Maybe not as much.
I don't I haven't heard anybody that's like,I'm who you turn the switch off on venture
based on what happened or what's happeningright now?
Some people did that in 02/2001, and then theydid in 02/2008.
And, hopefully, this time, they've they'velearned a lesson.
And in this market cycle, they're definitelykeeping or even adding to their winners.

(38:01):
What what you're seeing is maybe that point.
Like, they're they're adding to the winners.
So they're looking at that as like, okay.
You know, we had 30 venture managers that we'veyou know, we've added a bunch as as, you know,
late teens and and early twenties, And, like,maybe we don't think the all of these funds are
gonna be top quartile.
So you're not gonna re up with some.

(38:23):
You're gonna re up with others.
May you're gonna ask them for more allocation,but you're really trying to figure out who
those winners are.
Now there's not a ton of persistence in theseasset classes, but you still kinda think that,
you know, your ability to figure out theprocess and philosophy and the people that are
involved, that's gonna lead to the performance.
But think you're seeing that more in venturethan, hey.

(38:45):
We're just gonna turn the spigot off.
You guys have a small staff, so I know youdon't really focus on venture.
Do you look at it from a fund to fund lens?
Or how do you get exposure to that part of themarket, or do you just decide not to play in
it?
We have historically had kind of the growthequity piece of it.
So maybe late stage venture, and growth equity,which has performed pretty well.

(39:08):
We we don't have a ton of the late stage stuff.
It was more growth equities.
You're absolutely right.
Like, it's we're capacity constrained just froma time perspective.
And venture is you know, it's it's funnybecause we talk about as a team, we've got five
investors.
And there's a lot of fund of funds that areonly five people.
But there's a lot those fund of funds only doone thing.

(39:28):
Right?
And so it's it's not necessarily a peopleproblem.
It's if we do this, it's gonna take a ton oftime.
We're gonna be flying to Silicon Valley, like,every week or every other week, somebody's
gonna be there, and then there's things thatthey can't that we can't do.
As as we think about the program, it's rightnow, we're using fund to funds.

(39:49):
Maybe at some point, we we go direct, but rightnow, it's just fund to funds purely because,
you know, we do have times constraints, andthere's other places that we've determined,
that we can find value, or outperformance.
I think small staffs and and if you talk toendowments that have 20 people, they're gonna

(40:11):
tell you that they're a small staff.
So whatever endowment you're talking to, theyalways say that they have small staffs.
But when you're when you're five people,there's there's I think there's two or three
things that we can do well.
And we we could do we could say, okay.
We're gonna do venture, and that's gonna be anarea where we think we can do well.

(40:31):
But the reality of that is it's gonna be tenplus years before we figure out whether we were
right.
And are we willing to wait that long?
That's gonna be really hard.
And I know every endowment says they have along term investment horizon, but I I've yet to
meet one that that really does.
Right?
Like, there's somebody on that committee orstakeholder or something that doesn't have a

(40:53):
ten year investment horizon.
It's one year, three year, whatever.
And that's to your point earlier, that that'sthe loudest voice.
And so we've we've chosen to do fund to funds.
It's not throwing in the towel because we evenwithin that, we talk to a lot of LPs that we
respect that that have done this before, thathave been doing venture for decades.

(41:15):
And we said, hey.
If you had to start from scratch, how would youdo it?
You know, it's funny because, like, the largestfunds get the largest amount of money.
Obviously, they're the largest funds.
Right?
And they raised, like, 60% of the VC dollarslast year.
But we kinda talked to our committee about,okay.
If you have a $5,000,000,000 fund, what is theprobability that $5,000,000,000 fund returns a

(41:37):
three x?
Again, it's really hard.
That's $15,000,000,000.
Think about all the companies that you needneed to invest in.
They're gonna get you to that.
And then, like, a $2,020,000,000 dollar fund,three x is $60,000,000.
It's probably one company, maybe two companies.
And so that led us to, like, think of more onthe on the smaller side, which is, you know,

(41:58):
seed, pre seed, and and that's where we can getmaybe some of those outlier outcomes.
The later stage stuff, I think it's just gonnabe really hard.
I'm not saying they can't do it, but theprobability of them doing it is is pretty low.
I wanna highlight something very important thatyou said, which is we have five people on
staff.

(42:18):
So instead of trying to do everything, we'regonna pick our shots, the two or three asset
classes where we could win.
So just because you have a generalist teamdoesn't mean you try to be good at everything.
In fact, it means the exact opposite.
The biggest mistake I made when I first startedhere was, hey.
Here's this asset allocation.
That was approved before I started, but then Ilooked at it.

(42:40):
I'm like, okay.
Let's do this.
Let's go let's try and and add alphaeverywhere.
And it was just me, so that was that wasimpossible.
Right?
And then we added somebody.
We have one or two members along the way, and,like, it's still impossible.
And so we we spend a lot of time thinking aboutwhere can we add alpha.
And to to, you know, the point earlier aboutyou're gonna look at that underperforming

(43:02):
manager on the on the list and be like, you'regonna talk about that manager for an hour.
And if that manager is in public equities,like, what is the value add that that manager's
gonna have over time?
Like, if you think a public equity manager isgonna outperform by 10 basis points, like,
that's not a lot.
Right?

(43:22):
And so now you're probably gonna allocate tensor hundreds of millions of dollars to that
manager.
So that 10 basis point is is a very goodcontribution to the portfolio, but there's
going to be times when they're detracting bytwo or 300 basis points.
Right?
And so, you don't have that in private equitywhere you can outperform by three, four, five

(43:46):
hundred, a thousand basis points.
And so maybe it's a smaller amount, but you cando that.
Like, your time commitment is basically thesame.
Like, whether you underwrite a long only fundand it's, you know, $500,000,000 or you
underwrite a VC fund and it's $50,000,000 or$5,000,000 like, it's harder to underwrite that
VC fund, right?

(44:06):
I'm going to make a statement.
I want you to correct me because it'soversimplified, which is you want to focus on a
couple of asset classes where you have alphawhere you could outperform the by 300 to a
thousand basis points.
And then everything else, the public equities,you want to potentially index and focus on
fees.
So give me more nuance on that.
What do you want to do in the asset classesthat you don't have the edge?

(44:28):
The other thing you gotta think about if youdon't do beta, let's say you do active
management.
And if you if you do active management, you'restill taking some type of overweight or
underweight.
Right?
Whether that's sector, whether that's marketcap, or whether that's geographical region,
you're taking that, and somehow you wanna becompensated for that.

(44:49):
So so if I were to do that today, I wouldprobably say, let's have some overlay strategy
so we're getting rid of that.
And, like, if I I truly think this is managerselection, let's get rid of all these kind of
regional market cap or whatever sector biasesand just focus on their ability to pick stocks.
When you when you kinda flip it to the privateside, you know, you're three to 3% is

(45:12):
generally, hey.
We think we can outperform by 3% if we go onthe private markets.
But what I don't I don't think people spendenough time thinking about, but what is the
public market return gonna be?
Private credit's blown up today, so let's usethat as kind of the scapegoat here.
Like, private credit crushes public credit on aPME basis, and and the reason is it cheats.

(45:35):
Right?
Like, it's taking more credit risk than thepublic markets, and you can you know, what's
what's your what's your target kinda benchmarkon that?
Core or core plus?
Right?
And so, like, everybody knows you could beatthe core.
It's the easiest index to beat.
You just go longer duration, more risk.
Like, a huge percentage of of core managersoutperform the core index because they cheat on

(45:57):
it, and and private credit's cheating evenmore.
But what you have to think about on that is,let's say you outperform by 5% to whatever
benchmark you're using.
Is that 5% enough to justify locking upcapital?
We're an absolute return fund.
And so what you can find in a lot of thosestrategies, I'm beating this public benchmark

(46:17):
by 5% or more, but I'm only getting 10% IRR.
And you discount that IRR to get to anannualized return, and you end up, like, I'm
locking up capital below what my target returnis.
And, like, are you really benefiting from that?
Is it really providing you what you need?
And I would argue no.
I I you know, for us, I don't think it gets youthere.

(46:41):
But if I was a pension fund and was trying toallocate and was worried about the volatility
of returns, and I knew, okay.
This is gonna get me a 10% IRR every everysingle year.
I would allocate to that because that's adifferent incentive, than if you're an
endowment that needs to hit, you know, a atarget return so you can maintain the the

(47:02):
spending power of your endowment.
To play devil's advocate, when I listen topeople like a Stan Drunkenmiller or Cliff
Asness talk about how difficult it is for themnot to pull the trigger in a down market and to
hold steady, I start to think, could too muchliquidity be a liability, especially when you
have committee members?

(47:23):
So outside of providing for the university'sexpenses every year and maybe having a good,
good runway of capital, could liquidityactually be a negative function?
And why is liquidity always seen as positive?
Yes.
So so I remember talking with some folks at AQRabout this years ago where I was like, you

(47:45):
know, what what's the academic study that saysprivate capital should be three percent better
than public equities or public whatever.
Right?
And because my theory was that number isvariable based on kinda governance and other
factors that go on because private capitalprovides discipline.

(48:10):
Right?
To to the earlier point of, like, you're you'reworried about your underperformers.
Well, if you have an underperformer in publicequities, you could sell them.
If have an underperformer in private equity,you can sell it, but it's gonna come at such a
massive discount, you're probably not gonnasell it.
So you do buy some discipline just from that.
So I can make an argument for certainallocators that you don't need to outperform

(48:34):
public equities.
If you get the public equity performance fromprivate capital, then you're gonna be invested
all the time, and it's gonna be a better ridethan, you know, we're gonna allocate to funds
that outperform, and we're gonna redeem fromfunds that underperform.
And Morningstar has that return of, like, aflow based return, and it's always less than

(49:00):
whatever the annualized return is over the sametime period because people will allocate to hot
funds and redeem from underperforming funds.
And so with private capital, you can avoidthat.
Right?
So you do get some discipline.
And the other thing to that is, yeah,liquidity, we need to do something.

(49:21):
Right?
You you do have a little bit of, like, hey.
We've got all this liquidity.
Let's let's play with it a bit.
Let's buy this.
Let's buy that.
And so you have to have that discipline thatyou're not always buying things because then
you get up with that you end up with a coupledifferent scenarios there.
Either, a, you could be overdiversified becauseyou just buy a lot of different off benchmark

(49:42):
things, or you're taking unintended bets.
And so you have to figure out, like, hey.
Let's add 5% to EM, and EM outperforms.
It's like, okay.
Well, now we're 10% overweight.
I don't know what time period you're gonnadouble your EM waiting, but, you know, let's

(50:03):
let's assume that it happens.
And are we okay with redeeming from that?
And and I think what you find is is you youhave to really kinda figure out why are you
making this decision.
Right?
Like, are you going 5% into EM?
And predetermine why you would sell from that.
Because if you don't predetermine why you'regonna sell when you buy some asset that's

(50:27):
liquid, What I found when I was a consultantworking with clients, like, just never sold.
And so that would trail off.
You know, the returns would be bad, and thenit's like, well, why did you have us do this?
It's like, you guys wanted to.
You wanted this exposure at this size.
And and so, hopefully, your meeting minutesreflect that conversation.
You can go back and and say, remember, thishappened.

(50:49):
But, yeah, liquidity, it gives you thisillusion that you can kind of do things that
from a discipline standpoint, should probablyshouldn't do.
Yeah.
Listening to Stan Drunken Miller talk about howmuch he struggles with it actually gave me a
lot of peace in that.
It's essentially where ultimately human beings,it's kind of the analogy.

(51:10):
Do you wanna put out a bunch of chips on yourcounter every day and practice self discipline
or do you just not wanna buy them at thegrocery store?
There is a limit to human self discipline,especially when you have the committee approach
where everybody kind of reverts to the personthat's the most panicked in the room.
There's a study by Daniel Kahneman, on a topiccalled myopic loss aversion.

(51:34):
So this was a behavioral finance study, and itshowed that investors who check portfolio daily
see losses 41% of the time, far more often thanthose who review every five years, which only
see 12% losses in their portfolio.
So a three and a half X change just on that onefactor of how often do you see your portfolio
and how often are you predisposed to theseswings in the market and these kind of

(51:59):
emotional aspect of investing.
Think about private too.
You only get four marks a year.
Right?
But even when you get those marks, we're we'reyou know, we're at the March.
Right?
So we're just starting to get our $12.31 marketvalues trickle in.
And so you're reacting to something that'sthree months ago.
In the stock market, particularly, you'rereacting to something that's happening in the

(52:22):
moment.
You can trade twenty four hours a day.
So if, you know, COVID hits and the market'sdown 30%, like, you have to react right then.
Whereas with your private portfolio, you'relike, alright.
Well, let's wait and see what happens.
And then what might be happening is, well, thetwelve thirty one marks were x, but since then,
everything's improved.

(52:43):
Right?
And so we we're we think three thirty one'sgonna be higher, and that's generally what
happens when you go to an annual meeting.
And, like, they're they're kinda intimatingwhat's gonna you know, that's in April and May.
It's like, well, March is gonna be better.
And so you you do have that where if you don'tlook at it as often and you don't with private
markets, you're not gonna worry about it asmuch.
I I definitely worry about the stock marketmore than I worry about privates because I can

(53:09):
look and see.
I can look and see what the stock market'sdoing today.
Where will tariffs affect my public portfoliomore or less than my private portfolio?
I don't really know.
But I know with my private portfolio, there'snot a lot I can do with it.
And even though you get the marks everyquarter, you might be locked up for ten years
anyways.
There's nothing I can do with that mark whetherI like it or not.

(53:31):
The only decision I can make there's twodecisions I can make.
I can re up, which isn't gonna happen in themoment, but you could sell.
And I know there's a lot of organizations outthere that just use the secondary markets all
the time.
We've never sold part of our portfolio.
So if we were to look to sell, I if I'm on theother side of that, I'm gonna be like, there's

(53:52):
something going on in this portfolio.
I'm gonna give it a bigger haircut orsomething, or you just do it every year.
But you're sending a signal to the market.
I think the opposite has been what I actuallystruggle with, which I would have sold my
winners way early on the venture side.
Once something is up 10x it's like you knowit's time to exit.
I don't have you know, the cajones to basicallyhold something that's up 10x.

(54:17):
That's just not in my DNA but that forced holdis also an arguably especially for venture
where everything's driven by power law,arguably even more important than not selling
your losers.
The other thing you have when you sell that,like, GP approves it.
Right?
And so the GP knows that you sold that.
So when you go up back for that re up, they'regonna say sorry.

(54:40):
I think there's this mythology to that a alittle bit, and they're like, yeah.
That might happen.
But if you explain to them, hey.
Here's why we sold.
We had to sell, and you can come up with astory that might resonate with some.
It's not gonna resonate with everybody.
But if it's true they're truly a partner and belike, hey, man.
We just had to take advantage of your greatfund because all these other funds we had are

(55:01):
trash, and we just needed liquidity.
Like, maybe maybe that resonates.
But there is there if I sold a fund, I wouldmost likely be doing that because I had no
plans of re upping with that GP.
My guess is the GP would tell you, hey.

(55:22):
You're not in the next fund if you do this.
When we were last chatting, you mentioned thatas you looked into the private equity asset
class and how you wanted to to play it, youasked yourself the question, if everyone wants
to invest in private equity, will returns staythe same?
Tell me about that thought process.
I I I still ask that question because I I Ithink even even though there's liquidity issues

(55:45):
going on in in in private equity and privatecapital in general, people still are, hey.
Let's maybe not increase our private equitytarget, but at least maintain it.
And and funds are growing.
Right?
So you're kind of increasing the dollars inthat.
And so what we did was we looked at how peoplewere investing.

(56:06):
And, you know, the biggest funds obviously getthe the most dollars and and the most
attention.
But did we think that those big funds wouldhave the return potential?
And, you know, anybody can get into the bigfunds.
Right?
Like, I can call Apollo tomorrow.
I feel like I could call them, and if they'reraising a fund, they're like, okay.
Yeah.
You know, we have space for you.

(56:27):
Whereas some of the some other funds, youcan't.
Right?
You can't do that with Sequoia.
What we did was we looked at, like, where do wethink value is gonna be found?
And what we where we found, like, the higherability ability for a higher return is in
smaller funds.
And so you you also have a lower outcome.

(56:49):
Right?
So if you're fourth quartile, it's gonna beworse than if you're fourth quartile of the
mega buyouts.
The medians are all the same.
And so we thought, do we have some ability toinvest in smaller funds?
And so our network happened to be the the Iowanetwork and and folks that we knew at the time.
They they had access to folks that were prettysmart and that were in the smaller fund space.

(57:14):
So that's kinda how we built the the theprogram in private equity is, like, let's do
smaller funds.
There are a little bit some nuances to that inthat, you know, nobody's gonna know who those
funds are.
Right?
You you you go to a cocktail party and, like,yeah, I was in Apollo.
It was great.
Everybody knows who Apollo is.

(57:34):
You go to a cocktail party and, like, I was insome hundred and $50,000,000 fund.
Nobody's gonna know who that is.
Right?
And they're like, are you sure that's a realfund?
Are you not getting you know, is that fraud?
But we since we were introduced from ournetwork and some of our committee members were
instrumental in in that network, that gave alittle credence to this.

(57:54):
Like, these aren't fly by night folks.
It is a little different, though, in that,like, the underwrite like, if I underwrite
Apollo, I'm pretty sure that organizationswould be a going concern.
They have HR.
They're pretty good at fundraising.
If somebody leaves Apollo and starts their ownfund, they probably weren't involved in a lot
of that stuff.
So, you know, you have conversations with themabout what's the business plan of this

(58:18):
organization.
How are you gonna fundraise?
You know?
And talk to them about that and get someanswers to that.
And, like, we remember this stuff.
I remember distinctly being in the the officeof a fund that was raising their fund one, and
they they sat across the table from me andsaid, Jim, we're never gonna raise over a
billion dollars.
Fund three was a billion dollars.

(58:39):
Now fund one was a 30 x, a 30% return, so thatwas great.
But when we we didn't do fund threespecifically because he told me he'd never
raised a billion dollars, and here he's raisinga billion dollars.
And so we look to do things that other peopleweren't doing.
And so we were generally, a lot of the fundswhere you are one, if not you know, maybe

(59:01):
there's a couple, one other institutionalinvestor.
There's usually a fund of funds, but there'snot another endowment.
So we have to be comfortable being the onlyendowment in the space.
There's family offices, potentially, but, youknow, maybe they're doing a million dollars,
and we're doing, you know, $20,000,000.
That's a big difference.
And so it was, you know, skate where the youknow, really where nobody else was.

(59:26):
It the smaller funds, I think you can you cando a little bit of that.
It's it's kinda in the VC corollary that wouldbe pre seed and seed.
You know, is a little bit more capacityconstrained in those areas, but smaller kinda
leads to to, I think, better returns.
I think what somebody like Hamilton Lane wouldtell you is it's not fund size, it's deal size.

(59:48):
What I would tell you is show me a$5,000,000,000 fund that's buying $15,000,000
EBITDA companies, all of them, and I believethat fund size doesn't matter.
And then show me a hundred million dollar fundthat only bought one company.
If the correlation is performance and dealsize, I'm gonna say there are pretty strong

(01:00:08):
correlation between deal size and fund size.
And lower middle market is one of these two,three bets that you decided to really
specialize in at University of Iowa.
Why lower middle market, and what's your thesisaround that?
There's so many companies in the lower middlemarket.
And even if there are a thousand lower middlemarket private equity firms going for them,

(01:00:33):
they can't cover them all.
Right?
It's just it's an inefficient market.
It's inefficient sellers.
Right?
Those those sellers aren't as sophisticated.
I say that they're not sophisticated, and I'venever met a business owner that didn't have
some idea what their business was worth.
Right?
But they're not as sophisticated as the CEO ofWalmart.
Right?
Like, just just you know?

(01:00:54):
And so it was it was kinda plain in a pond thatnot that many people were fishing in.
And even if they were fishing in that pond,it's such a large pond that it doesn't really
matter if there's a million other folks doingthat.
You're buying these mom and pop companies thata a lot of the kind of the tailwind to this is
baby boomers retiring, their kids or grandkidsor whoever doesn't wanna buy the business.

(01:01:20):
They need to sell the business so they canretire.
And so that is a tailwind to this, but there'sso many of those.
And what I always found when I was aninvestment banker was you have somebody that
was running a company, and they made whateverlevel of income they were making, which was,
you know, whatever the revenues of theorganization were, they were comfortable with

(01:01:40):
that.
Right?
They didn't really wanna work 20% harder toget, you know, 5% more income or revenue or
whatever.
So they're just let's maintain status quo.
Whereas a private equity fund can come in andbe like, okay.
We're gonna pull these levers to grow thisbusiness to, you know, 20%, and we're gonna
bolt on some other acquisitions on this, andwe're gonna get it to a hundred million dollars

(01:02:03):
of EBITDA.
And all of a sudden, there's, you know, amillion funds that are gonna try and buy that,
and so then it becomes very competitive andmore efficient on the pricing side.
The the the way you make change operationallyin some of these smaller funds and smaller
deals, it's it's easy to understand.

(01:02:24):
Right?
You're figuring out which SKUs work and gettingrid of the ones that don't.
This isn't like, I'm gonna buy this business.
I'm gonna sell off the real estate and do kindof a leaseback thing, and and it's more like a
financing game.
You're not doing that in the in the lowermiddle market.
You're employing people, job creators as, youknow, Mitt Romney when he was running, would

(01:02:44):
would talk about.
Whereas the kind of Elizabeth Warren, like,their job destroyers and community destroyers,
like, that's not the lower middle market.
They're not buying assets, levering them up,and selling the aircrafts, and firing the
people.
Exactly.
Exactly.
It's like a lot of the
I think that's that's that's a very rare casein private equity just for the record.

(01:03:05):
I think outside of the movie Wall Street, it'sit's not very common.
It isn't very common, but that's what gets theheadlines.
Right?
And so even if it happens once a year, onceevery five years, like, you're seeing, I think,
this in in the Northeast where there was ahospital, I think, in the Northeast that went
bankrupt after private equity sold it, andthey're blaming private equity now.

(01:03:27):
There's all these laws that are being proposedto have clawbacks on private equity.
That's not gonna affect us directly, but itwill affect us in the fact that, like, maybe
some of the companies that we own in ourportfolio would sell to some of that stuff.
And so those buyers aren't gonna be there.
They're gonna be more scared.

(01:03:49):
I will say, like, from a buyout ventureperspective, venture has done an amazing job
selling what they do to the public at large.
Buyout has done a horrible job doing thatbecause, like, all you remember is, like, Toys
R Us or RJR Nabisco and things like that.
It's like, you know, there there are probablyother things going on
in this business.
Ironic venture has done a much better job PR,but private equity has done much better

(01:04:12):
lobbying.
The venture lobby Yeah.
Yeah.
All due respect, has not had the resources orthe fact of the private equity lobby.
I think some of that's changing now,particularly with a lot of folks from venture
community going to the Trump administration.
Yeah.
I think they're kind of recognizing, like, thatis where the growth of the of The United States

(01:04:32):
is probably gonna come.
I I I think there's a big baby boomer effect tosome of this stuff.
Like, I don't see a lot of people from mygeneration or or younger trying to start
concrete companies.
You know, if if you had a concrete company,you're, you know, you're trying to retire from
that, sell it to private equity, car washes,things like that.
Like, there's there's just a lot of thosethings out there where it's ripe for private

(01:04:53):
equity, but I wonder about kind of your pointof, like, you know, when built the program and
everybody's doing this stuff, I wonder aboutwhat what does ten years from now look like
twenty years from now when you kinda have thisgenerational cliff of, like, Gen X isn't really
starting these companies.
Will private equity exist?
The buyout industry exist to the level it istoday.

(01:05:16):
I don't think I don't think it will, and Ithink you're gonna see just this natural shift
towards VC because of that.
Like and and it the ability to start a companyis so much easier on the VC side.
Like, if I'm gonna start a concrete company,that's labor intensive.
It's capital intensive.
If I'm gonna be a pre seed fund, like,obviously, you're you're betting on the idea

(01:05:37):
and the person starting the idea, but it's,like, it's easier to do it at some scale.
It's easier to start a pre revenue tech companythan it is to start a mom and pop shop,
essentially.
That needs to change, and maybe it will.
But and and I I think in some ways, like,private credit's gonna play into that.
Right?
Like, eventually, private credit will startlending to that.

(01:05:59):
It's taking away everything that banks lend to.
And so I can see that having some of thesemicro private credit funds will do some of that
stuff.
And so that's just gonna change, over time.
It'll be a little bit easier.
There's this belief that lower middle market ismore risky, and there's a counter narrative

(01:06:20):
that it's actually less risky because there'sless leverage, is it more risky with higher
returns, or is it actually less risky withhigher potential returns?
I I would argue that it's less risky because,yeah, it has less leverage.
There the the the fruit is lower hanging.
I don't know what some of those mega buyoutfunds, the levers that they can pull are,

(01:06:44):
particularly now when it's when it's AmericaFirst.
And if your, you know, pathway to growth wasoutside The United States, like, that's gonna
be a tougher thing to do.
Like, you're you know, hey.
We're gonna build a plant in China.
We're gonna build a plant in Europe.
Like, I don't know if that's gonna happen.
You've you've maximized some of your revenue,like, short term, like, low hanging fruit

(01:07:05):
revenue opportunities, so now you have to bringdown costs.
Yeah.
Ten, fifteen years ago, it was twenty yearsago, was, let's build that plant in China.
Let's build that plant in Mexico.
I don't think you're gonna be doing that today.
Right?
And so gonna have to bring those those plantsback to The United States or or face a tariff,
and you don't have that problem in in lowermiddle market.
So I would argue on that level, it's lessrisky.

(01:07:28):
You know, we talk with some of our lower middlemarket funds about their underlying portfolio
companies, and they're under stress.
There's there's no question they're understress.
And even though they're not as levered, youknow, this is a bank.
They would have workout groups.
Right?
And they would just take the keys, they'dfigure it out.
With the private credit, it just grew so fast.

(01:07:50):
They don't have those that ability.
And so they're like, okay.
You're in breach of covenant, technicaldefault, work it out.
We don't have the ability to take over yourcompany and just work it out.
You see a lot of PIK loans because of that,and, you know, we'll get you on the other side
of this stuff, which doesn't give me a greatfeeling about, you know, this is a great time
to invest in private credit.
What do you wish you knew before starting atUniversity of Iowa roughly fifteen years ago?

(01:08:14):
I I the the biggest thing I wish I knew was howdifficult it is with one or two people to
manage the portfolio.
And so I would have hired, you know, two peoplefaster.
I would have hired two people rather than oneperson.
I would have done that sooner.
I I wish I knew how cold it got here in Iowa inin the wintertime.

(01:08:36):
I don't think I would have made a differentdecision, but maybe invest maybe in in warmer
coats and stuff.
The bigger thing is, like, figuring out how toscale the team because, you know, at the time,
we were very consultant driven.
We still have a relationship with theconsultant, but you're relying on that
consultant.
And it's the conversation that I had with mycommittee chairs over the years about about

(01:08:59):
that was, like, do we want the knowledge to bein Iowa City, or do we want the knowledge to be
outside of Iowa City?
And so it's hard for me to manage a portfolioif all the knowledge is outside of Iowa City.
So let's kinda bring that in house and and havethe team get that knowledge and and know the
companies.
And I think from a GP perspective too, if I wasa GP, I would rather work directly with the l

(01:09:26):
underlying LP than through a consultant becauseif I never meet that LP, then I I would just
intuitively think, like, re ups are gonna beharder.
You just don't have that relationship.
It's also relationship driven.
Right?
And so if I know somebody and on a personallevel, I'm not gonna forgive them for
underperforming.

(01:09:46):
But I'm I'll them the benefit of doubt.
Like, maybe they can work through this.
And so I I I probably would've pushed for alarger team faster.
You could try to get more information,understand why that underperformance is.
Is it the market is down?
Is it part of the strategy?
Sometimes it's part of the strategy down toperform three out of four years, like, the, you

(01:10:08):
know, hedge fund space.
And even even in private equity, you findsometimes, like, people are like, we're gonna
we're gonna take some operational make someoperational changes.
That's gonna be expensive, so the markupsaren't gonna be as fast.
And so we're gonna look like we're a thirdquartile, fourth quartile fund.
One of our best performing funds was a yearbefore a follow on fundraise, they were deep

(01:10:31):
fourth quartile.
And they said, this is what we're gonna do toturn this around, and they did it.
And it's it's a 25 IRR fund today.
And so we we knew from that relationship thatthey would do that.
And the other thing, we invest in smallerfunds.
When I when I give, you know, 10% of allocationto a fund, if they're raising $200,000,000 and

(01:10:54):
I give them $20,000,000, I'm probably on theLPAQ, but I'm definitely one of their first
calls.
Right?
And I get a lot of information from them,whereas if I give $20,000,000 to a
$20,000,000,000 fund, you know, I'm so far downthat list before I get a call returned, and I'm
not getting much information.
You develop that relationship with folks, andand you truly understand what they're doing

(01:11:18):
rather than, like, PR talking points aboutwhat's going on.
And, hey.
We can understand, like, okay.
At the end of this, it's gonna be really goodfun.
Right now, it's got some struggles, but we'reokay with it.
Jim, this has been absolute masterclass onDAOMA investing and a lot to talk about.
Wanna do around two and look forward tocatching up live as well.

(01:11:39):
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