Transcript
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At a high level, we're a $2,000,000,000
endowment.
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We do invest across public and private
investments.
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The breakdown is roughly 55.45 today.
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We have 5 investment professionals in house.
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We're led by Dave Morehead, our chief
investment officer.
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Can you take into account the macro cycle when
you think about your 5545 split.
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So it does tend to be more permanent.
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We have an allocation budget that we manage
each year.
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We're only investing in categories where we
think can clear our net return hurdle, which we
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define 15%.
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And we're going into categories where we see
secular long term tailwinds.
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And so it tends to be an area like enterprise
software, like health care, where we see a long
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term catalyst that's gonna drive growth and
allows us to be comfortable making a 10 year
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commitment.
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Talk to me about different shades of liquidity.
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One of the things that we really try to juggle
is IRR and multiple of invested capital.
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And so for us, we've talked about how we think
about venture
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as an asset class and being very long duration.
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You guys have consistently beat the large
endowments.
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How would you Arabia Baylor in in Texas, eating
the large Ivy League endowments.
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What's the secret issue with us?
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Yeah.
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I mean Renee, I've been excited to sit down and
chat.
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Thank you to your CIO, Dave Morehead, for
making the introduction.
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Welcome to Tenex Capital Podcasts.
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Thank you.
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Thanks for having me, David.
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Excited to be here.
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So tell me about Baylor's strategy when it
comes to asset management as at a high level.
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Yeah.
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Absolutely.
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So at a high level, we're a $2,000,000,000
endowment.
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We do invest across public and private
investments.
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The breakdown is roughly 55.45 today.
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We really
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try to manage to the strengths of the team that
we
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have in place.
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So we have, 5
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investment professionals in house were led by
Dave Morehead, our chief investment officer.
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In a previous life, Dave was a former trader,
and so we leverage this skill set on the
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marketable side and seek to be nimble and use
the size to our advantage.
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So unlike some others, you know, we do not have
any multi
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stress in the portfolio.
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We don't a buy and hold approach.
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He's very nimble on how he rotates capital.
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We have a lineup of position players.
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Everybody has a job to do.
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And effectively, he's rotating capital as
warranted, buy low, sell high, and making those
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asset allocation decisions across the
portfolio.
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Across privates, we manage it in a holistic
way, but effectively, we have a very similar
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mandate in terms of position players, you know,
very
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limited overlap, high concentration across the
private book.
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So tell
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me about your private book.
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It's 45 percent of your total
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strategy.
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Why are you willing to invest so much into
privates?
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So the private investment category is really
one that has steadily grown over the past
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decade.
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So I joined the endowment in 2008.
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At the time, we went through, a number of
leadership positions until about 2010.
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And then it wasn't really until 2014 where we
started making decisions, looking at our
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portfolio, looking at some of the legacy
decisions, and we decided at that point to,
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sell some exposure into the secondary market.
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We effectively, went to the market with
200,000,000 in an AV.
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We sold a 100,000,000 and the balance of what
we sold was brought back onto our book, at
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secondary market prices.
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And so
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that enabled our team to really have a fresh
start, to
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really have attribution from that point
forward.
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And so at that time, the allocation was 2%.
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Over time, it has steadily grown.
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And as the portfolio is matured, as we've
gotten away from the j curve, we now have a
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self funding private investment portfolio.
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That's really freed us up from a liquidity
standpoint because the decade it took for us to
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get to a self funding portfolio All of those
cap calls were coming from the marketable side
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of the portfolio and caused, you know, a real
drain in terms of liquidity and needs and how
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we could manage the portfolio on top of the 5%
spend that we have as the endowment going back
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to the university for scholarships.
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For us, it's really just a function of
liquidity and getting more comfortable.
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And so now we're making decisions on how we
allocate dollars into this higher earning
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return category, which is often private equity.
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We have the flexibility to do that because the
liquidity drain no longer there given the
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maturity of the book.
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I also think if you look at some of the larger
more established endowments like the Ivy's,
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you'll see that they tend to have a higher
level of privates as well, just likely for some
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similar reasons.
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Do you take into account the macro cycle when
you think about your 5545 split, or is that a
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permanent type of asset diversification?
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So it does tend to be more permanent.
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We have an allocation budget that we manage
each year.
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It's a function, you know, what we think we
need to maintain the asset allocation at 45 to
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50% within privates.
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But one of the things that we've done is we no
longer are trying to be, you know, overly
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diversified within private equity.
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We're only investing in categories where we
think can clear our net return hurdle, which we
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define as 15%.
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And we're going into categories where we see
secular long term tailwinds.
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And so it tends to be an area, like enterprise
software like health care where we see a long
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term catalyst that's gonna drive growth and
allows us to be comfortable making a 10 year
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commitment.
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Why not focus on diversification?
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Take talk to me about the trade off between
diversification returns.
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I don't wanna say that we don't think about
diversification across the portfolio.
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We do.
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We just don't think about it within a silo
where private investments in isolation has to
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be diversified.
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For us, when we think about private equity, you
know, we think that private equity at the end
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of the day is long only equity.
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It's levered.
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It's illiquid.
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And so when we're bringing it into the
portfolio, It's not really because of the
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correlation benefits that we think it's
providing relative to what we're getting on the
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marketable side of the house.
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If we're getting any type of smoothing or
mitigated downside, we view it more as a
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function of the valuation policy that's within
privates, less a function of true correlation
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benefit.
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So if we're trying to express a diversification
trade, which we will, we tend to do it on the
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marketable side of the house.
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For example, leading up to COVID, so 2019, as
valuations felt really lofty to us, we were
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putting on long ball trades on the marketable
side, and those trades delivered in 2020
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with the quick downturn of COVID that created
returns and liquidity gains that we could then
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take and plow
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into public equities to rebalance our
portfolio.
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Private investments does not exist for that
reason.
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And so, therefore, we're pushing those dollars
into categories that can create a 15%
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return, and we're comfortable allocating to a a
small subset of sectors that can deliver that
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and
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asset classes that don't which to us are
private real estate, private credit,
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infrastructure, don't meet that hurdle, and so
we don't invest in them in private investments.
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So you just see it as an inferior asset class?
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I don't wanna say it's inferior, but for us,
when we look at equity premium and what we
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need, we want to invest in private investments
that can generate a return that 350 basis
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points above
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public equities.
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And public equities is 6%.
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So that gets you to
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9a half.
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We also believe that over the course of a for
your period, there's likely going to be some
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type of correction in some asset class across
the marketable universe that's gonna create a
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20% opportunity, and we will not be able to
participate in that because we're invested in
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private investments.
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So we had a 5% opportunity cost to account for
that per annum.
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So that gets you to 14.5.
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We round up, and so our line in the sand is
15%.
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And if you have a strategy that doesn't warrant
or can't deliver that type of returns, you
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know, oftentimes it's something like private
real estate.
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Well, if you look at public REITs, they've
generated a return of roughly 8%, you know,
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annualized over the long term.
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So I can just do that.
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It's not that we don't have that exposure.
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It's just it's not giving me the premium that I
need to justify the lack of liquidity.
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So I'm not gonna participate in private
investments.
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We'll make the decision on the marketable side
to bring that exposure in house.
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Do you see capital that's locked up for 12
years, maybe as a pre seed fund, the same as
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capital that's locked up for 5 to 7 years like
a growth equity, talk to me about the different
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shades of liquidity.
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We think about that.
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Absolutely.
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When we're allocating to different strategies,
we're thinking about duration and risk.
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And so one of the things that we really try to
juggle is IRR and multiple of invested capital.
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And so for us, we've talked
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about how we think about ventures and asset
class and being very
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long duration.
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You know, the party line oftentimes inventure
is a 3x
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net fund.
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It's a good fund in venture.
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And I think the follow-up question for us is,
you know, that's fantastic.
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But how long does it take to get you there?
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And when you do simple math and you think about
a 3 x return over a 10 year period, you're
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getting roughly a 14% IRR.
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If you can have a 2 x return over a 5 year
period, that gets you to about the same.
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I think the mouse checks out to about 15%.
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But I can get that capital back, give it right
back to the GP.
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And at the end of a 10 year period, if I get
the same 2 x return, over 5 years.
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At the end of that 10 year timeline, we're left
with a 4 x versus the 3 x that we were getting
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from the VC fund.
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We do think about it differently, and we tend
to overrate lower middle market buyout
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expansion capital strategies, you know, groups
that are investing in the middle of the country
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in a bootstrap business.
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Because it tends to be a more repeatable
process.
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It tends to be a more concentrated portfolio.
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It tends to have a shorter hold versus, you
know, some of the other stuff that's out there,
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particularly early stage venture.
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A lot of your peers would say, I don't care
about IRR.
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I can't eat IRR.
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I could only eat, like, what would you say to
them?
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Yeah.
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I would say, you know, I think you have to look
at them in conjunction.
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And while you can't eat IRR, you have to think
about the benefits of compounding and you have
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to think about liquidity.
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And both of those matter to institutions, we
think about them in conjunction when we make
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investment decisions.
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Unlike some of your peers, you do focus on fund
1, fund 2 is you focus on sub $150,000,000
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venture funds.
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Tell me about the rationale of your strategy
when it comes to venture capital.
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For us, it's
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really just kind of lessons learned from the
legacy
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portfolio that we have in place, we believe
that at the end of the day, within venture in
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particular, it tends to be a hits business.
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Within every fund, there's gonna be 1 to 2
companies that really drive returns, and we're
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gonna have a higher probability of generating
the venture type returns that we think are
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necessary to justify being in the portfolio,
which we define as 5x plus.
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And so we migrate to smaller funds.
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We also think
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groups managing a portfolio of funds 1 through
3 tend to be hungrier, and we
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also think there's better loyalty and alignment
with the LPs.
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And so all of those things we're attracted to
and are willing to take bets on funds earlier
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with a smaller
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hungry team.
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A lot of, you know, if if I gave some of your
peers
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a truth serum, they would probably tell me that
there's slight misalignment in terms
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of
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know, getting into the multistage platform
funds seems more impressive than than this is
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no name, fund 1, fund 2.
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Why are you guys different?
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How are your incentives aligned in order for
you guys to really encourage this type of risk
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seeking behavior internally.
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One of the things that we think about is just
if we look across some of those platforms, the
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the numbers don't make sense.
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So if I'm looking at the types of returns over
the duration that it takes to get there, the
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IRR math doesn't beat the other stuff that we
could do in the market with lower middle
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markets at expansion capital.
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So for that reason, you know, for us, it was an
easy decision to look at other ways to maximize
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returns with Inventure.
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I also think if you truly believe you can get
outsized returns by making an investment with a
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smaller fund earlier in its fun life cycle.
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And there's some great white runs out there
with people who spun out very well networked,
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great domain expertise, you know, tackling
opportunities where there's gaps in the market.
230
00:11:01,519 --> 00:11:04,000
You know, the return profile for those is
likely greater.
231
00:11:04,000 --> 00:11:08,565
So I can have less exposure, maybe the
commitment for us is 10,000,000 versus your
232
00:11:08,565 --> 00:11:14,164
standard 20,000,000, but get a similar type of
absolute dollar value creation from that.
233
00:11:14,164 --> 00:11:18,245
If we're wrong and it goes to 0, it doesn't
have a detrimental impact to the portfolio
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00:11:18,245 --> 00:11:19,464
because it's sized appropriately.
235
00:11:19,950 --> 00:11:24,669
So I think that's a key piece of this is sizing
your commitments in an appropriate way.
236
00:11:24,669 --> 00:11:28,910
We don't size that early stage commitment the
same way we would size a lower middle market
237
00:11:28,910 --> 00:11:29,809
buyout commitment.
238
00:11:29,870 --> 00:11:31,389
It's different in a meaningful way.
239
00:11:31,389 --> 00:11:34,049
Because of that downside downside, exposure?
240
00:11:34,509 --> 00:11:35,009
Correct.
241
00:11:35,115 --> 00:11:37,914
How do you look at your exposure and your risk
with the venture?
242
00:11:37,914 --> 00:11:42,575
We think about the outstanding NAV that we have
relative to all of our private investment
243
00:11:42,634 --> 00:11:43,134
dollars.
244
00:11:43,195 --> 00:11:47,394
You know, those portfolios are going to be more
diversified, so they're not as concentrated as
245
00:11:47,394 --> 00:11:48,654
everything else in the portfolio.
246
00:11:49,000 --> 00:11:52,680
We want everything else in the portfolio
outside of Venture to be an underlying
247
00:11:52,680 --> 00:11:55,399
portfolio company position of $3,000,000 or
greater.
248
00:11:55,399 --> 00:11:56,360
You know, venture is different.
249
00:11:56,360 --> 00:11:58,059
So we size those checks smaller.
250
00:11:58,360 --> 00:12:00,279
We understand that it's gonna be a longer
duration.
251
00:12:00,279 --> 00:12:02,540
We understand that there's gonna be a higher
loss ratio.
252
00:12:02,774 --> 00:12:05,754
And that you're really banking on 1 or 2
companies to drive returns.
253
00:12:05,894 --> 00:12:08,715
And we, you know, allocate the size of the
commitment accordingly.
254
00:12:08,934 --> 00:12:14,134
In terms of concentration limits, do you guys
care about you mentioned $10,000,000 check.
255
00:12:14,134 --> 00:12:17,095
What if it's a $50,000,000 fund, will you be 20
percent of a fund?
256
00:12:17,095 --> 00:12:20,750
Will you be 30 percent of How do you think
about risk and concentration limits?
257
00:12:20,750 --> 00:12:21,230
We would.
258
00:12:21,230 --> 00:12:24,670
We're willing to be a high position in a
smaller fund.
259
00:12:24,670 --> 00:12:25,710
Generally, we like it.
260
00:12:25,710 --> 00:12:31,985
We want GPs who are investing with conviction
and willing to make outsized bets we want them
261
00:12:31,985 --> 00:12:36,065
to be uncomfortable when they sleep at night
because we think that ultimately it's gonna
262
00:12:36,065 --> 00:12:37,105
lead to better decisions.
263
00:12:37,105 --> 00:12:38,865
They're gonna make sure that they get it right.
264
00:12:38,865 --> 00:12:43,024
They're gonna pay attention to the details
because you have so much on the line for this
265
00:12:43,024 --> 00:12:44,100
one particular company.
266
00:12:44,100 --> 00:12:44,740
We think it's a good thing.
267
00:12:44,740 --> 00:12:47,860
We also think in general, we were just overly
diversified in the past.
268
00:12:47,860 --> 00:12:53,860
If you think on average, you know, it, an
allocator has 25 GPs, 3 funds per G.
269
00:12:53,860 --> 00:12:54,019
P.
270
00:12:54,019 --> 00:12:56,360
Each fund has 15 positions, give or take.
271
00:12:56,500 --> 00:12:59,394
I mean, that's over a 1000 portfolio companies.
272
00:12:59,394 --> 00:13:00,294
It's too many.
273
00:13:00,434 --> 00:13:04,215
And so we're happy to partner with somebody
who's willing to have a more concentrated
274
00:13:04,274 --> 00:13:06,035
portfolio and we seek that out.
275
00:13:06,035 --> 00:13:08,215
You want everybody's kind of best ideas.
276
00:13:08,514 --> 00:13:12,629
You're already diversified as an LP versus
versus within the fund.
277
00:13:12,710 --> 00:13:12,950
Yeah.
278
00:13:12,950 --> 00:13:13,450
Absolutely.
279
00:13:13,669 --> 00:13:17,110
You seem to have a bit of a contrarian view on
correlation between different asset classes.
280
00:13:17,110 --> 00:13:21,750
Our pre seed and seed funds correlated with S
and P 500, have you done any analysis in terms
281
00:13:21,750 --> 00:13:25,269
of, like, cross asset correlation and
diversification or lack thereof?
282
00:13:25,269 --> 00:13:26,710
I think it varies by strategy.
283
00:13:26,710 --> 00:13:30,334
If you're looking at late stage ventures,
companies are staying private longer.
284
00:13:30,334 --> 00:13:33,774
There absolutely tends to be a high correlation
between those companies in which you can get in
285
00:13:33,774 --> 00:13:34,595
public indices.
286
00:13:34,654 --> 00:13:36,355
And I think that's going to persist.
287
00:13:36,735 --> 00:13:39,934
The interesting things I think are, just the
supply and demand.
288
00:13:39,934 --> 00:13:44,149
So one of the interesting things that we saw
was a massive correction in late stage venture
289
00:13:44,149 --> 00:13:46,170
over this last growth investment cycle.
290
00:13:46,389 --> 00:13:49,610
As tech declined, late stage got hit really
hard.
291
00:13:49,750 --> 00:13:53,670
So many people pivoted at early stage, and
those valuations actually started to go up even
292
00:13:53,670 --> 00:13:54,230
in this market.
293
00:13:54,230 --> 00:13:56,389
A lot of dollars started to chase those
companies.
294
00:13:56,389 --> 00:13:59,785
We're paying attention to going on in the
public markets and making those trade off.
295
00:13:59,785 --> 00:14:01,384
So is it a better time to invest today?
296
00:14:01,384 --> 00:14:04,125
Is there better value in public securities?
297
00:14:04,345 --> 00:14:08,024
Small caps, for example, is it an area that
we've been excited about relative to what's
298
00:14:08,024 --> 00:14:09,225
going on in private equity?
299
00:14:09,225 --> 00:14:11,279
And how should we allocate our dollars when we
have excess
300
00:14:11,840 --> 00:14:17,920
moving to relationships with GPs, you guys are
in a lot of great funds and have have a great
301
00:14:17,920 --> 00:14:18,960
reputation in the space.
302
00:14:18,960 --> 00:14:21,200
How can GPs be better partners with Baylor?
303
00:14:21,200 --> 00:14:21,360
Yeah.
304
00:14:21,360 --> 00:14:24,639
I think one of the things we really look for
is, you know, obviously groups who are
305
00:14:24,639 --> 00:14:29,445
transparent, but more than that, they're
willing to share info and share intel and help
306
00:14:29,445 --> 00:14:30,325
us be in the flow.
307
00:14:30,325 --> 00:14:33,445
I think that's something that's really key in
the business that we're in.
308
00:14:33,445 --> 00:14:34,644
It's a game of information.
309
00:14:34,644 --> 00:14:37,924
And to the extent that we have GPs, we're
willing to be good shares.
310
00:14:37,924 --> 00:14:39,865
We seek to be good shares as LPs.
311
00:14:40,639 --> 00:14:44,879
And try to leverage that as we are making
investment decisions, you know, enabling us to
312
00:14:44,879 --> 00:14:49,360
ask better questions, but we we really wanna
have a a relationship with our GPs and, you
313
00:14:49,360 --> 00:14:50,480
know, that goes a long way.
314
00:14:50,480 --> 00:14:54,559
What is some valuable information or intel
you've gotten from GPs previously that's helped
315
00:14:54,559 --> 00:14:55,460
direct your investment
316
00:14:55,595 --> 00:15:00,075
going back even recently to what was going on
with the regional banking crisis and Silicon
317
00:15:00,075 --> 00:15:02,634
Valley Bank in particular, just what are best
practices?
318
00:15:02,634 --> 00:15:03,355
What are people doing?
319
00:15:03,355 --> 00:15:05,535
And then you can share that knowledge with
other GPs.
320
00:15:05,995 --> 00:15:09,615
You know, if you're looking to bring in, you
know, secondary banking relation relationships.
321
00:15:09,674 --> 00:15:10,394
Who did you use?
322
00:15:10,394 --> 00:15:11,215
Who was helpful?
323
00:15:11,279 --> 00:15:15,460
Just one recent example, which was very
relevant just as we went through our portfolio
324
00:15:15,519 --> 00:15:19,920
and we're talking through exposures and what
people were facing and being able to bring that
325
00:15:19,920 --> 00:15:21,139
back to other GPs.
326
00:15:21,200 --> 00:15:25,865
Another example is we see a lot going on with
the underlying portfolio and being able to be a
327
00:15:25,865 --> 00:15:29,485
connector and broker of relationships,
connecting different GPs in our portfolio.
328
00:15:30,264 --> 00:15:34,925
If they don't know each other, trying to help
them establish a relationship and has resulted
329
00:15:34,985 --> 00:15:40,009
in M and A activity that's happened across our
portfolio, exits have happened as a result of
330
00:15:40,009 --> 00:15:40,330
this.
331
00:15:40,330 --> 00:15:42,970
So just using our seat to be a good share of
information as well.
332
00:15:42,970 --> 00:15:45,850
How do you vet the qualitative factors for GPs?
333
00:15:45,850 --> 00:15:47,389
What do you look for qualitatively?
334
00:15:48,009 --> 00:15:50,490
I think this is one that we've gotten better at
with time.
335
00:15:50,490 --> 00:15:52,894
You know, obviously, got the references that
they provide.
336
00:15:52,894 --> 00:15:55,794
We do a ton of work like everybody else on off
list references.
337
00:15:56,095 --> 00:15:59,455
More than that, we really wanna understand who
we're partnering with over the long term.
338
00:15:59,455 --> 00:16:00,835
We ask for personal references.
339
00:16:01,134 --> 00:16:02,095
We ask for a neighbor.
340
00:16:02,095 --> 00:16:05,820
We also ask for somebody who you've had a a
long term professional relationship with 20
341
00:16:05,820 --> 00:16:09,899
plus years, a friend from college, just to try
and understand who the person is, you know, how
342
00:16:09,899 --> 00:16:10,860
they've changed over time.
343
00:16:10,860 --> 00:16:13,820
Because ultimately, we think you are who you
are, and so just trying to get a better
344
00:16:13,820 --> 00:16:15,340
understanding of who we're partnering with.
345
00:16:15,340 --> 00:16:20,154
And we really like to find, a chair I feel like
some of the better investors in our portfolio
346
00:16:20,154 --> 00:16:23,754
have a chip on their shoulder, and the reasons
vary, but really wanting to invest with
347
00:16:23,754 --> 00:16:27,195
somebody who's motivated by something other
than just pure dollars because we think that's
348
00:16:27,195 --> 00:16:29,134
gonna allow you to win over the long term.
349
00:16:29,434 --> 00:16:30,600
Congratulations, Tena.
350
00:16:30,600 --> 00:16:34,519
Capital podcast listeners, we have officially
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351
00:16:34,519 --> 00:16:35,500
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352
00:16:35,799 --> 00:16:40,039
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353
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00:16:44,315 --> 00:16:48,254
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356
00:16:48,315 --> 00:16:49,203
Thank you for your support.
357
00:16:49,203 --> 00:16:49,283
Do you use any third party reference in
companies?
358
00:16:49,283 --> 00:16:49,355
Any any resources to help in your referencing?
359
00:16:49,355 --> 00:16:57,000
We don't.
360
00:16:57,240 --> 00:17:01,399
So everything, and how many how many on
average, references are you doing on a
361
00:17:01,399 --> 00:17:02,200
potential manager?
362
00:17:02,200 --> 00:17:04,539
The one we just did, I think we did 25.
363
00:17:05,000 --> 00:17:06,059
It was a new relationship.
364
00:17:06,119 --> 00:17:08,359
We will not do that many with each round.
365
00:17:08,359 --> 00:17:09,960
It'll go down over time.
366
00:17:09,960 --> 00:17:12,585
So we're pushing through 2 commitments right
now.
367
00:17:12,585 --> 00:17:15,865
1 is with a manager where we've made 5
commitments at this point.
368
00:17:15,865 --> 00:17:18,765
Another one is a fresh manager, and so we had
more on the new relationship.
369
00:17:18,825 --> 00:17:22,744
When you're doing it for a second, third, 4th
time commitment, are you looking to make sure
370
00:17:22,744 --> 00:17:27,359
that those qualitative factors are staying
constant in terms of the hard work, the value
371
00:17:27,359 --> 00:17:27,599
add.
372
00:17:27,599 --> 00:17:30,820
What are you what are you trying to assess out
from the re ups, references?
373
00:17:30,960 --> 00:17:34,019
Speaking to the one that we just did, and I
think it's a really good example.
374
00:17:34,480 --> 00:17:34,720
Yes.
375
00:17:34,720 --> 00:17:38,244
It's making sure they stay constant, but it's
also kind of trying to better understand the
376
00:17:38,244 --> 00:17:41,765
next generation that's gonna take over the
firm, succession planning, who are the rising
377
00:17:41,765 --> 00:17:42,244
stars.
378
00:17:42,244 --> 00:17:45,684
We will spend more time talking to portfolio
companies and just making sure that they're
379
00:17:45,684 --> 00:17:49,125
still getting the same, you know, level of
service that we would expect from when they
380
00:17:49,125 --> 00:17:53,460
were smaller, making sure things aren't
changing as the funds generally tend to get a
381
00:17:53,460 --> 00:17:54,900
little bit bigger with each iteration.
382
00:17:54,900 --> 00:17:58,180
So wanting to make sure that we feel like the
firm culture and dynamics are staying
383
00:17:58,180 --> 00:18:02,579
consistent, but also using it as a way to vet
some of the rising stars within each firm.
384
00:18:02,579 --> 00:18:04,740
We spoke previously, your big fan of spinouts.
385
00:18:04,740 --> 00:18:05,744
Why do you like spinouts?
386
00:18:05,904 --> 00:18:10,224
Some of the similar reasons why we like funds,
you know, 1 through 3 and smaller for venture.
387
00:18:10,224 --> 00:18:12,305
We think they tend to be smaller.
388
00:18:12,305 --> 00:18:16,944
They tend to be hungry and loyal to LPs that
come in, which helps us maintain our allocation
389
00:18:16,944 --> 00:18:18,990
as we grow with the firm over time.
390
00:18:18,990 --> 00:18:22,609
Even if you don't get all the way to pulling
the trigger and making a formal commitment,
391
00:18:22,910 --> 00:18:27,470
it's a great way to vet and really understand
the intel of what's going on at the prior
392
00:18:27,470 --> 00:18:31,950
platform and what's going on to the industry,
why they moved, what they think their angle is,
393
00:18:31,950 --> 00:18:35,125
and the gap that they're filling, because there
tends to be some type motivation that helps
394
00:18:35,125 --> 00:18:36,085
them launch that firm.
395
00:18:36,085 --> 00:18:39,924
For those reasons, it tends to be a a
beneficial underwriting process even if we
396
00:18:39,924 --> 00:18:41,125
can't get to the finish line.
397
00:18:41,125 --> 00:18:44,964
And oftentimes, I think if we don't get there,
it's usually tends to be more often than not.
398
00:18:44,964 --> 00:18:49,045
We don't feel like there's been a well defined
framework or culture for how they're gonna
399
00:18:49,045 --> 00:18:53,950
build it the firm, you know, into a long term
generational firm, it tends to feel more like
400
00:18:53,950 --> 00:18:53,960
deal makers
401
00:18:53,960 --> 00:18:53,999
and transactional versus a long term approach.
402
00:18:53,999 --> 00:18:54,060
And I think sometimes people underestimate the
value of the platform.
403
00:18:54,060 --> 00:18:54,082
And so trying to
404
00:18:54,082 --> 00:19:05,535
really sniff out the attribution and what that
platform brought versus starting a new flag.
405
00:19:05,535 --> 00:19:07,317
I think those are some of the reasons why we
ultimately don't
406
00:19:07,317 --> 00:19:07,417
get there on every spin out that we review.
407
00:19:07,417 --> 00:19:07,561
You mentioned assessing out kind of attribution
for the success of the managers.
408
00:19:07,561 --> 00:19:07,595
What else do
409
00:19:07,595 --> 00:19:08,835
you focus on when it comes to diligence and
spin out?
410
00:19:16,710 --> 00:19:19,929
I think oftentimes it tends to be not finite
enough.
411
00:19:20,069 --> 00:19:24,329
Where we've gotten really comfortable is when
they have a very tight box that's very directed
412
00:19:24,390 --> 00:19:27,589
at what they can do, what they cannot do, what
they're good at, what they're not good at.
413
00:19:27,589 --> 00:19:31,704
Oftentimes, to be candid, it's a lot easier if
somebody has a prior book of business that they
414
00:19:31,704 --> 00:19:33,265
can point to and say, here's what we did.
415
00:19:33,265 --> 00:19:35,544
We're gonna continue this, or here's what we
did.
416
00:19:35,544 --> 00:19:36,024
Here's what worked.
417
00:19:36,024 --> 00:19:37,784
We're gonna only do this going forward.
418
00:19:37,784 --> 00:19:41,964
It makes it a bit cleaner for us because, I
think we're really good at evaluating data.
419
00:19:42,105 --> 00:19:45,429
It's much harder for us to just say, oh, we
think they're gonna get it right.
420
00:19:45,429 --> 00:19:49,269
I I don't think we've done a good job at that
in the past, and so we wanna stick to what
421
00:19:49,269 --> 00:19:53,029
we're great at and we're great when we have a
set of data to value, and that's where we tend
422
00:19:53,029 --> 00:19:53,589
to lean in.
423
00:19:53,589 --> 00:19:56,295
You've been at Baylor's endowment for 16 years.
424
00:19:57,095 --> 00:19:57,273
What do you wish you knew when you got started?
425
00:19:57,273 --> 00:19:57,282
I love this question.
426
00:19:57,282 --> 00:19:57,322
I wish that I would have asked more questions
in the beginning, and I wanna expand on that a
427
00:19:57,322 --> 00:19:59,835
little bit because it's not just asking
questions.
428
00:20:08,670 --> 00:20:12,750
Of the things I love about this job is we have
exposure to some of the best in the business.
429
00:20:12,750 --> 00:20:13,321
People who have really
430
00:20:13,321 --> 00:20:13,412
deep domain expertise and oftentimes people
come in.
431
00:20:13,412 --> 00:20:13,447
And, you know,
432
00:20:13,447 --> 00:20:21,525
as we all do when we're passionate about a a
subject, you start really deep in the weeds.
433
00:20:21,525 --> 00:20:23,205
And they don't break down the fundamentals.
434
00:20:23,205 --> 00:20:26,964
And so when I'm getting started early in my
career, I wish I would have had the courage to
435
00:20:26,964 --> 00:20:30,565
raise my hand and be like, can you break this
down for me like I'm a 1st grader?
436
00:20:30,565 --> 00:20:32,025
Because I'm not getting it.
437
00:20:32,325 --> 00:20:34,505
I feel much more comfortable doing that today.
438
00:20:34,644 --> 00:20:38,859
And I feel like oftentimes when you're, you
know, having that to and people are so happy to
439
00:20:38,859 --> 00:20:40,700
teach about something that they're passionate
about.
440
00:20:40,700 --> 00:20:44,319
So there's a lot that you can learn when you
come in and just break down the fundamentals.
441
00:20:44,460 --> 00:20:48,380
And I think you're sitting in that seat, you
feel like, should I know this and people coming
442
00:20:48,380 --> 00:20:51,339
in or feeling like, well, they probably know
this, so I don't wanna, you know, back it up
443
00:20:51,339 --> 00:20:52,779
too far because that's not productive.
444
00:20:52,779 --> 00:20:57,815
And so just helping whoever is giving you the
pitch or talking about the idea, understand
445
00:20:57,954 --> 00:20:59,180
where you're at and where you need to be to
understand the fundamentals of how this
446
00:20:59,180 --> 00:20:59,214
business makes money, how this strategy works,
why it's differentiated so you can ask better
447
00:20:59,214 --> 00:20:59,223
questions down the road.
448
00:20:59,223 --> 00:20:59,974
And you started at the Baylor endowment
449
00:21:09,580 --> 00:21:11,660
several months before the financial crisis.
450
00:21:11,660 --> 00:21:12,390
So tell me about that.
451
00:21:12,390 --> 00:21:12,465
So I started in May of 2008.
452
00:21:12,465 --> 00:21:12,646
I was at a multifamily office for a couple of
years prior to that and came into
453
00:21:12,646 --> 00:21:13,450
the institutional investing realm, very green.
454
00:21:22,315 --> 00:21:27,835
And, 1 month later, the CIO left, like, 6
months after that, the number 2 in the seat
455
00:21:27,835 --> 00:21:30,255
left, and we had quite a bit of turnover
thereafter.
456
00:21:30,315 --> 00:21:34,734
So it was a tumultuous time in house, as well
as just everything going on.
457
00:21:35,160 --> 00:21:37,115
With the GFC in hindsight, it was probably the
best thing that could have happened for my
458
00:21:37,115 --> 00:21:37,157
career because I'm getting all of the lessons
learned from the global financial crisis,
459
00:21:37,157 --> 00:21:38,940
seeing everything break.
460
00:21:46,964 --> 00:21:49,444
I don't have any attribution for making any of
these decisions.
461
00:21:49,444 --> 00:21:49,605
Right?
462
00:21:49,605 --> 00:21:52,565
Like, I could just kind of sit back and watch
and be like, oh my gosh.
463
00:21:52,565 --> 00:21:56,724
This is terrible, but it was really good
lessons learned for, you know, what not to do
464
00:21:56,724 --> 00:21:57,444
going forward.
465
00:21:57,444 --> 00:22:02,920
You guys have consistently beat the large
endowments, how would you attribute Baylor in
466
00:22:02,920 --> 00:22:05,080
in Texas, beating the large Ivy League
endowments?
467
00:22:05,080 --> 00:22:06,440
What's the secret issue success?
468
00:22:06,440 --> 00:22:06,759
Yeah.
469
00:22:06,759 --> 00:22:09,400
I mean, listen, it's an honor to be in that
crowd.
470
00:22:09,400 --> 00:22:09,559
Right?
471
00:22:09,559 --> 00:22:11,654
They've been crushing it for a while.
472
00:22:11,654 --> 00:22:13,335
Of the benefits that we have again is our size.
473
00:22:13,335 --> 00:22:17,335
With a $2,000,000,000 endowment, we can do a
lot of things that a $30 plus $1,000,000,000
474
00:22:17,335 --> 00:22:18,455
endowment cannot do.
475
00:22:18,455 --> 00:22:19,815
So we use size to our advantage.
476
00:22:19,815 --> 00:22:24,455
We use it, you know, are able to be nimble and
rotate capital around in a a quicker way than I
477
00:22:24,455 --> 00:22:28,269
think most of our peers You know, also I think
we have the benefit of sitting here in Waco,
478
00:22:28,269 --> 00:22:28,769
Texas.
479
00:22:28,829 --> 00:22:32,750
We're not constantly in the flow in terms of,
you know, what's going on at the coast or
480
00:22:32,750 --> 00:22:33,230
different meetings.
481
00:22:33,230 --> 00:22:37,309
We're a little bit isolated, and so it allows
us to kind of go on the road, which we travel
482
00:22:37,309 --> 00:22:41,954
quite a bit, come back, sit with our thoughts,
And then we have the freedom to be contrarian
483
00:22:42,095 --> 00:22:46,174
and come to a conclusion that we think is right
for the portfolio, make an investment decision
484
00:22:46,174 --> 00:22:49,454
and aren't constantly reminded of what
everybody else is doing that we're not when we
485
00:22:49,454 --> 00:22:50,974
go to a cocktail party or to a dinner.
486
00:22:50,974 --> 00:22:55,430
And so I think that works in our favor because
we are a little bit isolated on that note, it
487
00:22:55,430 --> 00:22:59,829
allows us to to maybe think a little bit more
freely without noise coming in and making us
488
00:22:59,829 --> 00:23:02,150
question the calls that we're making that might
be different.
489
00:23:02,150 --> 00:23:04,178
How much does governance in your IC play into
your
490
00:23:04,178 --> 00:23:04,206
structural advantages?
491
00:23:04,206 --> 00:23:04,234
It's huge.
492
00:23:04,248 --> 00:23:04,347
So we've really been, you know, we
493
00:23:04,361 --> 00:23:05,140
we've view our Baylor
494
00:23:09,944 --> 00:23:12,825
executive investment committee as just a
function of our team.
495
00:23:12,825 --> 00:23:15,784
And so without them, we wouldn't be able to be
as nimble, as I mentioned.
496
00:23:15,784 --> 00:23:19,625
I mean, they've been very flexible with
allowing us to jump on a call to get the
497
00:23:19,625 --> 00:23:23,424
recommendations that we need for a co
investment or to execute a strategy in between
498
00:23:23,424 --> 00:23:28,090
the quarterly cadence We also have domain
experts on our board that serve as reference
499
00:23:28,090 --> 00:23:32,410
calls for us, connect us to people within
different strategies that we're vetting, and
500
00:23:32,410 --> 00:23:35,289
they help us set asset allocation and talk
through those different things.
501
00:23:35,289 --> 00:23:39,605
Our board has been instrumental in our success,
and we've also gotten to a really nice cadence
502
00:23:39,664 --> 00:23:42,065
of when people roll on and roll off.
503
00:23:42,065 --> 00:23:45,345
And we've got this really nice stack of
institutional knowledge that's been there for
504
00:23:45,345 --> 00:23:48,644
some time and in place, and that continuity has
been really key to our success.
505
00:23:48,785 --> 00:23:52,865
What would you like our our listeners to know
about you, about Baylor University, about
506
00:23:52,865 --> 00:23:54,420
anything else you'd like to shine a light
507
00:23:54,500 --> 00:23:56,660
feel really blessed to be in the seat that
we're in at Baylor.
508
00:23:56,660 --> 00:23:57,799
It's my alma mater.
509
00:23:58,259 --> 00:24:00,740
Our investment team, 4 of us graduated from
Baylor.
510
00:24:00,740 --> 00:24:04,900
And I think that, you know, being alums, being
from the Waco area, it just gives us a nice
511
00:24:04,900 --> 00:24:07,859
passion for what we're doing and helps us stay
really aligned with the mission of the
512
00:24:07,859 --> 00:24:08,359
university.
513
00:24:08,734 --> 00:24:11,775
At the end of the day, at the highlight of all
of this, just kind of bringing it back to the
514
00:24:11,775 --> 00:24:14,035
core of what we do and why we do it.
515
00:24:14,095 --> 00:24:18,174
We want every endowment out there to win and
generate quality returns because it just means
516
00:24:18,174 --> 00:24:20,255
more students are gonna get a great education.
517
00:24:20,255 --> 00:24:23,779
And I just wanna bring it back to that because
the reason why we all do this, and that's why
518
00:24:23,779 --> 00:24:26,820
it's really important to highlight the issues
that you're addressing on the asset allocation
519
00:24:26,820 --> 00:24:30,339
and just make sure we're all thinking about the
risk that's out there to generate the best
520
00:24:30,339 --> 00:24:34,052
returns because as these pools of capital get
bigger, it just means more people get to go to
521
00:24:34,052 --> 00:24:34,244
school.
522
00:24:34,244 --> 00:24:36,805
Well, as always, over performance over long
periods of
523
00:24:36,805 --> 00:24:36,852
times is rarely random.
524
00:24:36,852 --> 00:24:36,994
So I really enjoyed unpacking the strategy and
learning more about Baylor.
525
00:24:37,006 --> 00:24:37,030
Thanks for
526
00:24:37,030 --> 00:24:37,077
jumping on the podcast.
527
00:24:37,077 --> 00:24:37,089
Alright.
528
00:24:37,089 --> 00:24:37,113
Thanks, David.
529
00:24:37,113 --> 00:24:37,625
I enjoyed
530
00:24:45,204 --> 00:24:45,551
it.
531
00:24:46,831 --> 00:24:47,071
For
532
00:24:47,071 --> 00:24:50,851
more ideas on how to raise venture capital in
this market, make sure to subscribe below.
