Marc Boatwright

@CIO_Baylor Thanks, Dave. Good quote. Curious to think about shorter duration returns (which can marginally increase spend rate) vs long-term returns (eg decades) which increase the corpus for future generations.

I like this Peter Thiel quote… “This is why I think competition is always this very two edged thing.  When you compete ferociously, you will get better at that which you’re competing on but you will always narrow your focus to beating the people around you.  And it often comes at this very high price of losing sight of what is more important or perhaps more valuable.” In endowment land, the competition is definitively NOT between schools, but versus the internal team itself to increase the endowment’s dollar value. Students can’t pay for school with return percentages! Returns are just a means to get to a larger funding pool to enable more scholarships. That’s why challenging oneself, thinking outside the box, and ignoring the naysayers is so important!

@CIO_Baylor Then likely smaller managers where you can have influence? Lots more work to source and assess….More alpha if your selection process is effective…

@CIO_Baylor All good points. But at a relatively small endowment like Baylor, do you have ability to drive terms? Seems like managers just give you the answer you want to hear, but the structures still allow them wide latitude to do what they want when it suits them.

We’d also like to applaud another manager of ours for using new fund capital to buy a company from a prior fund…with associated sign-offs from both fund LPACs. If the company fits the mandate and risk-reward of the new fund, use the capital you’ve already raised. We’d like to see more of this from private fund managers…don’t default to a continuation vehicle. There are, of course, times when a continuation vehicle makes sense…and it can be a positive proposition to LPs. The manager mentioned above did a CV 5+ years ago that worked out wonderfully. But, given that the industry is sitting on massive dry powder, how about using that to provide liquidity to LPs, rather than NAV loans, CVs, or other. Going forward, we will be asking private GPs for (1) terms of any CVs they inked (to see how LPs were treated in the deal), and (2) for their advance thinking/policy on creating liquidity for LPs (we want that to be strategically planned rather than reactionary). Such will be part of our future capital allocation decisions.

@CIO_Baylor @s2ref Underlying issue is PE fee structures. No incentive to cut under-performing assets early and crystallize losses. Fund managers keep the carry on the AUM and play the option value on the asset if it turns around.

We didn’t get too into the specifics actually, but I don’t think that is what is important. What matters is that the manager is continually reassessing the company vs its go-forward return potential. In other words, instead of trying to get the company to a particular stage or revenue/ebitda run-rate and then looking to exit, be constantly looking to exit and retain the company only if there is conviction that go-forward returns will outperform the bid in hand. The private market mindset is inherently one of optimism, hope, potential, can-do, which is very positive. The downside of private markets, however, is that there is little discipline enforced by the environment. Mistakes in leadership, operations, go to market, product fit, etc aren’t punished with immediate 50%+ drawdowns or loss of capital. On one hand that’s beneficial as it gives the company more runway to correct; on the other hand, the “solution” is always more time. But that additional time has a high opportunity cost associated with it. As Sam Zell said, “I have always believed that every day you choose to hold an asset, you are also choosing to buy it. Would I buy our buildings at the price Blackstone was quoting? Nope.”

In a manager meeting today, one of our favorites unveiled a “liquidity policy”. How many private managers have such? Shouldn’t they all?!! I suspect that going forward, GPs with strong DPIs will be rewarded at the expense of bottom DPI performers. It is in the business’ best interest to reward LPs with distributions. The energy industry has experienced a similar shakeout and the market now bestows higher multiples on those energy firms that best distribute capital to investors. We’d like to see more of such “liquidity policy” thinking from the private investment community. We all know the economy and, therefore, the financial markets are cyclical. Since those cycles are unknown, but E&F allocators depend on distributions to fund scholarships/programs, we’d like to see as much or more thought given to exits as initial investments and building the portfolio company. And this is from an endowment that is not facing distribution issues (Baylor’s private allocation % has DROPPED 10 percentage points in the past 2 years and is headed lower due to continued distribution activity). It simply seems savvy to not leave one’s business up to the uncontrollable vicissitudes of the market.

@CIO_Baylor Thanks, Dave. Good post. I’ve found my undergrad major in philosophy has been helpful in this regard. Constant questioning. At our endowment, we recently considered a cultural mindset toward liquidity on the operating side of the university clashed with investment mindset…

I’m a fan of (constant) tinkering. There’s something about moving puzzle pieces around that unlocks new ways for them to fit together. Yesterday at an investment committee meeting we discussed a new approach to two different “trades” that we’ve previously done. Today, I contemplated a new metaphor for an approach that we’re implementing…it opened up new thoughts about the portfolio. For those in the allocation space, keep tinkering, thinking, puzzling over your book. My experience is that doing so makes you better!