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00:00Higher ed, it's a space that's been under attack for the last year, and the business model is being upended.
00:07How is this affecting your role overseeing the endowments and how you think about managing that pool of capital?
00:14Amy, let's start with you.
00:15Sure. Definitely business models are under scrutiny.
00:20We are about 25% of the university's revenue.
00:24One thing I'd say that's important, higher ed is often lumped together, but actually the business models are quite different across different universities.
00:35So there are universities with much higher endowment support.
00:39The flip side of that is we have had relatively high research support, government funding.
00:48We have sports funding.
00:50So everybody looks a little different.
00:52But does this make sort of the endowment piece all the more important?
00:56We cannot slow down because we're a very important source of independent revenue.
01:03And also, we need to preserve liquidity because the operating model is more uncertain.
01:09So we have the unenviable task of generating higher returns, but also having more capital available as needed.
01:19So that can be tricky.
01:21Jane, how do you see things?
01:23Right. I mean, I agree with everything she said in the sense that we are under a lot of pressure in terms of the business model.
01:31We are required.
01:33We are 19% of the operating budget.
01:34So not as bad as, say, Princeton or Harvard, which are over 50%.
01:42And that is quite challenging.
01:45We also have a lot of research funding.
01:47So that puts our business model under pressure.
01:51We do need to ensure that we continue to have high risk adjusted returns.
01:55But nevertheless, we need to have liquidity to ensure that we can backstop the university if there's any issues.
02:01So have you had to adjust your portfolio at all this year, given the liquidity needs?
02:06I mean, what have you had to do?
02:07I've actually raised some cash.
02:09I think we've been pretty clear about that, which in a very up market, you know, is not the ideal thing.
02:15We've tried to barbell a little bit, so we have a little more cash.
02:19And we're continuing to drive towards higher return asset classes.
02:24But it is trying to hold two things that are usually in opposition.
02:30Liquidity generally is a good thing, but you get paid for illiquidity.
02:35So we're just being very, very intentional, trying very.
02:41And it helps to have rates a little higher.
02:43It's not as painful as when cash yielded zero, but we're a very sharp pencil about what we think we need, where we can get liquidity, and how to make sure that we're exactly on that edge.
02:59Jane, what about you?
03:00Are you also holding more cash these days?
03:02Well, the first challenge is that our private portfolio has been cash flow negative for about four years now.
03:07So that has put already a significant amount of pressure on all liquidity.
03:10So we try to hold about 12 months of cash available, and that is just keeping, ensuring that we always have that extra cash and trying to figure out where we're going to get it has always been the challenge.
03:23So I wanted to drill deeper into the private sort of portfolio.
03:28I mean, as you said, a lot of cash liquidity issues there, but at the same time, you're under pressure to increase returns.
03:34So, I mean, Amy, how are you thinking about that portion of your allocation?
03:39I mean, we still believe in higher returns in private asset classes.
03:45I think there are two components to that.
03:47One is the middle market and smaller to mid-sized companies, which I think has been said a number of times.
03:55The public markets have gotten more and more narrow.
03:57So, ironically, retail is coming into private equity.
04:01Private equity is becoming more publicly available.
04:04So it seems like a big circle, but we still believe that the company is in the middle of their life cycle, not huge, not tiny, or a great place to invest because it's easy to grow earnings.
04:17And that really you've kind of got to go through.
04:19There's a lot more opportunity via private equity and, of course, venture capital and innovation.
04:24So we've got to stay there, but there's no question that the distributions have been low relative to current NAV for the last three to four years.
04:37So you model what you expect.
04:39Then what you expect doesn't happen.
04:41You have to kind of...
04:43Have you been active in the secondary market?
04:46We've sold a little bit in the secondary market.
04:48We're more in the real asset space.
04:52I think the flip side of a lot of liquidity, retail money coming in and big evergreen funds, there is more liquidity in the secondary market.
05:00And I think that is helping.
05:03But you usually, you know, you've got to be careful and the pricing is erratic.
05:09Jane, how about you?
05:11So we believe that you can generate 300 to 400 basis points of that performance from your private portfolio.
05:18So we've actually built a, you know, a relatively large private portfolio.
05:22That, unfortunately, has not been the case for the past several years.
05:25That's been a little bit...
05:25Are you changing anything then?
05:26That's a little painful.
05:27I mean, we're long-term investors.
05:28We're always trying to think what's happening 10, 20, 30 years out.
05:31So I think it's hard to...
05:34First of all, it's unknowable.
05:36We do believe that still holds true.
05:38It's hard to continue to see how the markets can have these returns that they've had.
05:43We said that after the first year.
05:45We said that after the second year.
05:46Now we're in the third year.
05:47So it continues to...
05:49We'll see what happens next.
05:51And then in terms of trying to find liquidity, we're looking at all sorts of different ways
05:54and absolutely looking at the secondary markets.
05:59You know, everybody's looking for lots of different ways to do it,
06:01whether it be Nav loan, secondary markets, etc.
06:03The secondary markets have continued to become much more liquid, which is fantastic.
06:08We hope that continues to improve and that will just make, I think,
06:12these trimming and pruning of portfolios just much more efficient and effective,
06:16just even on doing it on a regular basis.
06:18How do you see the push towards retail and sort of democratization of P.E. changing the industry?
06:25Yeah, more money is usually not a...
06:28It doesn't drive returns higher, right?
06:29So if more capital comes into a space...
06:31Well, probably good for us, but maybe not good for...
06:34I think it may shift where we focus.
06:36So my expectation is the retail money will come in at the higher end of the market
06:41in terms of, you know, larger funds, bigger deal sizes,
06:45which may mean we migrate down to middle market and even lower middle market.
06:51The one thing I would also say, though, is we talk about liquidity as you get money,
06:56but public markets also set prices.
06:59And I think it's really important that price discovery is really done by public markets.
07:07And the more thin the markets get, the more narrow the markets get,
07:11the worse, I think, the broad-based pricing.
07:15The privates are a derivative of public markets.
07:17So I think it's really important that the public markets stay robust and healthy.
07:22And capital coming out of public markets going into private markets will make them more money.
07:28But it's not clear to me that that really helps the pricing of risk.
07:32The concept of this, you know, private markets being derivative
07:35almost seems to be becoming more and more disconnected.
07:37You're seeing some of these companies trading at, I don't know, 26 times revenue.
07:41I mean, how does that make sense?
07:42And you're just kind of, when those actually go public, are you actually going to get paid?
07:46And we're starting to see the public markets opening up a little bit.
07:49And so you're, you know, some of them actually go up.
07:51Some of them actually don't go up.
07:53And they're trading below their last several rounds.
07:55And that's actually tricky.
07:57So zooming out a little bit, I mean, you both invest across the globe.
08:02I mean, as you look at not just private markets but public markets,
08:05I mean, where, how are you viewing, and particularly the U.S.,
08:09given the run-up that we've seen in stocks,
08:12how are you thinking about the U.S. versus the rest of the world within your allocations?
08:17Do you want to go first?
08:18So we, so first of all, we invest primarily through managers,
08:25and we're thematic investors.
08:27So it might be a geographic theme or it might be just a, you know,
08:30some sector theme, whatever the case may be, and whatever that sector plays out.
08:34But, you know, one of the things we talked about this morning was the corporate,
08:37you know, revolution in Japan.
08:39That's been interesting.
08:40So we would spend time talking to different managers in Japan
08:43and finding out what parts of the market they're playing
08:46and whether that might be something interesting for us to do there.
08:49Those are the types of things.
08:50Any other sort of emerging markets that you've dabbled in?
08:55We've done quite well in Argentina.
08:57And what have you been doing there?
08:58We have a manager who's done a lot of credit in that space
09:01and been very successful for us.
09:04So that's worked out.
09:05What about you, Amy?
09:06I mean, we're pretty committed to staying global.
09:09Interestingly, the U.S. markets are up.
09:10The dollar's been a little weaker, so it hasn't been all bad to be outside the U.S. this past year.
09:15I think as an equity investor, we're looking for earnings growth.
09:24And I think there will be good growth in other parts of the world in addition to the U.S.
09:30Which ones in particular are you looking for?
09:32Well, it's interesting.
09:33We've been mostly focused on Asia.
09:35You know, I think Europe has a lot of potential.
09:38It's not as highly valued as certainly the U.S.
09:43And I'm intrigued with emerging markets and places like Africa and the Middle East,
09:49which have, you know, that's like probably not going to be a huge percentage of the portfolio.
09:55But the demographics are positive in many ways.
09:58There's a lot of infrastructure potential.
10:00So there's a lot of risk, unquestionably.
10:03And especially in Africa with debt burdens as high as they are, it's a little tricky.
10:06But I think we are very long-term capital, and we should be able to at least be looking at parts of the world
10:15that, you know, may have their time in this proverbial sun.
10:22One of the things we're concerned about, though, is when you said demographics, right?
10:25And I think one of the things as we look at this AI revolution and robotics,
10:30that may actually turn everything on its head, right?
10:33So where once we thought that India had this great demographic story,
10:36maybe having a larger population could be a problem.
10:41And having a smaller population or not a growing population like Japan
10:44might actually benefit from robotics and AI in advance of some of these larger countries,
10:50higher population countries.
10:52What about, I guess, the U.S. public markets and particularly, you know, the Mag-7?
10:56I mean, how are you thinking about navigating investing in, you know, the biggest market in the world?
11:03You know, Yi Shen, who was here, is on my board.
11:08And I have real, in some ways, concerns about the growth of passive investing
11:15in the sense that, you know, capital allocation happens when people make decisions about where to invest.
11:20But on the other hand, I have found that we're structured, as an endowment with active managers,
11:26most of them are not as long the obvious Mag-7.
11:31So what I've found is we kind of tend to be structurally short, those kinds of names.
11:36And a way to address that is through index funds.
11:41So I think...
11:41Have you been doing more in the indexing?
11:43We've been doing more of that.
11:44I mean, I'm going to say we're indexing the whole portfolio, but at the margin, you know,
11:48to have a plug in a highly liquid, low-fee vehicle, I think it has been not a bad idea
11:59in particularly large cap or the spread.
12:01It's really hard to beat the market.
12:03I've seen statistics that even the average endowment, let alone the average fund,
12:09it's really been hard to beat large cap, the index.
12:12Now, that could change, and I do think higher rates make, you know, it's less of a rising
12:18tide and, you know, the boat matters.
12:21But I think for some purposes, just keep it simple.
12:29These are big companies.
12:32And active managers, like, you're not going to pay someone $2.20 to buy Google.
12:37Like, so they just feel like that's not adding value and probably isn't.
12:40So, I mean, I think we're all dramatically underweight, the Mag 7, because of that,
12:47because of our managers, and they're not investing in those big companies.
12:50And so that's been a problem for a lot of our returns, I think, for the past several years.
12:54The way we address it is by, again, this thematic thinking.
13:00And if it's, you know, if we think the hyperscalers are really important, then we would maybe add exposure
13:06specifically to them, so that could be those, you know, some of those businesses.
13:12Or if we're really focused on our AI team, adding exposure just directly and kind of overweighting those
13:20because we're so underweight.
13:22Mm-hmm.
13:23I mean, so we've talked about your sort of investing and return goals.
13:26I wanted to ask how you think about balancing that mission with calls for increased transparency
13:34around the endowment, particularly around sort of political, ethical lines, including, you know,
13:40calls for divestment in some cases.
13:42You know, Jane, do you want to take that?
13:44Yeah, sure.
13:45So we sign agreements with all of our managers that they don't disclose our name
13:50and we don't disclose theirs.
13:52And so, you know, when the students come, and not just students, but whoever asks to understand
13:57what's in our portfolio, there's not really something to disclose.
13:59And you've engaged directly with them.
14:00Yes.
14:01Yes.
14:01We had dozens of meetings with students, alumni, staff, faculty over the past several years,
14:08basically trying to explain what an endowment does, since I think most people don't really
14:12understand how they actually work.
14:15And then, you know, they are obviously asking for transparency about exactly what we're invested
14:19in, which we cannot give.
14:21But there's this assumption, because we don't actually give direct names, although you can,
14:2713F, our portfolio, you can see our direct names specifically.
14:31We always show people, and we show the students, here's how you actually run a 13F, here's how
14:36you see what we have that we own directly.
14:37You'll see that.
14:38And then you'll know that we're not actually investing in, I don't know, genocide.
14:43They're always like, you're investing in genocide.
14:44I'm like, why would you think that's something that we would do?
14:48I mean, that's an interesting, just that assumption is strange.
14:52But so we do try to engage, and we try to communicate.
14:57We try to use it as an opportunity to explain who we are, what we do, how we're not different
15:01from them, how we actually have values, ethics, and how we try to utilize that as we make investment
15:09decisions on a daily basis.
15:11Amy, how are you thinking?
15:12Well, I think, for example, Brown's done a great job, so we've copied a lot of what
15:15they've done.
15:15But I think engagement is critical.
15:17We are educational institutions, and meeting with students particularly, but also faculty
15:23is important.
15:25We are also competing in a very difficult space, so we're not going to disclose everything.
15:36But I think focusing on the values and the purpose of the endowment, and helping to reassure
15:43people, students particularly, that we're not just willy-nilly without any ethical lens.
15:50The other thing that I find interesting with the younger generation is their theory of
15:55change.
15:56So what do you want to see happen, and are the capital markets the best way to effect
16:04that change?
16:05This was very evident in the climate discussion.
16:09And often students benefit from taking a step back and trying to think, you know, is the
16:17public policy a better, is the government a better actor in this space?
16:21Is divestment the best tool to achieve what your goals are, and even what are your goals?
16:27So I find that conversations can be quite robust.
16:30But the kids turn over every year, so it's just inherently a constant thing.
16:37But that's...
16:37But is that going to be part of your life?
16:39That's your job.
16:40Yeah, you know, I mean, these are young people and a lot of young women, and I feel that
16:45we are role models, and I teach a class.
16:48I mean, you know, it's a great space to meet kids and talk to them, and they're passionate,
16:55and they're not disingenuous.
16:57I mean, they care.
16:58It's good they care, you know, but just help them think what's the best way to express
17:03that concern.
17:04And they often want us to divest the stock.
17:08Many, they, you know, give us these lists of stocks and say, we actually don't own any
17:10of these stocks.
17:11But that's actually not what they're trying to achieve, for the most part.
17:15They really want the university to make a public announcement that we're, you know, they're
17:20trying to make a public statement, and the university's not going to do that.
17:24And so this is kind of their approach to getting that done.
17:27But I think most of the discussion, as you said, is, like, if you actually believe this is
17:30important and you want to actually make change, this is probably not the place to do it.
17:34You need to go to Washington, talk to your congressmen, talk to their senators.
17:37That's actually what it's, what they're there for.
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