How to be a Great Investment for Great Investors | Jay Ripley, Jeremy Heer & Adam Kurkiewicz

Tim Hanson: Welcome to the stage. Jeremy Heer, the director of investor research and engagement at the University of Illinois Foundation. Jay Ripley, managing director at Global Endowment Management, and Adam K. Managing drivers is giving a hard time.

Adam and I go way back. Managing director at Wash, Investment Management Company. So gentleman and I had questions, but I was, steamrolled this morning by Bryce, who said he wanted to know next year, they're gonna be more or less venture capital funds rates than this year. Obviously, they're way down this year.

Jay: I would hazard a guess they'll probably be more next year just because there haven't been many this year. So it's been a tough fundraising environment as everybody's digesting what happened over the past 3 years.

Jeremy: Are we talking about more funds or more dollars or both?

Tim: It sparks his question. I I just do it a full.

Jeremy: Now, you and I talked about this earlier. Yes. And so, you know, I agree with him. There's gonna be more.

Jay: Adam, do

Tim: you agree?

Adam: Yeah. I think so. I think this was the year everyone was avoiding, whether it's startups that were avoiding raising capital, hoping for a better interest rate or capital market environment. Next year is the year where I think a lot of the people that have avoided raising capital startups or funds that invest in those startups are gonna have to come back to market. So I'd assume it's gonna be more.

Tim: I think a lot of people probably here are interested to hear you guys talk about investing, but I'm actually gonna take it in a slightly different direction, which is you guys I mean, maybe actually before I do that, maybe talk just slightly because you're all, I think, different flavors of institutional investing. And so maybe, Jeremy, starting with you, just talk a little bit about Illinois strategy, how you think about the world. I I think that context would be helpful for everybody.

Jeremy: Sure. University of Illinois Foundation is a 2 and a half $1,000,000,000 endowment style portfolio with a standard 5% payout rate, like pretty much everybody else in the endowment foundation world has. And we're meant to last forever, so it's a perpetual institution. So we can't just go out and buy the S and P. It doesn't work like that because S and P goes down, and we don't wanna to sell things when they go down.

We wanna sell them when they go up. So we end up with a portfolio that has an equity bias. We also have to have some other things in there to make sure that we have money good when things go bad, pretty much. Our asset allocation model is a little different than a lot of endowment and foundations that I've seen. Most of them tend to have buckets that they fill.

You'll have your public equity bucket, your private equity bucket, your real assets bucket, whatever. Right? All the buckets. We tend to not bucket managers or funds at all. We look at the exposures they're going to give us, and then we classify those.

Equities, rates, cash, credit, commodities to real estate. And then you sum that up, and then that's your asset allocation. And a dollar of equity is a dollar of equity, whether it's public, private. Right? I mean, we look at total portfolio liquidity when we're gonna be 90% private or anything like that.

Right? But in general, if you own shares of a company, you own shares of a company. And we're a long duration investor, so we tend to have patient capital. We're trying to concentrate capital on our best ideas, which means we tend to take bigger bites than you might think for a 2 and a half $1,000,000,000 pool. We're trying to limit the number of partners we have, which is which makes things kind of interesting too.

We wanna be we we wanna, you know, know what we own. Right? Know what you've got in your portfolio. I would say that there are a lot of E and F's out there that probably don't know what they've got in a lot of corners of their portfolio. Let's see.

We're a fairly new investment team with the CIO, only starting 18 months ago. And so it's kind of, been interesting. It's a it's a we're building, and so it's pretty exciting time. Yeah. And so, yeah, I'll show up now.

Next.

Tim: Jay Jay is a little different. Right? In terms of so, who masters you serve?

Jay: So the the firm I work for is called Global Endowment. We are, an investment office. We serve as the outsource CIO for small and midsize endowments and foundations. So

Jeremy: How long did it come did it take for you guys to come up with the name Global Endowment Management?

Jay: We like to be very specific as to what we are. And so Jerry, I I is not our suit. Oh.

Jeremy: And, you

Jay: know, for for, you know, pools of capital above 750,000,000, a 1000000000, those tend to be insourced and run by teams like, you know, Jeremy and Adam's teams. Below 750,000,000, it tends to make sense to outsource to a provider, whether to to a consultant on a non discretionary basis or to someone like JEM who are out by us on a fully discretionary basis. And so we've got about 9,000,000,000 of of OCIO assets, 40 odd clients around the country, a couple in Asia as well. Very similar approach to what Jeremy said. We use a factor framework.

Our our team are generalists, and so we, like to invest bottom up and worry top down when we think about putting the portfolio together. And this year, from an allocation perspective, we've been shifting the the boat has sort of shifted from, low rates, long duration assets, a lot of venture, a lot of real real estate development, a lot of large cap, you know, stuff equities, etcetera. Really to the other side of doing more in credit, absolute return, things where higher rates are a tailwind, not a headwind, and then things like smaller buyouts, which I would characterize a lot of what folks in here do, lower leveraged equities that, maybe are neutral to an interest rate environment that we're in today.

Tim: And you guys are the weirdest of them all. Right?

Adam: I I'd say I'd echo a lot of what what Jeremy said. We're we're pretty similar. So, we're about 13,000,000,000 of capital today. We're staffed as generalists, so we don't have anyone that owns a specific slice of the pie. You know, we we don't bucket things to Jeremy's point.

We we basically have an unconstrained mandate from our board that says here's how much risk you're willing to take, generally defined as kind of long only, you know, equity like assets. But within that, there's no pressure to do real estate, venture, buyout, infrastructure, credit, any kind of flavor, within the capital market. So, we're staffed as generalists so that we can kind of shift resources as the opportunity sets wax and wane. You know, some of the shifts that Jay is talking about, what is driving a lot of our time as well. And then just on the, what that ends up in is we I think we have far fewer partners, at least scale partners, than the vast majority of institutions of a similar size.

So we spend the vast majority of our time getting to know our partners' best ideas, and looking to put direct capital to work. It's not a prerequisite or anything like that, but roughly a quarter of that 13,000,000,000 is a reasonably concentrated portfolio of directs, public publicly traded stocks and private, that are generally sourced alongside our partners.

Tim: So I heard I heard all of you use the word partners quite a bit. Now it's kind of the direction I actually wanted to wanted to take this, which is to say, you guys have partners you work with who are investors. You work with companies directly in some cases, I think. And then also you

Jeremy: have partners on the kinda your

Tim: client side, which is your

Jay: the people, you know, the the institutions you

Tim: need to help fund. I was wondering, may Adam start with you. Your experience, you know, traveling the world, seeing all these things, what makes a good partner?

Adam: Good question. Very open ended, difficult to answer, succinctly. But I'd say, like, every one of our partners has to surpass an objective level of investment acumen and quality and return potential. Above that, there's a lot of there's a lot of firms out there that surpass that, but are bad partners for us. So think about really credible, high quality, at scale, established firms that have been around for 30 years, where we come into the Fund and we're just a commodity.

You know, we're just a diversification of their business. But we're really and I'm saying I'm not saying we have 0 of that in our portfolio, but in terms of where we spend our day to day looking for incremental partnerships, we spend 0% of our time on that. The vast majority of our time is spent on people that we think, you know, surpass that, absolute threshold of of attractiveness, of opportunity set, and their credibility therein. But maybe it's not established yet. So we wanna find people then and take them from, you know, ground level to cruising altitude at at 30,000 feet to to help them in those first few chapters.

So that's the ideal partnership for us because our involvement is actually meaningful to them. So what that encourages is kind of mutual trust, open communication, transparency, access. So co investing is a big part of what we do, but, like, it's actually a slim minority of the the reason that it's beneficial to have partners like this. The main reason is that we just know them better. It's not such a black box, you know, when they have a hiccup in the portfolio or the market environment changes, we ultimately have to underwrite process because the outcomes take so long to actually materialize.

So that type of partnership really helps us just be better partners.

Tim: And Jay, you mentioned how you're shifting a portfolio, you know, maybe away from equities into credit things where interest rates are a tailwind, but there, as I understand it, there are a million, maybe not a million, but quite a number of people who are in the credit field. Right? So when you look at the different opportunities, everybody's probably got a similar deck in terms of the quantitative profile. Do you assess the qualitative? What makes a good partner in that in that regard?

Jay: Yeah. I think the, credit maybe in particular is a funny area because it's one of the few where we think size is the friend of returns. You know, there's no right tail in credit. You either get your yield or you get something less, and so there's no such thing as a right tail to sort it. You can't earn a 3 x to offset the one you lost money on.

And so we spend all of our time. We look at credit on the quality of the of the asset being underwritten, your ability to get at that asset, either yield you're generating, and then sort of comparing and contrasting. And so I think within the within that context, a good partner is gonna look like someone who is, balancing this inherent tension that exists in any financial sponsor relationship, where there are business imperatives to grow, and it's very lucrative for everybody involved if you do grow on the GP side, while also sort of maintaining the fidelity of high quality underwriting, originating only the best assets, maybe not raising that incremental fund as fast as you'd like to, even if it would get you to some of your financial goals faster. And I think a lot of the worst mistakes are made when, folks reach on things and move too quickly. We think pace of growth is really critical.

That's true across asset classes. I I think it's particularly true credit where you can make up for your mistakes later. Jerry, you mentioned how you

Tim: look at your holdings and kind of on a pass through basis. So you're it's manager agnostic, but actually an equities and equity, whether it's public or private managed by me or Adam or whomever. As you think about getting quality of information from your partners, like, how often are you checking in with them? How often do they check-in with you? What's the in your best relationships and your worst relationships, what is the give and take in in in information flow?

Jeremy: We very highly value transparency as often as possible. Travis is fond of saying that we have to have texting relationships with our with our partners. You gotta be able to just text them and say, hey. Did you see this or did you see that? And they should respond.

Right? That's I think that that's probably one of the easiest ways to describe it. Right? We're we basically want these to be our partners. They're not just giving us a return stream.

Right? They're not we're not buying a return stream from them. We're buying we we always want a second order effect. We want something else. We want knowledge, information, access to co investments if it's private, maybe act maybe we have one a manager that's an emerging market financials manager.

And so they do the emerging market macro stuff really well. And so if we want to if we want to talk about the broad backdrop of the emerging markets, they are someone we would talk to every time. So, those are the sorts of things that we're kind of looking for in a partner is that not we want them to be aligned with us. We want them to provide us both with the kind of returns that we're after as well as information. I'd echo a lot of what he said too in terms of raising funds too quickly, getting out over your skis.

Right? That all that's part of alignment and and partnership. And partnership is probably the most important, like, thing we look for in a manager. We want it so that they're well incentivized so that we all make money. Right?

Tim: Yeah. Our litmus test one of the litmus test we use at permanent equity for partnership is when you get that text, you're excited to get it. You don't just answer it, but you're like, oh, Jeremy's texting me.

Jay: Sweet. I

Tim: wanna I wanna call them back as opposed to, like, I'll do that.

Jeremy: I I can't tell you for sure whether people are excited when they get my text, but, I know I'm excited when they answer.

Tim: So, I'm sorry, Jay. Did you wanna ask? I was

Jay: I was gonna say, I think in general, anytime you have investors, whether it's in a fund construct or, you know, investors in your small businesses, it's important to understand the returns are always gonna be the most important thing, but a close second and having invested in 100 of these, I can say this for 1st and experience. The experience the the the client experience is critical as well, and that looks like transparency, intellectual honesty, you know, quick follow-up, owning your mistakes when you need to, and offering opportunities directly. And so that stuff really makes a difference, and for us has tilted if you had to rank order the folks we've we've re upped with, it's not as simple as ranking them by returns. Often, our experience with them is a critical input into that.

Tim: So, you know, Adam, you alluded to the fact that returns are hard to underwrite sometimes because it takes a very long time for them to materialize under a strategy. So, you know, let's say, you know, returns are something, but partnership starts going poorly or badly. Any stories about what that looks like? How you extricate yourself from that? You're smiling.

Do you have do you have something top of mind?

Adam: So how we get out of a partnership?

Tim: Well, I guess, when when when when do you know I mean, because it's interesting. You know, you guys you guys are investors roughly in many small businesses. Right? These are small managers just like whether you sell toothpicks or pesto sauce or try to generate returns for an endowment. These are small businesses trying to serve their customers.

Any small business that never really hits rocky patches. Like, what what what is your sense, like canary in the coal mine, oh, this partnership is not going as planned, as expected. How do I get it back on track?

Adam: Yeah, I don't know what you guys think, but certainly personnel issues tend to be, you know, within a GP. You know, those tend to surface as a result of things that are going on in the portfolio or at the firm that haven't shown up in returns yet, but are very likely to lead to those types of outcomes.

Tim: You mean like turnover?

Adam: Yeah, exactly. Important people leaving, you know, observing just, you know, deep attention and discomfort with people being around each other. Getting people in the same room is really, you know, sharing meals, things like that is a really good way for us to kind of assess the quality of the relationships within the GP. But we definitely see that. If you see tension, you know, within the firm, it can be a sign of greater problems underlying it.

Tim: Will you guys step in at that point and try to be helpful? Or is it more just like, Oh, boy, we're signed up for this? It can't

Adam: I mean, if it's the right type of partnership like we've all described, hopefully we're a sounding board for the key partners at the firm to say, hey, this person is, you know, we're struggling with this or we're having this issue, this debate internally. What have you seen? So, if it's if it's transparent and it's solvable, you know, we're we're happy to weigh in and see if we can, you know, give some pattern recognition insights, but we can't make the, you know, decision for for the GP.

Jay: I think there's there's some optimal rate of new investment ideas coming through an organization, and I think where you tend to see these things trip up are 1, when performance just hasn't been good, which is always challenging to to watch a firm shrink and sometimes go away. But there's a second issue we've observed where maybe your market's out of favor. It's harder to get deals done. You know, today, certainly anything that's a levered transaction, real estate buyouts, etcetera, it's hard to get done. You know, lending rates make that very difficult, and so if you're a vice president that at a private equity fund, you know, today, you're you're assumed carried interest value is probably lower and will take longer to get there.

And so you might see, they might need coaching around how to, you know, build morale with the troops. Just recognizing that they're doing the right thing for their investors while still not, maybe what's not best for those some of those folks on the team.

Tim: Pivot again. Obviously, we've got a lot of small business operators and owners, I think, in in at the summit. You guys see a ton. I mean, I know you guys travel a ton. You're in every asset class, many, many managers.

You know, one of the things our observations about small businesses is that they're, they're fragile and it's hard for them to hedge. It's hard for them to be prepared about stuff that's looming around the corner just because you don't have the luxury of having 1,000,000,000 of dollars of cash sitting on your balance sheet. Maybe Jeremy, start with you. What are some of the things that you're seeing in the world that maybe a small business owner or operator isn't seeing right now and should be preparing for?

Jeremy: Wow. That can go a lot of ways, can't it? Yeah. I mean, you're talking about interest rates

Jay: and and

Jeremy: staying them staying higher for longer. Right? It can it can be harder and harder to keep your business afloat with that. Right? I mean, I think that's gonna be a problem for years to come.

Of course, that also means that the private credit stuff that you're doing should probably do pretty well. Right? Because someone's gotta supply the financing. Right? Hope so.

Exactly.

Tim: Was that a forward looking statement? Sorry. That's an that's

Jeremy: It's it

Tim: was a probabilistic it was

Jeremy: a probabilistic statement. You know? I'm I I I make no guarantees. Just a general I I I kinda feel more like there's almost this malaise right now where people are kind of I I feel like some people are still afraid to do things. You know?

I I it's just a very general statement. It's something that I just kinda perceive. It's like, people are more negative about the world today. And to me, I'm a super positive happy guy. Anybody who's talked to me for any length of time knows that.

And it's just something I I more and more tend to hear, you know, kind of the downside of things in general, and it's I don't I don't know how to describe that, but you asked a very wide ranging question, so I'm I'm giving you a wide ranging answer.

Tim: Jay, anything you're seeing or hearing from from I mean, either the many endowments you work with and how they're preparing versus managers you work with and what they're trying is there any tension between giving money and taking money right now?

Jay: Well, we we we have a large, our largest portfolio, our asset classes, leverage buyouts, and so we we mostly do small buyouts, which it would look like, but a lot of folks in the room are doing. And so our observation is that it's the the problem is inverted from what people have experienced the past 15 years. So, typically, when you run into issues, its financial conditions are excellent, and there's some fundamental issue in your particular vertical, which is you're dealing with, you know, earnings headwinds, and then, you know, low rates have been a a benefactor. Today, you're seeing the opposite in our portfolio, which is the fundamentals have been outstanding. The most part, the the b to b service providers, generically speaking, in the US are generally doing quite well.

The trick has been, you know, if you had floating rate debt 3, 4 turns, you know, that that really takes the auction out of the room. It does it it impairs your ability to build the next building or do the acquisition or, do a lot of the things you wanna do to grow, and so I think it's been that premium on we we've sort of historically viewed private equity as the the capital allocation piece as kind of a commodity, and that the ability as the one of the fellows who was on here earlier said, like, to do something with the business once you own it is a critical piece. And we're seeing today that those capital allocation decisions are really impactful on outcomes in a way that you just haven't seen in the past 15 years, frankly.

Adam: Yeah. I mean, I don't have anything specific on that other than, like, the last 5 years are, you know, to me at least a testament to the value of maintaining more financial discipline and conservatism, you know, because you never would You go back, you know, to the beginning of the COVID pandemic. I remember talking to Brent and we were wanting to call you and say, just make sure it doesn't go near any tall buildings. You know, it's, and it But you never would have guessed what would have happened in 2021 and 2022. You never would have guessed.

There's always some, you know, Black swan event or whatever silly term you want to use, but you just want to ensure that you can survive the, you know, whatever the that phrase is about, you know, the stream that's 4 feet deep on average, but it's, you know, 12 feet deep in the middle and you drown in it, and you're, you know, 6 feet tall.

Tim: Yeah. It's a funny thing to I mean, we you know, at our businesses in the businesses, even if we're not invested in this business, we try to be helpful to for small businesses, how much cash to keep on your balance sheet is really interesting question. Because on the one hand, if you keep too much, it's a real drag on your returns, and you're not reinvesting, and you're starving the business for cash. On the other hand, if you invest aggressively and all of a sudden something happens, and banks won't lend to you because their underwriting has clamped up and rates are high and so on and so forth. It's a, can be a real it can be a real nightmare.

So Yeah.

Jeremy: It seems to me that that's something you have to kind of I don't I don't know if you can do that dynamically. I'm most of these the businesses we're talking about are hopefully cash flowing businesses. Right? And so you can kind of save for a rainy day a little bit some of the time. That's the way that I would think about it.

You can flex that up or down with financial conditions. Right? When financial conditions are really easy, you just don't need to keep as much of a cushion. And when they're well, like now where, you know, mortgages are 8% or whatever, You maybe just need to keep a little bit more.

Tim: So, you know, I asked, Keith and Michael, what are some things that they can do or what are some of the things potential acquisitions can do to make themselves attractive? As a completely selfish and self serving question, what is something a small asset manager can do to make themselves appear attractive to a large institutional investor like yourself? Provide big returns. I thought you said the people matter, Jeremy.

Adam: I would say, like, the biggest question that's really hard for us to answer is why would a disproportionate number of high quality sellers or founders in your opportunity set reliably choose your capital, all else equal, over the 1,000 other competitors that are trying to buy your business. The people that call you all the time, the family office, the independent sponsor, the other lower middle market funds. It's really hard for us to assess that. And it it's not so we end up saying no to a lot of, you know, really good things because we can't really answer that question. It's a really interesting opportunity set, but, like, we don't wanna end up with a a hit rate, you know, do 10 10 funds, you know, and have a hit rate of, you know, really low hit rate, and then you've just got a big drag on your portfolio.

So we're happy to say no to a lot, but if you can really answer that question, I think everyone thinks they answer it, but you're not answering it as as frequently as you think you are.

Jay: I I I think there's a we see a lot of these, and I I think the the frustration is that having a a number of them have high returns. Typically, they're driven by one outcome though. And so there's always this question around, like, the durability and repeatability of what you What

Tim: gross of scale?

Jay: Which is a a critical issue. And I think, you know, going back to I I only read what Adam said. I think there's a there's a sort of fundamental question of, like, why do you win? What's your right to win? Mhmm.

I think in a lot of cases, like, a lot of private investment firms have done quite well and generate returns on the back of hustle without any sort of explanatory variable. But I would say, in general, like, most of the sponsors we back today are, you know, the the old days of, like, the 4 industry vertical, you know, private equity fund is, like, those are long gone. Like, I mean, the last one we backed as an independent sponsor is a blue collar services buy and build specialist. Right? I mean, there's 9 words to get to the word private equity firm before they describe what they do, whereas it used to be, you know, such and such equity, and they just did kind of whatever they wanted.

And so I think we're in an era now where that operator, you know, investor kind of has that's a hybrid role in some ways. And so I think just being very clear about, you know, we do x, and x is very specific, and your edge is definable.

Tim: And I think

Jay: then you'll get some traction.

Jeremy: I love that. That's we we think the same way. And to your point, we we always ask the question, you know, why should your private equity firm exist? Right? There's many other people out there with capital that can do this.

Right? Why should you why do you exist? And if you can't answer that question, then, you know, there's really no reason for me to carry it on much further than that. Right? And I I love what you're saying about specialized edge in different in different verticals and so on.

Love that. We think the same way for sure. And I think we should all get together and do a fun since we're all, like, you know, thinking exact same way.

Tim: Last question. Is that a two way street? Like, is or do you all do things so that when you approach a manager, they go, oh, no brainer. I'm, I have to take Jay's money because, Jay's gonna do all these things to be helpful to me, or is it or is it just does the heft of the amount of assets you carry usually carry the day?

Jeremy: Well, I would say that that's absolutely what we're trying to do. We want to be known. That's part of my job, actually, and the engagement part of my

Tim: job. Part.

Jeremy: Yes. Part. That's part of my job is to raise our public profile so that when we have generated thesis, come up with an investment idea, pick a group of managers to talk to, we go and talk to them. We pick one that we want. They're all gonna be capacity constrained.

They always are. We want them to say, oh, that Travis said Jeremy, we know them. They're good people. We want to be partners with them. Right?

We want that ahead of time. We don't want them to be be like, wait, who are you again? No. We want we want

Jay: them to already have heard

Jeremy: of us. And so to do that requires a lot of, you know, proactive kind of outreach and doing things like this.

Tim: Anything else you do to be genuinely different?

Adam: I mean, there's a lot of I don't know if it's genuinely different, but I think a lot of good LPs do this. But there's a lot of industry, you know, connectivity that someone in your venture portfolio might never interact with, but is another core partnership somewhere else in your portfolio. And they get they get benefit from just information sharing and deal flow sharing and things like that. So making connections like that, I mean, being at a university, we do things like try and help recruit young engineers to, you know, early stage technology companies, all that type of stuff. But the most important thing, I think, any sufficiently good GP raising capital should be referencing their core LPs.

And so having a good reputation, treating people well, you know, just just having the things that you don't say to them that are said about you be positive goes a long way towards, hey, this is this is someone I wanna partner with.

Tim: Jay, last word if you want it.

Jay: Yeah. I I found that, we we certainly, you know, desire to, similar to Jeremy said, invest with folks who don't need our money. And so I think the way we try to position ourselves is, 1, we're global endowments. We represent 40 wonderful causes and that, I think, tie goes to the runner, typically, when it's us versus a a pool of capital that doesn't have that. But I think the reality is, in most cases, like, just doing what you say you're gonna do, and, like, move quickly, do your deals quickly, don't analysis paralysis this thing, like, focus on what matters and do a good job with it, and they they tend to appreciate that as in a in a partnership.

And I think that's, you know, it's it's simple, but it matters.

Tim: That's a good way to close. Thank you, gentlemen. Appreciate you. Have fun tonight.

Jeremy: Oh, yeah.

Tim: Thank you everybody for coming. Enjoy the rest of your afternoon.

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