Building Portfolio Resiliency Through Private Markets

[00:00:00] Speaker A: It really is people first. What is their vision for this firm? Do they intend to expand their product line really for the sake of having a large firm and being the next you name the bulge bracket that's out there? Or do they go ahead and say, my strategy requires throwing a number out there, a $300 million fund, and I plan all of my funds to be roughly around the same size? That tends to show someone who is more alive. [00:00:30] Speaker B: Welcome to the Institutional Edge, a weekly podcast in partnership with Pensions Investments. I'm your host, Angelo Calvello. In each 30 minute episode, I interview asset owners, the investment professionals deploying capital, who share insights on carefully curated topics. Occasionally, we feature brilliant minds from outside of our industry, driving the conversation forward. No fluff, no vendor pitches, no disguise marketing. Our goal is to challenge conventional thinking, elevate the conversation, and help you make smarter investment decisions, but always with a little edginess along the way. Welcome to our Private Market series in which allocators will share their thoughts on investment strategies, case studies and approaches to the current challenges in private markets. My guest today is Venus Phillips, Managing Director at the Kresge foundation, where she's responsible for evaluating investment opportunities and investment managers across all asset classes and geographies. Venus joined Kresge in 2019 as an investment director focused on private markets, including private equity, real estate and natural resources. Previously, Venus served as the Director of Public Markets at Fiat Chrysler, where she led the investment strategy for the company's pension funds and employee benefit plans. She has held positions with Morningstar, the University of Chicago Investment Office, NextGen Capital Partners, J.P. morgan Private Bank. In this episode, Venus will share how she's building portfolio resiliency through private markets. Venus, welcome to the show. [00:02:11] Speaker A: Thanks for having me, Angelo. Happy to be here. [00:02:13] Speaker B: I'm glad you're here. We've had a lot of conversations. We've worked together sparingly, but I've always enjoyed our conversations and our, I guess I'll say our bona meme. So hey, let's just jump right in. Could you give me an overview of your exposures across the private market spectrum? [00:02:30] Speaker A: Absolutely. And first Angel, I will say it's always been great working with you as well. That's one of the reasons I was so excited to come here and join and just starting podcast. So again, thanks for having me. So at Crypti, our private markets portfolio really spans the spectrum across buyout, venture capital, real estate and natural resources. Now, the endowment has been investing in private market for decades, but the portfolio has really evolved over time. So early on when our investment function was outsourced to a consultant. So that, let's say prior to 20 years ago, it was really in traditional. At risk of using a dated term, but a more appropriate term for what it was at the time, leveraged buyout focused private equity as well as core real estate. But over the past 20 years, we brought the investment team in house. And as we built out the team, we built out a more bespoke portfolio for the endowment as well. And so that allowed us to consider strategies managed by firms that at the time would have been much smaller or more niche, like venture capital or opportunistic real estate. So the goal really with pursuing these strategies by building out our portfolio into managers that we thought could really give us what we need to build a balanced portfolio that not only delivered strong returns, but also created resiliency across cycles. [00:03:51] Speaker B: So let's go just a little bit deeper. This idea of constructing a resilient portfolio through what seems to be strategic private market allocations. I mean, how do you define resiliency as an investment objective? [00:04:05] Speaker A: Yeah, so when we think about resiliency, we think about a portfolio's ability to withstand shocks, so adapting to changing environments, but still generating attractive long term returns. Now of course that means that any given individual strategy could be out of favor in a moment, but for us it really shows up then a diversification across different strategies, strategies across geographies. We have a higher weight to international strategy than the benchmark and many of our peers. And that's really been intentional across our endowment because we realize that when you're investing in world class firms and strategies, they're not always necessarily located in the US and then the third piece being across vintage year, you know, it's really difficult to decide when to get in and out of the market. And so keeping an even pace across the vintage years really takes that element of predicting what's going to happen over the course of your investment period in the first couple of years of the fund. And so we really pursue opportunities that help us have diversification across strategy, geography and vintage. And I can give real examples of this across some of our asset classes. Real estate and buyout are the ones that stand out most to me. In real estate, we really waned into general partners who invest across property types and or into multi use properties themselves. And so for managers who invest across property types, the thought is really that as something goes out of favor, one thing that's been on all of our minds for the past several years is office. For example, you know, people use office Differently now, before our managers to invest in an office, what else can they pivot into in order to be able to maintain their relationship with us throughout the cycle and still put capital to work, but also be able to drive real value through the opportunities that are attracted today. So a lot of the managers that we are into may have invested in office, but are also now able to look at industrial and look at multifamily. But then also, you know, I'm sure all managers can do that, but we want the ones that have some sort of competitive advantage, whether it's their network, their ability to lease up whatever it is that can be applied across each of those property types. And I also mentioned in that real estate example, multi use. And so with multi use assets, looking for managers who are really good at activating whatever is attractive in the moment there. So if office is out of favor or if a certain community needs more retail or more apartment or residential, that they can have someone who knows the community well enough to activate what that community means. So it's really just a matter of looking for partners who can pivot with their environments, whether it's across property type or cross uses within a single property. So that's the real estate example, going to the buyout example there. We've really emphasized managers that have a disciplined approach to value creation. So looking for operational value add and really steering away from financial engineering. And that can be tricky to do. It's not always obvious with a GP that they're using leverage in order to goose up returns. And for many that really drives their return bridge if you look closely. So it's important for us to perform diligence to understand what is truly driving this manager's returns over time. Because if interest rates shift, you know, in a low interest rate environment, those highly leveraged strategy was really good. But as rates rise, we've seen over the last couple of years those strategies start to struggle. And so really whether it's in real estate or buyout, with these two examples, just showing that regardless of what's happening in the market, that we have that flexibility and protection. But no single shock derailed our portfolio. [00:07:53] Speaker B: I'm not going to try to summarize what you said, but there's clearly an element in your portfolio design for downside protection. And you've got, you like the flexibility and I think you said from your partners, these would of course be the GPS you invest in. Do you really look at them as partners? Do you have a strategic relationship that just simply goes beyond here's my money? [00:08:16] Speaker A: Absolutely. We feel that part of that resiliency comes from the quality of those partnerships. We want GPs to see us as partners and not just the works of capital. And for us, that means that we get transparency into their underlying exposures, we get clarity on their fees and their fund structures and that they have thoughtful valuation methodology. And that valuation methodology piece really comes into play when a manager, for example, is starting to raise a new fund. There are some that we see all of a sudden, if you look at their, their marketing materials over the past few quarters, they may have had pretty steady valuations. But then all of a sudden, right before that manager comes back to market, those valuations pop. And so it's as though they're trying to show strong returns, strong valuation while they're fundraising. And for us, that that manager is in our book, it doesn't really give us a good idea of what we truly own. And so that makes it even harder for us to take well calculated risk in difficult environment if we can't trust the marks in our book. And so we want to know what we own so we can better manage our risk budget and really ultimately fulfill our responsibility of meeting the foundation's obligations. And that's why it's so important that managers are aligned with us in that way. So we want one who care more about building enduring companies and generating real return than doing whatever it takes to rush back to market and raise the next fund. [00:09:44] Speaker B: And with this issue of valuation, I mean, if you have a partnership with a manager, you want to understand, okay, the new marks, would you speak with them directly and ask them to clarify the, you know, their marks or, I mean, it's a partnership, you're telling me. [00:10:01] Speaker A: Absolutely. And the more you work side by side and have these conversations with managers, the more I think that it builds mutual trust. And so we will sit down with these partners and for example, if we see a write up that doesn't necessarily make sense to us or a series of writers that don't, we just have very frank conversation. I can think of a couple that we've had even in the past year where we want to understand what drove these returns. And, you know, I'm happy to say that many of the partners that we have in our books today have had good reasons for when we've asked those questions and it's given us more comfort and those conversations have, you know, made us happy to continue those partnerships, but it's not going to make us stop asking the question. But there are many other ones who, when things start to sound a Little loosey goosey. That's when we dig a little bit deeper and may, may not trust that being such a well aligned partner going forward. [00:10:57] Speaker B: So I mean, you're, you're making managers accountable in this one example, you know, for their, for their marks. But it sounds like the accountability stretches throughout the relationship. You know, you don't want to see drift, you want to see flexibility, you don't want to see dogmatic positions. So I mean, it must take time to, to identify and then build those strategic partnerships with your gps, am I right? I mean, it just doesn't happen overnight. You give them a check, yeah, they love you, but you want more. I mean, you talked about alignment also. You want to make sure, you know that they're running this portfolio the way they said they would. [00:11:34] Speaker A: Exactly how do you do this? So it really starts an initial diligence before we even make our initial investment in a fund. And so it's spending time with gp. You know, these days it may start on Zoom, but it's always going to involve us spending some time in their office, getting to know their teams. It's really about people first for us, and then we kind of get into the other stuff later. But if we can't get comfortable with the people being good stewards of capital, being good partners, being aligned with us, then it's really difficult for us to get comfortable with all the other pieces that are important as well. So it really is people first. What is their vision for this firm? Do they intend to expand their product line really for the sake of having a large firm and being the next, you know, you name the bulge bracket that's out there, or do they go ahead and say, you know, my strategy requires throwing a number out there, a $300 million fund, and I plan all of my funds to be roughly around the same size. That tends to show someone who is more aligned. Now, we don't necessarily hold them to that because we understand that as the market moves, the size of your checks and size of your strategy may need to move. So we completely understand that, but it's just seeing the thoughtfulness around that approach. So it really starts with people first and then every meeting that we have, whether we're still performing initial diligence or monitoring a manager over time, we'll continue to ask about people first and then we get into market and strategy and. [00:13:07] Speaker B: Portfolio company update in these partnerships that, you know, as they evolve over time. Are you looking at co investing with some of your partners? [00:13:16] Speaker A: We have, we have co invested in the past. It's something that we're not necessarily doing anymore because early on a lot of those relationships had that agency issue that a lot of people are aware of where we weren't necessarily seeing the best co investment. And for the we have a pretty small team. And so for the time that it takes to underwrite those individually, it just wasn't the best use of our time. And so today we are not participating in co investment. However, if there is a structure where a fund is a GP fund, so we get GP economics by them sort of including co investment capital and everything that they do, which is something that we do have a bit of exposure to across the portfolio. That's something that we're happy to participate in, but we don't want to be responsible for going out and picking individual deals to co invest in. [00:14:06] Speaker B: So you mentioned a small team. I mean, tell me how big is the team at Kris G in general? And then, you know, looking at private. [00:14:12] Speaker A: Markets, our investment team Kat Kresge has 13 people today and it's really sort of in three different groups. So we've got our risk and operations team, we've got our public markets team and our private markets team. There are four people on our private markets team today managing a roughly $2 billion portfolio across more than 70 relationships. Now, a lot of those relationships are tail end relationships where, you know, they may be funds that have wound down and that we're kind of managing a few assets that are still there, but yet it's still important to us. We're still on top of it. We're still attending meetings and checking on a regular basis. But in terms of our core relationship, there's still a few dozen there that we are actively managing across the four people on our team. [00:14:59] Speaker B: Well, you have a small team. You're telling me there's a lot of qualitative due diligence starting with people. I know there's also going to be quantitative due diligence in there. I got to ask, are you using any artificial intelligence at this point to help you kind of at least read reports or generate reports? Anything at all? With a small team, I'm thinking AI could help. [00:15:21] Speaker A: We are thinking that too. So we're working very closely with Kresge's IT team to figure out what that looks like in a way where we can protect our information and the information of our partners while still using these large language models. And so I would say I would love to come back on a future episode and tell you where we landed, but where we stand today, I would say that we're, you know, we're using it to, to help us kind of know what to look at. So like maybe to see if we had any blind spots. And as we're preparing for manager meeting and performing diligence. But in terms of doing more of our quantitative analysis, because we want to protect the information, taking time for us to figure out exactly how we want to go about that. But it's something we're actively looking into today. [00:16:06] Speaker B: You and your peers face that same issue of data privacy. Data security is front and center, especially if you're going to be using generative AI and you're using kind of public models. So I get that. Let's kind of go to a hot topic in the private markets area and that's secondaries. There's been a lot of talk, especially this year about secondaries. I think I saw a number, it was something like 70 billion had been done in secondaries already this year. They're looking at maybe 200 million total. 200 billion total. What are your thoughts on secondaries? [00:16:39] Speaker A: We have participated in secondaries before. We've looked at them on both the LP driven secondaries and the GP driven secondaries. We look at being buyers in the market, we've looked at being sellers in the market. We have transacted as sellers in the secondary market as for a variety of reasons over the past several years. And so it's something that we may do for rebalancing or for managing our uncalled capital, but in terms of actually purchasing secondary, we continue to look at that market. If we could find an opportunity to invest with a general partner who may have already been difficult to get into, but now we can get that exposure or someone who is a high quality GP who we'd like to have more exposure to, but at a reasonable price. Now, over the past few years, while he's been looking into it, that's been difficult to do. Those are either not in the market because nobody wants to get rid of them, or if you have these very large institutions shedding their portfolio. And we can think of a couple of endowments who've done that recently over the past couple of quarters, our hope was that we'd see some of those GPUs going off. But as it turns out, those books, you know, they weren't getting rid of their sort of blue chip name necessarily. And so or at least not the names that we would have hoped to have picked up. And so with that we continue to look at that market, but haven't participated today. [00:18:02] Speaker B: So it's basically opportunistic in the secondary space, you know, and I understand selling for some rebalancing, some liquidity, et cetera. I mean, just in general looking at secondaries and you know, we have continuation vehicles now and you think the market's going to keep moving towards secondaries. [00:18:21] Speaker A: More and more companies have been staying private for longer. It's just been a situation where we have a lot of gps and this is across all of our peers. It's not unique to Kresge where they're asking to extend their fund, extend their fund. But yet at the same time we've got, you know, responsibility for our, our organizations that we all work for, whether it are foundations or universities who they work for, that we've got to be able to meet their obligations, meet their spending needs. And so to have capital locked up in companies that haven't had exit event is difficult for us. It's a liquidity problem that, you know, can be challenging to manage. And so as these companies stay private for longer, we're going to see continuation vehicles, are going to see secondary sale, we're going to see opportunities for LPs to be able to get that capital out, to be able to have that liquidity. However, it also though makes me think that we're missing something in the lifetime of these companies if we're always cashing out whenever we're given the opportunity to cash out. And so it's important that LP understands secondary understanding, continuation vehicle when it makes sense to roll into them and when it doesn't. And that goes back to the partnership piece that I mentioned too as well. Is that a good partner? If they're asking us to participate in a continuation vehicle, they are rolling their carry into it. They are not crystallizing it. They are doing it because they really genuinely believe that there are more inflection points for these companies to hit before it makes sense to actually exit them. It's not something that they're doing so they can crystallize, Carrie, but still continue to collect people in these assets. And so that's really important for us to see. And you know, your question about will this persist? I really do believe it will. You have companies now that are raising money out in the private market at market caps much higher than we've ever seen in an ipo. And so if they're going to be able to do that, if there is enough dry powder in the private market for companies to raise, and there's really not too much incentive to go out and raise in the public markets, where you then have to be more transparent to the, or more beholden the quarterly reporting and, and all that it takes in order to list the private company, excuse me, as a public company. [00:20:40] Speaker B: The public company, you know, embedded in that comment you were talking about how you'll speak with your colleagues, you know, in this, in, in, in terms of opportunities. Do you also speak with peers and see what they're looking at, maybe specifically secondaries, but also just in general across your private markets book? [00:20:59] Speaker A: Absolutely. There's a few pure organizations that we tend to just naturally come across. They are like minded organizations that will find ourselves in a lot of the same funds that they're invested in. But in order to avoid groupthink, we also try to leverage our own networks as well with people who might be outside of that group that we just naturally run into. So this can happen at conferences. This can happen by doing reference calls. For example, as we're underwriting a new gp, if I reach out to another peer organization to do a reference call, I'll ask them, you know, what else are you working on, what else are you doing? And then that becomes now a contact or part of my network that I can continue to reach out to if I have a question or, and likewise back and forth. And so it's about sharing as much information as we can in this industry, especially in private markets, where it can be a lot more difficult to access that information. And so as much as you can share insights and thoughts and just the problems that you're facing and maybe there's someone who faced that same problem and found a good solution. And so it's, it's very important to, to maintain communication across peers in the industry so that we can. Because we're all really trying to solve for the same things. We're all trying to meet the obligations of our organization. We're all trying to solve for liquidity issues, especially over the past few years and we're all trying to earn more than we spend. [00:22:24] Speaker B: Are you doing any work with emerging managers in private markets? [00:22:28] Speaker A: We are. And this kind of goes back to my comment at the top of our conversation and talking about how as we built out our investment team, we built our ability to reach beyond large generalist firms and really go into niche strategies. And so I would say that we don't have an emerging manager program because we look to invest in small firms, first time funds. Like it's just the core of what we do. And so because we have that bias towards smaller managers. Yes, in the private market we do invest in emerging Managers, we will Invest in Fund 1. We have criteria that it takes in order for us to get comfortable with doing that. But it's absolutely something that we will do. We, we don't have to wait for someone to have two or three funds before we put money in because at that point you probably missed out on some of the best returns that you're going to get in that fund series. [00:23:24] Speaker B: It's kind of interesting because when I think of emerging managers, I go back to your comments about the need for alignment and in partnership, you know, an emerging manager might be more predisposed to build that alignment and to work with you on knowledge transfer. Especially if you're in a sector which might be your first time. You know, you might be going into, I don't know, music royalties or something for the first time and you're going to this manager because you believe they have a material advantage. That advantage is, I think, both sourcing and knowledge. And maybe they'd be more inclined to work with you. Do you find that with your emerging managers? [00:24:06] Speaker A: If. Absolutely, you know, we're more likely to have a seat at the table and to be able to speak directly with the decision makers when they're making a new investment or pursuing a new strategy or just trying to think through something. The more that managers are willing to sit down with us and provide us with their insight, to sit down with us and ask us for our insight, it builds that alignment, a sense of alignment and that trust between us. Now, there are some larger firms where we get that, but it's more rare. It's something that we find much more readily with smaller managers. [00:24:42] Speaker B: Are you doing anything with, you know, ESG and the private market portfolio? I'm thinking Venus, let me tell you, I'm thinking like data centers. Right off the bat, people are looking at data centers and there are certain environmental consequences to a data center, but you don't have to pick data centers. You can pick whatever you want. [00:25:02] Speaker A: With the Kresi foundation, we, from the grant making and programmatic side of the foundation, we make grants across a variety of program areas. So it's health, human services, education, arts and culture, community development and the environment. Now with the environment piece, it's very important to us that we are not undoing the foundation's work. And so one thing that we've done in order to align ourselves with the environment team there is invested in the energy transition and really looked at the fact that this is going to be critical in order to support not only the increased power needs that we have in the country or in the world really, because of AI and needing data centers to run AI, because of growing population, because of so many things that drive our energy needs in this country and in the world. And so we've over the past two years started really mapping out the energy transition landscape and seeing where it makes sense for us to invest. So far it's been really across the spectrum and managers who typically have more buyout like return profile, but are at the forefront of power battery storage, of building more resilient grid and building more grid capacity. And so that's, I would say even though we haven't labeled it esg, we are definitely taking a very close look at how do we build a portfolio that really helped mitigate the pace and scope of climate change. [00:26:37] Speaker B: It seems like it goes back to this sort of a ground truth for resiliency. I mean, you know, energy transition by definition should build resiliency into a portfolio. And then the other piece, alignment again now, alignment not just with the investment office, but with the entire enterprise with the sponsoring organization. Because you're doing this work and you said it so nicely, you don't want to undo the work you're doing through your grant making. So Venus, we're at 30 minutes and it flew by. Anything you want to add to this? You know, I'm asking you one more question, but anything in private markets you want to add? [00:27:18] Speaker A: No, there's nothing specific that I would want to add. I would really just say that, you know, just to sum up our approach there, it's really, we've discussed today, grounded enough, building a resilient, diversified portfolio, cultivating those deep transparent partnerships and you know, always refining our practices to align with our long term objectives as a foundation. [00:27:40] Speaker B: You just said it. I got nothing else to add except I ask every guest this question. What's the worst pitch you ever heard? [00:27:48] Speaker A: So we hear a lot of pitches, but without naming names. I will say the, the worst I've ever heard was from a manager who showed up and just name dropped the entire time. So name dropping, sort of all the well known people that they've worked for or worked with or you know, went to school with or whatever it may be. And this has happened more than once, but there was one where it was particularly bad. And we spent the whole meeting through this without this person telling us what their edge was, what was their strategy, the reason to win, what made them the right person to run this capital for us. And so it was a fast no. And we believe in giving fast no's. I think that's the right thing to do and giving it with feedback. Because again, that goes back to who we are at people, partners, when you can, when you're leading with people. But none of those people are you and what your edge is. You know, it's something that we're not going to get comfortable with. And so it's a reminder to all of us that dial without substance is a quick way to lose credibility. [00:28:54] Speaker B: It reminds me of the verse from the song Enough about you. Let me tell you about me now. Well, and you know, the hard part is, you know, I know from a sales side, people work so hard to get in front of you and your team and then they kind of trip over their own shoelace by saying, these are the people I know. This is my background. I mean, we all know the same people at the end of the day. But Venus, this was great. I appreciate you taking the time. I've enjoyed working with you. We worked, of course with Jim Dunn down at Verger. We had that ESG committee where we had a chance to learn a little bit about esg. And it's good to team up with you again here for this 30 minute conversation. So thank you. [00:29:38] Speaker A: Well, it's great talking to you. Thanks for having me. [00:29:40] Speaker B: Thanks for listening. Be sure to visit PNI's website for outstanding content and to hear previous episodes of the show. You can also find us on p and I's YouTube channel. Links are in the Show Notes. If you have any questions or comments on the episode, or have suggestions for future topics and guests, we'd love to hear from you. My contact information is also in the Show Notes and if you haven't already done so, we'd really appreciate an honest review on itunes. These reviews help us make sure we're delivering the content you need to be successful. To hear more insightful interviews with allocators, be sure to subscribe to the show on the podcast app of your choice. Finally, a special thanks to the North Northrop family for providing us with music from the Super Trio. We'll see you next time. Namaste. [00:30:33] Speaker A: The information presented in this podcast is for educational and informational purposes only. The host, guests and their affiliated organizations are not providing investment, legal, tax or financial advice. All opinions expressed by the host and guest are solely their own and should not be construed as investment recommendations or advice. Investment strategies discussed may not be suitable for all investors as individual circumstances vary. [00:30:51] Speaker B: SA.