Investing Billions - E302: Legendary CIO Larry Kochard On Where Alpha is Today

Episode Date: February 11, 2026

What actually creates sustainable alpha in endowment portfolios and why do most investors mistake activity for edge? In this episode, I talk with Larry Kochard about building investment programs that endure across cycles. Drawing on his experience as CIO at Georgetown and the University of Virginia and later at Makena Capital, Larry explains why preparation before crises matters more than heroics during them, how governance and stakeholder buy-in reduce behavioral mistakes, and where real alpha still exists in increasingly efficient markets. We unpack liquidity discipline, rebalancing under stress, manager sizing, and why “people are upstream of everything.”

So, Larry, you've had a story career to say the least. You were a CIO at McKenna, $25 billion asset manager. You're also CIO at University of Virginia and Georgetown, where you were the first CIO, really built that endowment strategy from scratch. Let's start there. Tell me about your experience at Georgetown. It was the first time I was a CIO. So one of the first steps I took was to go out and do a survey of other successful, long-time serving CIOs. a lot of people were very generous with their time. I sat down with the likes of a David Swenson. I sat down with Alice Handy, who was the longtime CIO at the University of Virginia, who really was, for all intents and purposes, a mentor to me.

As a result of that, I came back in the first investment committee meeting I had with my investment, with the board, I kind of had the results, presented the results of the survey. And really what I was looking to do was craft and new investment policy statement that would set the rules of the game, how much risk we would take, what would the asset allocation look like, what would be the process. What do those legendary CIOs tell you in terms of advice on how to build an endowment? I'll pick out two of them. So David Swenson, again, very generous with his time.

The thing he impressed upon me was this notion of having the investment committee be part of the process. So even though the investment office is driving the bus in terms of idea generation, in terms of the investments that they wanted to do, having the investment committee buy in to the investments produce this idea of sustainability, meaning you could sustain yourself through the long term. Because any investment you make,

it's not going to be a straight line from here to the finish line. You're going to have ups and downs. And making sure that the investment committee really was bought into the process and the logic behind why you made certain investments was really helpful to me. Alice Handy really impressed upon me the notion of becoming very embedded into the institution, being close to the senior leaders of the institution, the president, the provost, the CFO, but then also on the academic side, as well as alumni groups, as well as students.

And so that was really instrumental to me because she impressed this notion of what makes those job so special is the fact that you're part of this academic community and making sure that you're not isolated from the community and thoroughly embedded in the community will again make it easier to ride the ups and downs of the market over the long term. I often think about this rootedness in terms of investing. A lot of people invested in Bitcoin at $50 and then when it up went up to $100 they sold because they didn't have a fundamental thesis on how big Bitcoin could be and what was really driving that. They were more speculators than investors. Similarly here, you chose to have a rooted thesis with the stakeholders. Why was that so important? And what were the downstream

consequences of that? First of all, to get back to your point, I do think the notion of fundamental investing as opposed to being tactical, trying to be more of a trader, it's really important to me to out for that long-term approach to investing. If you do adopt this long-term approach to investing, it's really important to, again, have the buy-in from all the constituents, because there are going to be times when that long-term approach is not going to work. And making sure that you have the personal fortitude, there's a long literature of behavioral finance that talks about why people fail in their own portfolios, but then you kind of layer in the notion that you're investing on behalf of an institution and making sure that that institution is an asset as opposed

to a liability, which could make you even more prone to behavioral mistakes, is really a significant, you know, it was a significant epiphany for me of understanding that. Last time we chatted, you said that you were very focused on making sure that the programs that you built were sustainable. What did you mean by that? So again, there's this notion of trying to make sure that the investment portfolio is impervious to these behavioral biases and making sure that both the team is not susceptible to that. And one of the ways, way you achieve that is by having diversity of thought on the team, having a team that's very comfortable pushing back, having a team that's very comfortable of changing their mind. There's been a lot of evidence that people become intransit, in particular when things go against them. So they just don't change their mind.

They just hang on to their losers. But then also having this notion that the institution is supportive of this long-term approach and not constantly second-guessing for short-term reasons. They could second-guess for long-term reasons if there's a flaw in the process. If it does appear that the team is much more of a momentum-oriented, investment strategy, that's certainly something that should be pushed back upon. It could be that the team does too much in a certain asset class. But having that ability to sustain through the ups and downs of the market and sticking to that long-term approach to investing

is what I talk about sustainability. So you're a CIO of Georgetown during the global financial crisis in 2008. Take us into that room with the Investment Committee. What were those discussions like? we were much more liquid. And so some of the problems that a lot of other endowments had gotten themselves into is having too much in the way of unfunded commitments. That was not a problem for us. So one of the, again, one of the hallmarks of a very healthy process, in addition to not panicking at market lows, is that having this conviction that you should rebalance. Meaning if your equities have gone down, you want to sell the part of the portfolio that's held up, the fixed income, oriented, cash flowing assets, and rebalance into the equities that have traded off the most.

At the very least, you want to not panic and sell at the bottom, but you also want to be able to rebalance and also just be front-footed. You want to be able to be opportunistic at those moments. So although we had a golden opportunity to, in theory, go into some ill-liquid investments because a lot of the endowments, again, were kind of on the sidelines because they were just too with liquid, at that point, it was harder for us to go heavily into illiquid investments to capitalize on some of those dislocations. With that said, we still rebalanced. We did not panic. But there was a lot of discussion from a risk management standpoint of what to do in that situation. Part of good risk management is you go into a downturn with a plan. So you want to have this plan. But it's the notion of,

you know, if you, you may have a plan in the boxing ring, but if you get a, punch in the face, you know, things could go awry. And so everyone got punched in the face. Looking back and having perfect hindsight, what's the best practices for what endowment should do during a downturn? Yeah, that's a great question. So two comments. One is, in theory, what they don't want they want to, they want to prepare for this going into it. So endowment should have a very thoughtful annual budgeting process that doesn't kind of constrain them from overcommitting to privates. So every year you're committing at a certain pace. So your unfunded is never going to get too out of line.

If you happen to get in a situation where your unfunded commitments do get out of line, you will certainly reduce that commitment pacing. But you don't want to ever be in a position where you just stop committing. That's a bad process because oftentimes it's times light during the GFC, that those are some of the best vintage years across almost every private strategy. because people are at that point handcuffed, they're hamstrung, in terms of what they can do.

Did the top funds, the top venture funds, these unobtainium hedge funds at the time, did those open up during that crisis and was there an opportunity to come in? One of the hardest things of investing is seeing what's shifting before everyone else does. For decades,

only the largest hedge funds could afford extensive channel research programs to spot inflection points before earnings and to stay ahead of consensus. Meanwhile, Smaller funds have been forced to cobble together, ad hoc channel intelligence, or rely on stale reports from sell-side shops. But channel checks are no longer a luxury. They're becoming table stakes for the industry. The challenges has always been scale, speed, and consistency. That's where AlphaSense comes in. AlphaSense is redefining channel research instead of static point-and-time reports. Alpha-Sense channel checks delivers a continuously refreshed view of demand, pricing, and competitive dynamics powered by interviews with real operators. Suppliers, distributors and channel partners across the value chain.

Thousands of consistent channel conversations every month deliver clean, comparable signals, helping investors spot inflection points weeks before they show up in earnings or consensus estimates. The best part, these proprietary channel checks integrate directly into AlphaSense's research platform trusted by 75% of the world's top hedge funds with access to over 500 million premium sources. From company filings and brokerage research to news, trade journals, and more than 240,000 expert call transcripts. That context turns raw signal into conviction. The first to see wins, the rest follow.

Check it out for yourself at alpha-sense.com slash how I invest. It was easier to get capacity, yes. It's not as this as seamless that everyone's doors was open, open for business, but you had a lot more flexibility into getting access to previously hard to access funds, of whether it's venture, buyout, hedge funds. And so that is just a golden opportunity. Because the bottom line is even LPs that are constrained, they're probably not going to pull back too much from those best funds, but they're going to pull back a little. And so that does create an opening. So you want to make sure you have the liquidity flexibility to be able to take advantage of that

during those types of downturns. So if you think about it, endowments have this infinite time horizon. So if you think about getting into these funds as almost free money, I know you would never phrase it that way, but alpha, in capturing this alpha, getting a foot in the door and expanding your position could not only help you today, but for many decades to come. Yes, without a doubt. And so, you know, there's two sides of the coin. And one is avoid being put in the situation where you're having to redeem or at the worst case, sell secondary positions in private funds because if you do sell positions in certain funds that, again, there's a lot of demand for.

You may be in the penalty box forever and not get back into that fund versus a situation where you've already been working to build a relationship. And this is going to give you an opening either to commit more, commit for the first time. or be able to potentially buy secondaries from those who really just need to, from a risk management standpoint, gather some liquidity. Perhaps this is a very dumb question, but when these funds, these difficult to access funds, when they fill out their next fund, everybody essentially starts at their pro rata stake and then people move at the edges? Generally, yes. You mentioned something really interesting, which is you prepare for the crisis ahead of the crisis. outside of budgeting, is there a psychological aspect to us? Yes, that's a great question, because the more you are prepared, both in terms of what is going to be the game plan that you go through, whether it's the GFC, whether it's during COVID, whether it's even just smaller downturns like we had back in April last year on Liberation Day.

Having a plan of how you're going to approach that, having a plan on the opposite side, let's say the market's rips. You know, the market's ripped, post the depths of COVID, and what do you do at that point? Because, again, it's so easy to just say things are great. Let's let our winners run. So having a game plan that kind of forces that sense of discipline ahead of time is really important. So you have a big downturn, 10%, 20%, you have 30, 40% of figuring out, okay, what are the opportunities you want to get into? and then where is that source of liquidity coming from

in terms of cash, in terms of bonds, in terms of any potential hedges that you have on that you want to be able to create cash, basically cash those in. And so having that game plan ahead of time gives you the confidence to act quickly, but doing it not quickly,

meaning you're just shooting from the hip, but quickly with a lot of analytical rigor that was behind that game plan. Do you believe there's the self-fulfilling prophecy for endowments where as you get better returns, you start to think more long-term and you get even better returns. I found this in my own portfolio. The more further away I get from zero, the more I'm able to think rationally versus emotionally. I'm able to think more long-term. There's so many analogies between investing in sports. I mean, you see the same thing

with sports. When people are in this zone, they're playing well, they have confidence, even if they fall behind, if they've been playing well, they feel confident that their process and the talent that they have is going to be able to produce a wind. So they're not going to start panicking. They're not going to, once they're ahead, start playing overly defensive. And the same is true with investing. You have a certain process. You know the strengths and weaknesses of your team. And you know what you'll do in certain instances. And it gives you so much more confidence to just stick to that process versus a situation where you're really just shooting from the hip, trying to be tactical. And again, you then default more.

into this more momentum approach to investing, which generally is what produces the worst long-term outcomes. I heard an interview with Stanley Drunken Miller, arguably one of the greatest traders of all time, and he said nothing feels as cheap as when it's gone up 40%. And when I heard that one of the greatest traders in the world suffers from this kind of momentum bias, I realize that is really about structuring your portfolio the right way, not trying to outsmart and of this mammalian brain that we have. That's a great comment.

I will probably borrow that comment in the future. So one of the things I'm really trying to dig deep into is the sources of alpha in endowment portfolios. People talk about alpha as if it's this regular thing. You just walk down the street and you have alpha to the right, alpha to the left. In my opinion, alpha is extremely scarce and only in very certain places within the investment universe. For endowments that are looking to generate alpha, not just beta and not just be lucky in terms of marketing. fluctuations. Where should they look? That's the $64 million question. I completely agree with you, first of all. That's what I've always told my team. The markets have become increasingly efficient.

Alpha is hard. Investment firms are very good at selling themselves. A lot of performances due to luck and not skill. And so you really have to search in the right places. Ultimately, alpha is it's a zero-sum game, a negative sum game because the returns net a fees, are going to be negative sum. So the way you generate sustainable alpha, long-term alpha, is you have to be able to find inefficiencies that can be exploited, and you have to find skilled managers that are good at exploiting that. The efficiency part, again, waxes and wanes over time.

Inefficiencies will exist because something's hard, because a market is dominated by more momentum, trading-oriented investors, and there's just a certain amount of complexity, private investors. To me, the reason you invest in private is less about this, because for years people thought there's this illiquidity risk premium. You just naturally will get compensated because people require extra return for the compensation of the greater illiquidity of private investments.

Because of all the money that has flowed in to private investing, I just don't think that's true anymore. And really, ultimately, the value proposition is finding managers that might be good at the buy, might be good at the sell, but ultimately are good at helping make change, positive change to the underlying portfolio companies or properties or whatever they're buying. And that's ultimately the skill

that distinguishes a very good manager relative to one that is mediocre or not so good. And so that's something I think is repeatable. It's hard to find. Again, you have to do the work and look position by position, what have managers achieved? Emerging markets are relatively inefficient, which I do agree with because so many of the emerging markets, there's less competition in terms of finding really good fundamental managers that

can exploit some of those inefficiencies. The problem that you've had in the emerging markets up until this last year when they perform nicely is that the beta has been so bad. So even though the markets have been relatively inefficient, the beta is going to actually detract from the returns. And then going to hedge fund world, whether it's credit investing, again, I think credit investing, relatively inefficient, takes a lot of skill to be able to navigate and short selling. Shorting is hard. And you have to have the right mental temperament to be able to navigate being a good short seller. So it's hard. Certain sectors, whether it's biotech. And I would argue just growth investing. Such a large percentage of growth investors are ultimately momentum

of investors. And so if that is the vast preponderance of the market, if you're a fundamental manager investing in growing companies, investing in technology, that can really understand both the underlying driver of the edge of the company, but whether that growth that you've seen short term will sustain itself over a long term, which is really the intersection of the business quality, as well as the management quality. And so trying to find that, again, is hard to do, but trying to find those managers that have that skill that can exploit markets where there are inefficiencies because the market is either dominated by people that are not steeped in fundamental investing or just because there are these natural barriers to entry

of being a skilled investor that can exploit things. My mental model is when it comes to picking managers, you should almost discount IQ. everybody's top 1%. And some are top 0.1% storyteller. And that's where a lot of people, that's kind of the trap as somebody that could tell a good story. And really focus on supply and demand dynamics. Even if you're the smallest investor in the world,

even if you're investing $25,000 through an RIA, you still should be looking at the supply and demand dynamics of that specific industry. Why are people bullish on an industry? Why are they bearish? And then think from first principles whether that makes sense. For example, a lot of people today, are bearish on large buyouts.

I think that's probably a rational thing. There's so much capital. There's no DPI. But a lot of people are not bullish enough on lower middle market, why? Because it's hard. It takes a lot of effort. You need to meet the managers.

It's not sexy. These funds, almost by definition, no one's heard of because they're in the lower market. They don't have this marketing budget. So I think about it from I discount the IQ of the manager. And I even discount the layer of the manager. Because typically the manager will outperform the asset by a couple hundred basis points. And I think about more the asset and the sub asset.

And why are people bearish and why are people bullish on that specific asset class? I think that's great. I mean, another, I think, impediment to long-term success is so many of those lower middle market buyout funds. You know, they start the first fund, you know, that's even pre-fund. They're doing their funless sponsor. They're raising money deal by deal. they then may scrape together some LPs for a fund that's $100 million, then maybe it's a few hundred million dollars.

But the challenge is ultimately a lot of people aspire then to be managing $2 billion, $3 billion, $10 billion. And what the challenge is, they go from being an exceptional investor to being an exceptional manager of an investment firm. And those firms that just scale, they might have had an edge when they're managing, a couple hundred million dollars and doing smaller deals. But it just becomes so much more competitive and they lose their edge when they go up market. Success often breeds this sense that they can

discontinue to scale. And oftentimes, the scaling, there's problems related to just trying to deploy a much larger pool of capital, but also some of the problems are related to the fact that there are significant dis-economies of scale in managing investment firms. The larger you get doesn't necessarily mean produce better returns because it's just harder. I think smaller firms, smaller number of people is just easier. So I think that's also a detractor that you'll see. You oftentimes hear size is the enemy of returns. The way that plays out is, you have a very disciplined, $300 million fund. Now there are billion dollars that increment. deal where I don't really think we may or may not want to do it with a $300 million

fund, hard no. With a billion dollar fund, well, subconscious on a subconscious level, well, we have to do it because we have a billion dollar fund. We have to do these marginal deals. One of the challenges is a certain amount of growth is inevitable. And, you know, you have a team. You want to keep the team. And the way you keep the team is you have to offer them more opportunity.

but the challenge is is balancing that sort of tradeoff between keeping a team intact while not getting too big is oftentimes too difficult for a manager and they opt for just being too big. Now with that said, there's some firms that will defy that logic. They're firms on the public side, their firms in the private side, that they're so extraordinary that they've been able to either just develop. just because of the way they manage the firm or the fact that they're just that extraordinary that they can overcome the difficulties of size. I've seen that in both public and private investing.

As a CIO at McKenna at University of Virginia at Georgetown, did you have a framework for figuring out how big a manager should be and how to tell when they're getting over their skis? It's a framework, but again, I've been historically at least for better or for worse, not someone that just believes in a complete black and white formula that you get above a certain size and you're just gone. And I know some people that do that. And there is a certain beauty in that discipline. But I do think you need to look for exceptions.

I also think, though, that what you want to be cognizant of is, there are multiple factors that can lead to success and failure. And the failure might not be just bad failure. It could be just mediocrity. And some of it is one of them is size, but some of them is just incentive alignment, alignment between the LP and the GP. What is their ability to manage a team? There are a handful of firms that are just exceptional at hiring, developing, keeping,

incentivizing, rewarding people the right way. and keeping them together such that they can get bigger. And there are other firms that just become a mess. And one of the things that we look for also is firms that offer multiple products. You start off of whether you're a buyout firm that gets bigger, and then you start offering different buyout strategies. Maybe you start offering a smaller strategy like you were originally, and then a European strategy and Asia strategy,

you then may start doing a credit fund. And so it's, it's, it's, it's, it's tells like that. Characteristics that change beyond just the size that are also something that are red flags for me. So you, it's almost, again, this mosaic approach, as opposed to just one thing being the death now. There's certain things that, you know, obviously you can't live with. Any sense that they are bad actors and they're not good partners. and they're not good partners, you're gone. But the other things are if it's just size,

you may give them a pass if they're good at managing the team. They're good at managing a bigger portfolio. As long as they've stuck to one strategy, they've kept the team together, the people that you like. They reward people the right way. So there's an incentive alignment between them and you as an LP.

It's kind of like what got them there, won't get them to the next phase. In the beginning, you're underwriting them as investor and then later on as a firm builder. Doesn't mean that they can't do both, but it's a different skill set. It's like that Dodgers pitcher, Tani, amazing pitcher and amazing batter, but literally once in a generation talent, somebody that can do both. Yeah. So you're not going to underwrite that day one. And that's part of what we're doing. We're underwriting people. You know, ultimately, whether it's people on your own team or the people that you're partnering with at the all these funds is that assessment of people what makes them special what gives them a right to win is what

we're constantly doing and constantly pressure testing that what are we getting wrong constantly re-underwriting those people their process their approach and so just because someone's done well doesn't mean they'll continue to do well but you look at Warren by Warren Buffett is a great example. Someone that, you know, managing way more money. Obviously, his returns in later years weren't as good as they were early years, but still this is an exceptional talent from a temperament standpoint in particular that overcomes some of the other limitations to the size. And this re-underwriting of people, you could think of that as the alpha in being an LP and the beta, everybody can more or less tell whether someone was a good manager,

especially now with AI, at some point, a high school student will put it in and say, is this a top quartile manager? It'll be very easy. That's going to be very quickly commoditized. What's hard is all things being said, yes, they'd be a great manager, but now with all these different factors, different market environments, different team, different fund sizes, different strategies, will they continue to be? How do we underwrite the future? That's where it alf is. Well said. Tell me about structural alpha. How much was structural alpha part of your investment philosophy? It was probably different definitions of structural alpha, alpha. But I would say just what the framework that we discussed really is structural alpha is trying to

identify why someone has a right to win. What is their edge? What is the inefficiency they're exploiting? Has it become commoditized? Is there been so much, again, getting back to your comment before supply and demand of capital for strategy, for a sector, trying to make sure that you stick to those areas where there is more likely to be this intersection of skill and edge, or skill and inefficiency, that to me is the definition of structural alpha. I guess the one area that historically people said is structural alpha is this illiquidity premium. I think that existed years ago.

You know, if you go back to even David Swenson's pioneering portfolio management is, you know, so many of the things that he was focused on is this notion of being unconventional. So if you're unconventional, you're by definition is structural. But I think so much of that has gone away. I'm just not a believer that there's going to be this beta to owning illiquid assets because there's just so much capital chasing all those illiquid assets. And so the structural alpha is less about illiquidity and really more about this identifying this intersection between skill slash edge and inefficiency.

And some of those inefficiencies get harder, but some I do think persist just because there's so much harder to invest in. Reflecting back on your UVA and Georgetown days, you etched in stone the six investment principles. What is the most important investment principle for creating sustainable investment program? Support for today's episode comes from Square, the all in one way for business owners to take payments, book appointments, manned staff, and keep everything running. in one place. Whether you're selling lattes, cutting hair, running boutique, or managing a service business, Square helps you run your business without running yourself into the ground. I was actually thinking about this the other day when I stopped by a local cafe here. They use Square and everything just works. Check out is fast, receipts are instant and sometimes I even get loyalty rewards

automatically. There's something about businesses that use Square. They just feel more put together. The experience is smoother for them and it's smoother for me as a customer. Square makes it easy to sell wherever your customers are in store, online, on your phone, or even at pop-ups, and everything stay synced in real time. You could track sales, manage inventory, book appointments, and see reports instantly, whether you're in the shop or on the go. And when you make a sale, you don't have to wait to get paid. Square gives you fast access to your earnings through Square checking. They also have built-in tools like loyalty and marketing, so your best customers keep coming back. And right now, you could get up to $200 off Square hardware when you sign up at square.com

slash go slash how I invest with Square. You get all the tools to run your business with none of the contracts or complexity. Run your business smarter with Square. Get started today. I'll go through all six, but I'd say the last principle I have in the list is people matter. And something I've already mentioned today is this notion of, you know, we're in the business of underlying people. What makes people special?

What makes people you think are going to not necessarily do the right thing on behalf of you as an investor or limited partner. So constantly underwriting people and then constantly underwriting what is the edge. What is the edge of the institution? Because we didn't really spend a lot of time of that. We're talking about what is the edge of the manager. You know, why possibly could a manager that has generated alpha and large cap public equity, which everyone is trying to do the same thing and it's very competitive, why is that person going to possibly continue to have that edge, which has existed over an extended period of time? Why will that continue in the future? So that notion of underwriting people, understanding edge, and how the fact that that edge could

change over time, I think are the two most important. But then getting back to edge is this notion of being introspective. You as an allocator, as an allocator, as an asset owner don't need to do everything. You don't necessarily have to be good at everything. I've never invested with, you know, speaking of Stanley Drucken Miller, I've never invested with macro hedge funds. And he's obviously, if you look at his historical track record, it's exceptional. But I've never felt that I had any edge at either accessing someone like Stanley Dracaneller or be able to identify the next Stanley Druck and Miller. And so trying to make sure you focus on where you have your own edge of your network,

the institutions network, and where you have areas where you think you have no edge. And maybe you could get better. Maybe you add someone to the team that can do it. But even if you add someone to the team, ultimately you as a CIO have to have conviction. because if someone is getting you outside of your comfort zone because they have a track record in a history of doing it, and then all of a sudden it doesn't work out short term. As a CIO, you might be prone to the behavioral mistake of pulling the plug at just the wrong time. It goes back to this, not understanding the thesis.

Yes, exactly. Double-click on the edge of an institution. What are some common edges that an institutional investor may have in the market? And this relates to what we talked about early in terms of being embedded in an institution and really enjoying the fact that you have a board or investment committee or both who have experience in the corporate world, investment banking, hedge funds, private equity. And these are individuals that have clearly signaled they will do anything to help you. They want you to succeed of trying to leverage them. And so each institution has a different, you know, composition of that board.

And then even beyond that, the alumni network of an institution. And each institution has a slightly different sort of edge. You know, when I think at UVA, going way back in time before I was even there, they had a very large allocation to hedge funds. There was a large number of graduates that went into the hedge fund world. A lot of them were a tiger. And that Tiger Cub portfolio really paid dividends over decades for UVA. So that was part of my network then, since I was part of that.

And so leaning on that versus we had certainly some very strong venture relationships, but unlike a Stanford that was on, you know, right off of Sand Hill Road, which is really still the epicenter of the venture world. It wasn't as good as another institution. We still had strong relationships that were built up over time, but understanding those relationships that you either have developed yourself or just have acquired as for being part of that organization is really, really helpful. Playing to your strengths.

I'm so curious, if you're at UVA, you have access to these Tiger Cove's in the Hedgefund world or if you're at Stanford Endowment, you have access to these top quartile venture programs. Is that kind of where you start with the program? If you're starting it from scratch, you build around your strengths, and then you're like, oh, crap, I'm like over-allocated in venture.

How do I defend the rest of my portfolio against this alpha? It's a really good question. I'd say what you don't want to do is to get so oversized in anything, just because it does supply to your strength, because you then end up with these other problems. It's just like, you know, too much of anything that's good for you can also be bad for you. You can actually, you know, have negative health consequences from drinking.

Everyone should hydrate. But if you drink a lot of water or too much water, it could also be bad. You also want to have this sense of play to the strength, but also know their limits to something. So it because of illiquidity. So let's say you just had, you know, 70% of the portfolio in venture. That's not going to work well over. long period of time, just because you have these bursts of the IPO market being open, so you can get liquidity then, but there are long time periods where you're not going to have

any liquidity. So that's not going to be good. But what I would say is you end up figuring out what is the most you can handle from a risk standpoint, from an asset allocation standpoint, and still meeting the long-term objectives and the institution. So having, say, over-allocation to that, relative to other institutions. But then the rest of the portfolio, it might take you a time to build that out. And a good default option is just being passive. If you were just starting from scratch,

play to the strength of the institution, where are the relationships that you can leverage day one? But then the rest of the portfolio, until you develop those level of expertise, let's say you build out a venture portfolio, and that was your edge. then over time you developed hedge funds, you developed other private strategies, you develop a public equity portfolio.

You can always be passive and just be passive until you build up that level of capability that is going to be sustainable over time. But just understand that, as opposed to just saying, oh, I have to have exposure to all these active asset classes or even private asset classes, even before I feel I have any kind of edge. This is such an underrated point. I had the CIO of North Dakota Land Trust, Frank McHale, and the way that he builds out every asset class is he finds an index of that asset class. And then he sells that index into a manager. So if he was to go and buy a large buyout, he would find an index approach to that. And as he finds a manager that he believes,

could actually deliver Alpha, he sells from that and puts him in that manager. And the reason it's so underrated is behaviorally, it's so important not to have a pressure to act when investing. Very well said. I think that's brilliant. And when you're starting out of CIA, I'm sure there's certain asset classes that you weren't an expert in. How many managers did you have to meet with before you were ready to make the first investment? Fantastic question. I would say that is very underrated. When I look back on my career, if I would have any sort of lesson learned, it would be to approach what we just talked about, whether it's being passive until you're active, approach that even slower than what I did in the past. It takes many reps to develop

a sense of pattern recognition to really understand who's good and is not. And it's, it takes years. Now, it could there will be that you have a team that already possesses some of that, and you've developed conviction in their ability to do that. But even then, that's a learning experience of understanding who you have on the team. So it's hard for me to give you a precise number of years or meetings, but I would say it's longer than most people appreciate. And 30 managers, de-resks a lot of it, 300, another sense. of it and then at the margins, the downside becomes less and less, the more managers. The odds of making a huge mistake are largely mitigated by a number of meetings.

And, you know, Warren Buffett always talks about this notion of waiting for the fat pitch. And although there's rarely this pure no-brainer of fat pitch, because there are always shades of gray that something, there's always something that you can come up with it. You could dislike about investment, but you don't want to make that paralyzed to make decisions. But I do think they're this sense of patience and this notion that you as an allocator should make very, very few decisions over a period of time should become, even if you have plenty of liquidity to do it. And even if you have, you're fully invested in an approach similar to what we just talked about where the default option is passive, of set this, this sort of this guideline of being very slow. in terms of the number of decisions that you make, I think is really helpful. One natural way of doing that is by just having a smaller team.

So when I think of, you know, a typical team size at large endowments could be anywhere from, say, 10, 20, maybe 30 people. Depends they could be even bigger if they're doing. But is trying to keep that number of people, the team size smaller, is going to make you less likely to make decisions. And I think that will just naturally force you to be longer term, force you to make things more slowly, have an inventory of things that you might do. But I do think there is an advantage of being slow in terms of the number of decisions you make in a period of time. How do you marry the strategy of going slow or going where the opportunities really

are with managing the board and the stakeholders and the messaging. Whether it's going slow or whatever that criteria is, you have to impress upon people the reason that you're doing that and what you're trying to prevent or what you're trying to guard against. And then you communicate that rationale. The logic to that is also it will make you less prone to chasing fads. But I think most people will get that if they keep on hearing that story over and over and over again. The hard part is just the sense of patience, the sense of FOMO, the idea of just doing things.

People like to be doing things. And again, there's this notion of if you have a team, they want to be making changes themselves, as opposed to moving very slowly. but doing that in a way where it still is a fun intellectually stimulating place to work, I think is interesting. I mean, one idea, most endowments, you know, is essentially manager or managers. You know, we're hiring managers. As you said, there could be certain sleeves where we have passive allocation as a toehold, but it's for the most part hiring investment managers and with a different, you know, range of

number of manager relationships. I do think doing direct investing as co-investing, where you're investing alongside of public and private managers, having that on the periphery of having a concentrated portfolio of number of managers and doing a lot of co-investing around the edges keeps people engaged and gets them closer to the underlying portfolio companies, which at the end of the day, that's the edge of how well of those portfolio companies actually doing and why do they have a right to win? And not that you're necessarily going to be making, doing the level of research and sourcing that managers would be doing, but leveraging up some of those decisions, it reduces the fee load, but it creates more liquidity, gives you more direct control over the sale of certain investments.

And it keeps the team very engaged in the process without then having to make a bunch of manager hire and fire decisions over a period of time. I think that's actually a useful addition. At Professor Steve Kaplan, he quantified the 220 is 600 basis points per year. So if you could average down that co-investment, if you have a fee structure low, you start with a margin of error is another way to put it. And then on top of that, you're partnering with your GPs. That also is a great way to diligence the GP.

Like, how are they thinking on specific investment? Completely great. You're doing ongoing due diligence and, you know, you're getting closer to the portfolio companies, which is what is ultimately going to cause the alpha and your cutting fees. It reminds me of a Peter Drucker quote, which is when CEOs get bored, they start doing M&A. They start acquiring companies. It's a good analog to that. That's a really good comparison.

So you're known for your real estate portfolios and specifically about your focus on the risk of inflation. Tell me about that. I'll tweak this question a bit. And this is what I would say is actually an even bigger career lesson learned. If you go back in time, whether it's me or whether it's other CIOs, you look at a portfolio. what are you trying to achieve? And you have this mix of public and private and you have this mix across, you know, sort of cash flowing, fixed income type assets and then riskier equities. And you're trying to create this portfolio balance. And you're trying to create this balance between deflation and inflation as two broad risks that are facing you as a portfolio manager. And so you think of equities as providing growth in the portfolio over a longer period of time,

fixed income protecting against deflation and real assets broadly as protecting against inflation. And it's a nice story. It holds together really nicely. And a lot of asset owners have some degree of kind of justifying their asset allocation using that type of argument. What I've kind of drawn the conclusion of after many years is a, and this is this is nothing new, that during inflationary times, equities tend to go do badly initially, only because what typically happens is the central banks tend to tighten into that, which causes a problem with stock prices. So that's why they initially, partly why they initially will sell off in addition to the fact that there's some economic costs associated with

inflation. But over a long period of time, equities are a real asset. To the extent that companies of pricing power, they can pass along cost increases. And it's a real asset as opposed to fixed income. Anything where the cash flows are fixed that does worse in inflationary environment, anything that the cash flows can go up with inflation is essentially still a real asset. So over a long period of time, I have a bias to more just equities as opposed to real assets in the portfolio because so much of the way or the way people or allocators implement real assets is through private real assets. And my observation over extended vintages is that private real assets, almost not all the time, but a vast majority of the time, underperform private equity, buyout, growth equity, and venture. And so I'd much rather use my private, again, to the extent that there's a budget that you have,

there's a constraint in terms of how illiquid you can get. I'd rather use that private illiquidity budget with buyout growth equity and venture than I would private real assets. And the exception being when I've gone back and looked at this, there are occasionally vintage years where, so for example, estate will have an exceptional period. Just right after the GFC, there was a great vintage year for real estate. And it's the times of distress. So real estate can be really interesting during times of extreme dislocation. Just like anything that is more distressed oriented is attractive during those periods of times. But I would, as opposed to just trying to target an allocation to that, I'd much rather be doing private investing broadly where the default option is private equity

being buyout growth venture. And then say for special periods where you're going to be doing something that could compete with those in particular in those vintage years, that's going to be more as a real asset. So what that, again, argues for is having more of this generalist. You're not always just always committing to real estate. You're just waiting for that fat pitch. that fat pitch is going to be very episodic, as opposed to just being always on. So that's how my view is involved over time.

And for that, you need liquidity. You can't hit the fat pitch without liquidity. Yeah. And you need to have, you need to have liquidity, and you need to have that sense of, is it going to compete with what else I can do privately? So that's my sort of long-winded view of getting a much smaller, to no allocation that's private, except for episodically, opportunistically, that is a real asset. And Professor Steve Kaplan, who we talked about earlier, he has compelling evidence for non-taxable

investors. They shouldn't really have almost anything in infrastructure and real estate because those just don't outperform over long term. Yeah. And there are other strategies like that, too. I mean, there is a difference between taxable and non-taxable investors. There are certain strategies for a non-taxable investor. that are at the margin, you could argue that's one of the reason you're doing it because you have an edge from a tax standpoint.

But you also don't want to make sure that you want to make sure that the tax reason is not driving the bus. Perhaps a dumb question, but when you have individuals, they're able to borrow against their personal stock portfolios at a very low rate. And endowments, which seem to be the greatest counterparties you can have in terms of a creditor. they don't seem to really borrow against their illiquid part of the book, even to any degree. Why do you think that hasn't become a thing where there's products that allow endowments to borrow against the liquid portfolio? It's a great question. I mean, a couple comments.

One is, at least, I mean, certainly not the venture in growth, but certainly the buyout, there's already leverage. And so that would just be leverage upon leverage. So that would be one thought. You already see a little of that. So to the extent that, you know, whether it's the GFC, whether it's other times where endowments have gotten to a liquid, there have been times where the university either has or could serve as a backstop, because so many of these elite universities have very strong balance

sheets. So they could do that in times of stress. You could almost argue as opposed to borrowing against the private portfolio, there's some element of that of using derivatives and futures for a rebalancing approach. So there's ways of rebalancing that you get it through futures exposure, which is essentially, you know, implicit leverage. So you're doing that. And then the third comment is you already have a little leverage embedded in the system, just the way that you do private equity. There's unfunded commitment. That is an implicit liability also. And so you already have a little leverage. So you just have to be careful. You've been in around the endowment model for decades. There's now also this TPA, the total portfolio approach model.

What's your sense for the future of endowment investing? What's the model going to look like? The total portfolio approach, there are a number of endowments that they don't call it that, but they do a version of that already. They're not bucketing a set of target allocation to buy out, target allocation to venture, target allocation to this and that across the portfolio. And they're thinking of it more as, okay, what is my beta to public equity, which is the way I've approached it,

which is, you know, can do a total portfolio approach. The endowment model, which, you know, has different elements. It's some, to some extent, embedded in some of the things that we talked about, whether it's being long-term, focusing on no liquidity, focusing on your edge, focusing on inefficiencies, being able to be unconventional and contrarian, playing to the strength of the organization because you have these alumni that are really willing and able to help you, which does give you an edge and access. That's all elements of the endowment. approach. I'd say a couple tweaks is one is endowments historically have been very benchmark, less benchmark sensitive than, say, pensions. Pensions run at a certain tracking error and the way

they think of risk is not just, you know, absolute level of drawdown, but also how much they're deviating from their benchmark in terms of return. They're so much more benchmark sensitive and aware than endowments have historically been. It does appear that in light of the fact that there's been this, you know, enormous gain in the public markets over the last few years driven by mega-cap stocks, which has caused private investments to lag, that there are a number of endowments that have been lagging public benchmarks, which I think is causing a rethink in terms of being more benchmark aware that's more so more to pensions.

I don't think that's going to lead to big changes, but I do notice there's more of a discussion about that among CIOs. I'd see where you're seeing, you're probably going to see differences, is one is, endowments have just gotten much less liquid. It's less about unfunded commitment problems that they had during the GFC,

and really more related to the fact that private investments across the board, bio-growth venture, have just not generated the liquidity that they have historically, and there have just been longer holding periods. So even good companies in portfolios, managers have been reluctant to liquidate those, either sell them or do an IPO,

and these companies don't need to go public. And so companies are staying private for longer, and I think that's caused people to just reassess the speed with which they're committing to private investments. So they've just gotten less liquid. So people are using the secondary market. There is a fairly liquid, especially on the buy outside, secondary market. So people are tapping into that more.

And so I think there's a greater appreciation of illiquidity. I think there is a growing awareness to the fact that, yes, illiquid investments, because of differentiated access to good funds, that's still going to be an edge for a lot of the larger endowments. But I think there's less of this sort of risk premium that's going to be generated because of the fact that they're just illiquid, this illiquidity risk premium. So I think there's going to be greater appreciation of illiquidity. Another example is for years on hedge funds, there'd be different as share classes

that you can invest in in hedge funds, quarterly, annual, three-year lockup. And so many endowments would just go automatically into the long. longer term lockup to get lower fees. I think people realize that the cost of going into the shorter lockup is less than the cost that you're getting from going into those longer share class. It's just a renewed appreciation of liquidity risk, if you will. Finally, is this what I talked about this mixing. I'd say there's a lot of co-investing. There are a lot of institutions that maybe almost akin to what some family offices are doing, which, is fewer manager relationships a lot more in the way of direct and co-investing around the

periphery. I think there are more institutions that are doing that. I don't think you're going to see the repeat of Harvard management from years ago, which was not entirely but a large percentage of the portfolio in internally managed funds. But it's going to be more of this investing alongside of managers. I think that will be a greater part of what a doubt. we'll be doing. If you look at this endowment versus TPA approach, they both have strengths. If you got rid of the labels, they probably both have wisdom that you can integrate into just best, best practice. Agreed.

Completely agree. If you go back to 1986 when you were just starting out at Goldman Sachs, I'm not trying to age you. But what would one piece of advice would you give a younger Larry that would have either accelerated your career or helped you have what caused the mistakes? I'm going to double down it again. It's all about the people. is, you know, one of the things that, you know, mistakes that have been made over the years is not thoroughly assessing quality of people. You know, whether it's in personal friends or whether it's, you know, investments is just making sure that there's no stone unturned and you're not done with that reassessment forever. You're just constantly doing that, as long as you have a relationship with that person.

You need to constantly re-underwrite that. And people change. So that combined with people, meaning people in the positive sense, one of the things, going back to Goldman Sachs in 1986, that I think was exceptional, still a partnership, exceptional people, and was the ability for them to work as a team. And the collaboration of Goldman, I think Goldman still is exceptional people. but I just speaking from that point in time is the ability and the importance of collaboration and how well what that meant to your success, you were being, you were being rewarded as much

on how you collaborated as well as how much money you made for the firm. That sense about quality of people and ability to collaborate partner is to me the thing that is most important. You know, when I grew up, I was a math science guy. I ended up getting a PhD in economics. It was very mathematical. And as I've gotten older, what I feel like is the most valuable is the relationship side. The people, understanding people, what makes them tick? Are you aligned? Do you trust them? Both sort of the understanding that downside as well as the upside, what makes them special? Why are they one and a million? Why are they potentially a unicorn? And then that ability to work together with them and with your team and building a group of

people that have that. To me, it's all about the people. And that's why to me, that is the most important of all my core principles. That's the most important. And that's the most important thing. That's going to determine success and failure. People are upstream of everything, whether it's people on your team, whether it's a GPs you invest in. If you make those decisions correctly, even if you make them for the wrong reasons, hypothetically, they'll lead you to the right decisions. If you think about leadership, it's this vague overused term. Leadership is really selecting the right team and leading them together to the right answer. Well said. Very well said. Larry, this has been an absolute masterclass. I've been really excited to jump on a podcast.

Thanks so much for jumping on. Looking forward to continuous conversation live. Thank you so much. It was great meeting you. I really enjoyed this. That's it for today's episode of how I invest. If this conversation gave you new insights or ideas, do me a quick favor. Share with one person your network who'd find a valuable or leave a short review wherever you listen. This helps more investors discover the show and keeps us bringing you these conversations week after week. Thank you for your continued support.