Investing Billions - E67: Children’s Healthcare of Atlanta CIO - Muthu Muthiah

Starting point is 00:00:00 You mentioned you had your first CIO position at Inatai Foundation. You had a very interesting problem set. Somebody gave you essentially $2 billion and you had to create a strategy. Tell me about that process. So the way we think about the world is if you plot kind of time and revenue for a company, it ends up looking like an S-curve. And we think in the first part of that S-curve where revenue goes from zero to something or remains mostly zero where you're funding losses, that's venture.

Starting point is 00:00:24 And then when revenue is kind of scaling up, that's growth. When revenue is maturing at some point, it's buyout or public markets. And when it's tipping on the other side, it's either distressed or short equity. When we go back to that construct of kind of where we want to concentrate and the notion of concentrating in places where there's efficiency and innovation, that clearly leads you to technology and it clearly leads you to venture capital. So it's very much a core focus for us. Again, I said we're 10% now. We think we'll get to 20%, you know, slowly over time.

Starting point is 00:00:52 For more ideas on how to raise venture capital in this market, make sure to subscribe below. Mutu, you have one of the most unique backgrounds for chief investment officers. I've been really excited to chat. Welcome to 10X Capital Podcast. Thank you David. Thanks for having me. Tell me how you came to be the chief investment officer of Children's Healthcare of Atlanta.

Starting point is 00:01:12 Yeah, I think you're right. I think very differentiated or unique background, I guess, in that, you know, my undergrad is in hospitality management, which is not the foundation most people build an investment career off of. So I did that for undergrad and then worked in the hotel business and thought to myself that I worked in the business for two years and realized it wasn't something I was interested in. So I quit and took some time off and really considered what I wanted to do in life.

Starting point is 00:01:37 And I still wasn't quite sure, so I went and got an MBA. I was really, really lucky because between my first and second year of B school, I got an intern with the state of Florida's pension fund down in Tallahassee. And that kind of opened my eyes up to this whole world of kind of mission-driven investing. And that started me on the journey. I think, you know, I just want to get into the business. Started kind of in private equity at the state of Florida after I graduated, worked for this wonderful human being called Jim Traynor, learned that, and then got an opportunity to move to the University of Richmond, Spider Management, where I really was able to learn a lot outside of private equity. And that

Starting point is 00:02:13 got me interested about being a CIO and spending more time on asset allocation and things like that. I was just lucky that I kept getting into the path of people that were willing to kind of giving me more opportunity and let me learn. And that finally converted in 2019 into a CIO job at the Innotye Foundation, which I was, you know, incredibly lucky to get, I think, but it was an incredible experience also and kind of got me on the path of the chief investment role. You've been able to navigate your career very effectively, staying, gaining skill sets, building relationships, and moving on into roles where you had more autonomy, the next generation people that are leaving business school, how would you advise that they approach their career? One of the favorite books I've read is called Range. And I think it talks about kind of

Starting point is 00:02:59 generalist and how generalists kind of operate in the world versus specialists. And I think what I took away from that is that a lot of times before you specialize, it's good to be a little bit of a generalist. And I think getting as much exposure as you can to as many different things as you can early on in your career, I think is really, really useful. Even if you want to do that, you have to find yourself in places that can allow you to do that, I think. So, you know, my advice would be to look for opportunities on teams where it's available to kind of look at one thing and then switch over and look at the other thing or just available to be to be a generalist.

Starting point is 00:03:32 Landing at Spider Management and working for Geico Rob Blanford is where all that came together for me, where, you know, so my advice would be to kind of seek those people out that you think will give you that opportunity and also seek those teams out that have the structure where you can learn more than one thing. Tell me about the skill sets that you learned by being a journalist. I think it's mostly connecting the dots. It's thinking across the opportunity set is really what I learned. I'll give you an example. One thing that stands out to me is the decision, let's say, on illiquidity. You think about growth, for example, and you weighed the opportunity of doing kind of public market

Starting point is 00:04:09 or private market growth in the U.S. versus public market growth in Asia. I think the comparison you're making is that in developed markets, for the most part, so many sectors are so saturated that to get growth, you need to actively take market share from your competitors, which I think at some point means that you have to actively change consumer behavior. I don't think it's impossible, but it's complicated. And then you weigh that against the opportunity of public investing in Asia, where a lot of the growth doesn't come necessarily from taking market share from competitors and changing consumer behavior, but it just comes from growth of wallet. Having worked in both of those areas helps you make those decisions, I think, on relative value terms. Buyout is another example,

Starting point is 00:04:49 at least for me. So at the end of the day, if you look at small cap U.S. equity markets, it is, I think, a liquidity play or an illiquidity play in that you're investing in companies that maybe have some efficiency gains to make, and then the market recognizes it and pays you with liquidity. There's a better way to do that within the buyout world, where you are still kind of in small cap equities, but you own it, you control it, and you can add the value, and then you can seek liquidity in the market. The biggest thing for me on The Generalist and why I think it's been additive to how I think about the world is that you can connect those dots. And you can say, I see this here, I see this here. How do those dots compare? Because I have the opportunity to both.

Starting point is 00:05:25 Where's the best thing in each bucket. You've chosen at a children's healthcare to also have a group of generalists. So one thing is the CIO is the generalist and the other is the team as a generalist. Tell me about that. Yeah. So, you know, we're all generalists, but we all have our biases on the team. So there's folks that kind of grew up in the private world as folks that grew up in the public world.

Starting point is 00:05:44 So I think, you know, we all have different biases, but we all kind of, you know, come together to work on it. And I think, you know, if I were to describe the process and how it works, I think it's a little bit of kind of organized chaos, right? Like, you know, things come in and people tend to look at it. But we try to process it out by having kind of one, you know, funnel of ideas that the team can talk about in totality with each other. So that, you know, the general model, the generalist model works in that there's always a deal champion. The thrust of it is that we, we would like for it to be not, you know, one person doing all the work and then presenting it to the rest of the team. And they kind of ask, but having a small group of nimble, nimble generalist folks that could all kind of, you know, more than one

Starting point is 00:06:24 person can work on one thing type approach. Let me play devil's advocate. If you were to take a journalist and put them into venture, let's say they're a top decile LP in the private equity space, they would make significant costly mistakes. They would create concentrated portfolios. They would try to look for companies that they could change or improve. So it'd be disastrous. How do you negate the potential risks of having a generalist team investing into different assets that may be idiosyncratic? I think each team member has their biases.

Starting point is 00:06:51 So if you look at our team today, my biases are kind of venture and private equity. That's where I mostly grew up, I'd say, rather than barring the last five years or so. I think that's where I mostly grew up. And then Zach McGuire on our team has a very deep kind of experience within venture and buyout. And then, you know, John Dolphin has spent most of his time, you know, within the hedge fund universe. And then Mike Neguse spent a lot of time in the public equity universe.

Starting point is 00:07:17 So we think we have enough biases there and we have enough kind of, I guess, internal expertise in each thing where we do have folks, I think, that are more apt to not make those mistakes. I think we're going to make plenty of mistakes, but there's some learnings embedded about, you know, venture and buyout and long-term equity, you know, from individual team members that grew up in those asset classes. I think what we try to add on top of that then is, you know, the viewpoint of someone who's not from the asset class. So, you know, John's view on venture, a lot of times it's somewhat differentiated just because, you know, he didn't grow up in that,

Starting point is 00:07:50 I think, at the end of the day, right? But there's other people in the team that did grow up in that, that we can hopefully kind of, you know, add balance to it. We're definitely going to make mistakes, David, but I hope it's not kind of fundamental mistakes because we do have people that have fundamentally done the work within each asset class on the team.

Starting point is 00:08:03 You mentioned you had your first CIO position at Inatai Foundation. You had a very interesting problem set of somebody gave you essentially $2 billion and you had to create a strategy. Tell me about that process. Yeah, it was fun. First of all, I think it's always kind of fun to build something from scratch. And I think the biggest and most fun part of it was that there was no legacy that you had to argue against. It was mostly like, hey, does this make rational sense? Let's go ahead and execute it. So it was a joy to kind of work on. But I think, you know, when I joined Inertai,

Starting point is 00:08:32 we thought about kind of what foundation do we want to build and then what do we want to build on top of the foundation? How do we want to get there? So I think the foundation, you know, is pretty much the same for most investment organizations, right, or at least mission-driven organizations. I think you need a really strong governance structure that can provide oversight, but that also can move nimbly and make decisions. I think you need an apt amount of resources to go out there proactively and kind of build relationships and source and underwrite managers in all of the markets that you want to be operating in.

Starting point is 00:09:04 And you need an amazing team, and you need access to good managers. And so we thought about those four things as the fundamentals of what we're going to build. And we started there. And so where that started was with governance, saying, hey, this is what we want to do. This is where we want to go. Talking through governance, understanding how the values and what the organization wanted, how the mission all dovetailed into that. And that actually took a lot of time and a lot of work.

Starting point is 00:09:28 And we spent the time doing that. On the resource side, you know, making sure that we communicated the resources that we needed to do what we needed. And then it was hiring the team. So we got some really great hires done off the bat, which I was incredibly grateful for. You know, Peng Wang that came in as MD and then Don Wilson, who came in as the head of operations. And those were key hires and then Xiao Zhang and Julia Riley.

Starting point is 00:09:53 Those are key hires that we all kind of, you know, built the stuff. We had to find out. And I think a lot of the time that access comes from, you know, being able to evangelize the mission, I think, and then, you know, leaning back on networks that you may have had in previous places. So that was kind of the fundamentals of what we built. And then on top of that, we said, okay, we need to, you know, put together an investment philosophy, but the investment philosophy has to be apt for the pool of capital. But what kind of pool of capital do we own? I think he kind of, you know, things that stood out to us in the pool of capital in a tie is that, you know, perpetual investment horizon and variable spend rate, so we could manage it

Starting point is 00:10:25 like most endowments do with a very long-term horizon. And the second thing we had to kind of think about is what is our constraints, or at least what is our risk framework? And the two things that we were trying to solve for were making sure that we had enough capital to pay out for the payout, and then also compound capital. So we tried to think about the balance of kind of shortfall risk and drawdown risk and what that equity risk might be, and decided that 0.7 equity beta was the appropriate risk to take for the portfolio.

Starting point is 00:10:53 So we kind of put that philosophy in place saying, look, we're here to allocate that unit of equity beta to where we think the most alpha lives, and then back that up with a process that helps you execute, proactively look for markets where we think, you know, there's fertile alpha markets, proactively build relationships, underwrite, et cetera. And then on back of that to drive the process to try to hire the right people and create the right cultures. I want to unpack a little bit because you said a lot of things that are very interesting and novel. So one is you created the governance first, the system second, and you hired the people third. Is that correct?

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Starting point is 00:12:05 Click the link in the show notes below to book a free, no-strings-attached demo with Deal today. You know, it all kind of came together at the same time, I think, honestly. It was one of those situations where I think, you know, we had the basic framework of what a process would be, and then when people came in,

Starting point is 00:12:19 it got better and it got more refined. So I think, you know, it was a little bit of both, honestly, David, but governance is where we really started. i first got to in a tie i was at one of our staff retreats and you know somebody said and i can't remember who was it was only stopping said you move at the speed of trust and that really stuck to me and so you know we we spent the time building trust i think with the governance structure. And that trust came from saying, look, here's a, hopefully a clearly articulated investment strategy. You know,

Starting point is 00:12:50 here are the risk parameters, you know, let us really understand the values of the organization and let's bring all that together so that when we build trust around, you know, where we're headed, we can move quickly. So I'd say that's- That's trust with the stakeholders, trust with employees. What was the initial trust that you really had to build? Honestly, everyone, David. So I think initially it was the governance structure and the leadership at Inertai, et cetera. And then it was honestly trust between ourselves too, right?

Starting point is 00:13:16 We could run quickly and get things done too. So the nice part of all of it was that I and Pong had worked together before and Pong and I had both worked together with Dawn before. So there was already like a very much embedded amount of trust between the three of us. So that enabled us to kind of go off in our own three directions and just get things done. So I think the trust thing was everywhere. But if you were to think about it sequentially, I think, you know, the only real sequence was kind of getting the governance stuff right first, probably getting the resource stuff right second, because that allowed us to hire people. Deeper you go into LPs and asset management, you start to learn something really interesting,

Starting point is 00:13:52 that the most sophisticated LPs care about two things. One is governance and one is asset allocation strategy. There's significant research that shows that how you allocate your assets is much more important than which managers you yeah especially in in asset classes outside of venture where there's less variability between top and bottom quartiles yeah i think you're absolutely right i think how did you come to that it was a discussion between kind of pong and i and i think you know leaning back on a lot of the work that pong had done i think in asset allocation and seeing if it was apt for where we wanted to go. So you're absolutely right. So we kind of honed in on saying, we want to be more dynamic in the asset allocation. We picked very broad benchmarks and very broad

Starting point is 00:14:38 target asset allocation, which is the same at Children's, but we picked a 70% allocation towards equity-like investments and a 30% allocation to fixed income-like investments. And what we thought that gave us was just an equity beta budget. And so, you know, things with equity beta of, you know, 0.5 or less, probably about 0.3-ish, go into that fixed income-like portfolio. So that's where, you know, all our hedge funds are housed and all of that. And then everything else with a beta higher goes into the equity-like portfolio.

Starting point is 00:15:05 So the way we kind of thought about it was like, hey, that is a benchmark. And then we picked MSCI Acquies, the equity-like, and Buckley's Act for the fixed income-like. And on the MSCI Acquies side, we're like, look, it's clear we can only beat the benchmark if we take risks that aren't in the benchmark. So we tried to think about what big buckets of risk are that we need to take. And we kind of said, look, the big buckets of risk we need to take are concentration, illiquidity, leverage, and timing. And we're like, you know, in terms of concentration, we want to concentrate in markets where we think there's a higher probability of generating alpha.

Starting point is 00:15:38 And we think those markets are characterized by inefficiency and innovation. And then within illiquidity, again, we want to take illiquidity in places where control is meaningful or influence is meaningful. And that is buyout and venture for us. And then leverage and timing is our hedge fund book. So we kind of thought about benchmark, sets the return target, sets the risk parameters. What risk is we going to take that's not in the benchmark, what levers are we going to use to kind of execute those risks. At a very high level, you're optimizing around seems like two goals. One was funding, you know, the short-term liquidity needs of the foundation and long-term was the evergreen nature. How do you make in a tie the highest amount of AUM on a

Starting point is 00:16:20 risk adjusted basis 20, 30, 40 years from now? Was there anything else that you were optimizing on? No, I think those were the two goals that we focused on. I think the 70-30 was a result of saying if you have more than 70% consistently over time in equity-like investments, then the volatility might be too much and would negatively affect your drawdown risk. And then on the balance of that, if it was below kind of 60-ish, I think was the number, you weren't taking enough equity risk to kind of compound capital in the shortfall risk was high.

Starting point is 00:16:49 So we kind of decided on that 70 based on that math and that analysis, and then kept that as our North Star. And then also kind of constrained, I think, over time for liquidity need and payout and then self-funding of the private portfolio. Do you think there's a systematic risk of the principal agent problem, NASA management, in that there's significantly more downside for people's careers than upside? Clearly, GPs and venture capitalists have quite a lot of upside. So I think they're doing fine.

Starting point is 00:17:20 But in terms of LPs, there seems to be systematic conservatism, which may or may not be beneficial to the underlying organization. As with any job, I think there is kind of downside and upside. And likely the downside is a little bit more maybe in these jobs than not in terms of the payoff. But I do think the upside really is being able to, I think, serve a mission that's powerful, that's hopefully personally meaningful to you. And I think there's an incredible amount of non-quantifiable kind of upside in that, in terms of maybe a career and then having meaning in life. But I do think probably economically that the tables don't look like they do on the GP side,

Starting point is 00:18:02 that it's about all facing the right direction over time, right? The governance structure and the team. And I feel what might be critical in that is to have an investment strategy and framework, et cetera, that's easy to communicate and that everybody around the table understands so that, you know, that moment of capitalization doesn't happen, but also people are willing to kind of see what the longer term outlook is and not make, you know, decisions on staffing based on short-term outcomes. During your time in Initia before you went to run Children's Healthcare of

Starting point is 00:18:34 Atlanta, what was your biggest learning at Initia? You know, honestly, I think it was that the trust equation, David, on how important that is to kind of keep momentum going and building and getting things done. So I think coming out of that, for me, again, one of the biggest learnings of the trust and then the second biggest learning was communication. And, you know, going into that job, I thought I was good at like, you know, trying to keep people abreast of what's going on. But a lot of the times, you know, execution gets in the way sometimes and you can be a little not so great at communicating it. So I think another lesson I took away was, like, keep that focus on communication.

Starting point is 00:19:14 Again, I think, Denblin, your earlier point that, you know, make sure that people around the table understand where you're going, what you're doing, you know, consistently. So I think it was that. It was kind of like, you know, trust everywhere, you know, among the team members with governance structure, you know, consistently. So I think it was that it was kind of like, you know, trust everywhere, you know, among the team members with governance structure, with leadership, you know, again, you know, I think it was, was one of the biggest takeaways. A lot of LPs will say, okay, what did you learn from fund one, fund two?

Starting point is 00:19:38 Of course you made mistakes. What mistakes did you make and what did you learn from that? Because there's an, there's an assumption that it's okay to make mistakes of course, but it's what you learned from that and how you become better. That that's most important. Yeah. I think lessons learned, I think it was probably was the communication. I think I got in and was kind of doing things and, and maybe not communicating

Starting point is 00:19:56 everything I was doing as well. And the team was doing, so I think the biggest lesson, like, yeah, the biggest lesson learned was, you know, keep, keep your focus on communication and you can get sucked into the weeds of execution, but every now and then get back up and make sure that all the constituents know what you're doing. So then you went to Children's Healthcare of Atlanta. So tell me about the problem set there. What problem set were you taking over and what were you able to accomplish in the first

Starting point is 00:20:19 year? Well, get right back to the interview. But first, to stay up stay updated on all things emerging managers and limited partners, including the very latest data on venture returns and insights on how to raise capital from limited partners, subscribe to our free newsletter at 10xcapitalpodcast.com. That's www.10xcapitalpodcast.com. In terms of the approach or what we've been working on over the last, you know, a little over a year and a half has been kind of the same three pillars that we were working on at Innotie, which is, you know, is this philosophy apt? Does the asset allocation really reflect or allow the philosophy to work?

Starting point is 00:21:00 Does the process kind of support it? And, you know, does the team structure in terms of, you know, how we approach the work and who's assigned to what all kind of makes sense? So, you know, that was where initially the work started, David, just to kind of figure out where we were. What catalyzed that analysis was just maybe, you know, a shift in the economic backdrop, just generally going from a world that felt like, you know, low interest rates, low inflation, globalization to higher interest rates, higher inflation, and deglobalization maybe. So that's what catalyzed saying, hey, do we still want to do the things that we've been doing over the last 15 years? And that's where the analysis started. So philosophically, I think we were where we needed to be, long-term oriented, leaning

Starting point is 00:21:41 into our competitive advantages in terms of capital and the nature of it. What about within venture? What's your philosophy on that? How many managers are you looking to do? Venture for us is, you know, is more about, I think, the number might be a little harder for us to control because, you know, access and capacity and the size of venture funds. So I think the answer is, I'm not quite sure. That is probably where the most number of managers are going to be for us. It will probably be kind of the venture bucket, just given how much we can get to work per fund with relationships. But we have to have some framework for relative value, I think, between kind of strategy asset classes. And we try to at least take more of a first

Starting point is 00:22:21 principle approach to that and allocating it. So the way we think about the world is if you plot kind of time and revenue for a company, it ends up looking like an S-curve. And we think in the first part of that S-curve where revenue goes from zero to something or remains mostly zero where you're funding losses, that's venture. And then when revenue is kind of scaling up, that's growth. When revenue is maturing at some point, it's buyout or public markets. And when it's going, tipping on the other side, it's either distress or it's short equity.

Starting point is 00:22:53 And then we try to think about what are the value drivers of each one of those strategies? What are the risks embedded in each one of those strategies? What are our expected returns for each one of those strategies? And then in which areas of geographies can we kind of underwrite the risk and understand the risk better, I guess, to kind of deploy into that strategy. So within venture, we think what drives return innovation, and we think the risks you're taking clearly are tech risk, market adoption risk, and execution risk. And for that, we want kind of five times gross on a fund level is our expected return. And then in terms of where we think we can go to solve for that, you know, we love the U.S. because we think you can solve for innovation and technology here.

Starting point is 00:23:32 And, you know, we like India because we feel like you can find that in India, too. And so we think about which geographies and which sectors that kind of makes sense. And then when you go to the growth spectrum, we think you're driving kind of value through scaling and you're taking market adoption risk and execution risk. And for that, we want three times gross on a fund level. And we think that's available sometimes in public markets in Asia, specifically in India. And then just kind of for sake of completeness on buyouts, you know, we think what fundamentally drives value is efficiency. And we think you're fundamentally taking execution risk. And we expect kind of two to three times growth for that on a fund level.

Starting point is 00:24:11 And then we think about where do we want to deploy that money. And we've decided to do that in developed markets because we think there's a depth of operating talent and a depth of transaction talent and a depth of opportunity set in terms of small companies to buy. So tell me about your venture book today at Children's. So our venture book today, there's about 10% of the portfolio. And, you know, we have plans to kind of take that to 20% over time. When we go back to that construct of kind of where we want to concentrate and the, you know, I guess, notion of concentrating in places where there's efficiency and innovation, that clearly leads you to technology and it clearly leads you to venture capital.

Starting point is 00:24:50 So it's very much a core focus for us. Again, I said we're 10% now. We think we'll get to 20% slowly over time. That is not really, I think, a target, I'd say. It is a target in that we'd like to get there, but only if we can find the right partners. So we wouldn't just fill that bucket. But if we think we can invest and partner with the right people, then over time, we can kind of get to 20. Do you have first-time funds? Tell me about kind of the vintage diversification. Yeah, we have both. So we have fund ones in the portfolio, and we also have firms that have been around for a long time.

Starting point is 00:25:31 So we do try to plan that in that we always have a set of emerging managers in the portfolio. And over time, we think the balance of that is kind of, you know, 60, 70% in kind of mature managers and then, you know, 15, 20 to 15% in emerging managers and that developing in the middle as we kind of, you know, cross that bridge. So, you know, we very, very much focus on kind of looking at emerging managers and then having that balance, I think, of longer dated managers too. What would you like our listeners to know about you, about children's, about anything else that managers and then having that balance, I think of longer dated managers too, in the portfolio. What would you like our listeners to know about you, about children's, about anything else that you'd like to shine a light on? Yeah, dude, I think, you know, really our mission at the end of the day, you know, I think, you know, here as a team, we take a lot of meaning in life just for

Starting point is 00:26:18 working basically for the kids of Georgia. And so, you know, if anything, I'd love to leave your audience with a sense of kind of who we are in our community, what our mission is, and kind of what we do. And, you know, to summarize it, our mission at the hospital, at Children's, is to make kids better today and healthier tomorrow. And, you know, I feel like the endowment, you know, serves the purpose of really those two words, today and tomorrow, kind of making sure that we're here for spending and making sure that we're compounding capital for future generation, Georgia's kids. When we partner with folks, whether it be venture, buyout, they contribute to that mission meaningfully in a big way. And the returns that they generate go directly to helping children.

Starting point is 00:27:03 For a long time, Sequoia almost exclusively only had LPs with causes that they believed in. So, so I think it is truly a huge differentiation in the space and we emailed originally when you were at Emory, so maybe five, six years ago. It's crazy. It's been a while. Yeah. Yeah.

Starting point is 00:27:19 Yeah. It's been a while, long time coming. I really appreciate you jumping on the podcast and look forward to meeting up in New York or Atlanta very soon. Yeah, absolutely. David, thanks for having me on. And it was, it was a great conversation. I really enjoyed it.

Investing Billions - E67: Children’s Healthcare of Atlanta CIO - Muthu Muthiah

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