The Pomp Podcast - #1069 Adam Kurkiewicz On How To Invest Like The Best Performing Endowment

Episode Date: August 2, 2022

Adam Kurkiewicz is the Managing Director of Investments for the Washington University In St. Louis Endowment. In this conversation, we discuss endowments, asset allocation, portfolio construction, how they know when to buy and when to sell, and his views on alternative assets like cryptocurrencies. ======================= Crypto wallets and browser extensions are outdated, limited in features, and don’t meet the needs of today’s Web3 users. Core, the free, non-custodial browser extension built by Ava Labs, is more than just a wallet. Core is packed with features that give Avalanche users a more seamless, and secure, Web3 experience. Did you know you can also bridge Bitcoin natively across the Avalanche Bridge, and take advantage of the thriving DeFi ecosystem on Avalanche? This is just one of the innovative properties that make Core so powerful, giving users an all-in-one operating system that brings together Avalanche apps, Subnets, bridges, and NFTs in one high-performance browser experience. With Core, any crypto user can easily swap assets, display NFTs in a beautiful interface, and store your assets in a Ledger-enabled wallet. Plus you can put real dollars in your Core wallet in just a few clicks. Go to www.core.app to access the full power of Web3 on Avalanche! ======================= LMAX Digital - the market-leading solution for institutional crypto trading & custodial services - offers clients a regulated, transparent and secure trading environment, together with the deepest pool of crypto liquidity. LMAX Digital is also a primary price discovery venue, streaming real-time market data to the industry’s leading analytics platforms. LMAX Digital - secure, liquid, trusted. Learn more at LMAXdigital.com/pomp ======================= Valour (formerly DeFi Technologies) represents what’s next in the digital economy -- providing simplified, trusted access to crypto, decentralized finance and Web 3.0 investment opportunities. Institutions and investors can gain diversified, secure, compliant, and easily tradable access to a diversified set of industry-leading equity products and protocols, through a single stock purchase on a regulated exchange. Currently listed on U.S. (OTC: DEFTF) and Canadian (NEO:DEFI) exchanges. For more information or to subscribe to receive company updates and financial information, visit our website at valour.com =======================

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Now let's kick this thing off. Adam Kirkowitz is the Managing Director of Investments at Washington University in St. Louis. Adam and I had a fantastic conversation. We talk about endowments, asset allocation, portfolio construction, when they know to buy, when they think it is time to sell, how he thinks about looking at alternative assets like cryptocurrencies, venture capital, and many other things. This conversation with Adam was really fun, and I also learned a ton.

I hope that you guys enjoy it just as much as I did. Before we get into this episode, though, I first want to talk about our sponsors. This episode is brought to you by Avalanche. Crypto wallets and browser extensions are outdated, limited in features, and don't meet the needs of today's Web3 users. Core, the free non-custodial browser extension built by Avalabs, is more than just a wallet. Core is packed with features that give Avalanche users a more seamless and secure Web3 experience. Did you know you can also bridge Bitcoin natively across the Avalanche bridge and take advantage of the thriving DeFi ecosystem on Avalanche?

This is just one of the many innovative properties that make Core so powerful, giving users an all-in-one operating system that brings together Avalanche apps, subnets, bridges, and NFTs in one high-performance browser experience. With Core, any crypto user can easily swap assets, display NFTs in a beautiful interface, and store your assets in a ledger-enabled wallet Plus, you can put real dollars in your Core wallet in just a few clicks Go to core.app to access the full power of Web3 on Avalanche today This episode is brought to you by LMAX Digital, the number one institutional crypto exchange They offer clients the deepest pool of crypto liquidity on the planet, underscored by a 100% uptime track record through volatility spikes They leverage LMAX Group's liquidity relationships and ultra-low latency technology. LMAX Digital is the market-leading solution for institutional crypto trading and custodial services. LMAX Digital features a central limit order book that streams various cryptocurrencies, and it's all paired with US dollar, euro, and yen. They also allow you over the internet to execute your crypto trading strategy with precision.

LMAX Digital, you may never heard of them. It's because they only serve institutions, but they're secure, they're liquid, and they're trusted. You can learn more at lmaxdigital.com slash pomp. Again, check it out at lmaxdigital.com slash pomp. This episode is brought to you by Valor. Valor represents what's next in the digital economy. They provide simplified, trusted access to crypto,

decentralized finance, and Web3 investment opportunities. Institutions and investors can gain diversified, secure, compliant, and easily tradable access to a diversified set of industry-leading equity products and protocols through a single stock purchase on a regulated exchange. They're currently listed on the OTC at DEFTF

and on the Canadian NEO Exchange at DEFI. For more information or to subscribe to receive company updates and financial information, you can visit their website at valor.com. That's V-A-L-O-U-R.com. Valor.com. Go check them out today. Anthony Pompliano runs Pomp Investments.

All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. All right, guys, I've got Adam here with me. I'm very excited about this conversation. I think that we talk to tons of investors, we talk to tons of founders, but we don't really talk to that many

kind of institutional asset allocators. So maybe let's start with just like, what is an endowment? People have heard that term, they know that it's important, but it's a very unique type of asset allocator. So how would you describe what an endowment is? Yeah, absolutely.

So an endowment is basically at a university, a separate pool of capital from operating funds that's generally funded by gifts over many years. So in Wash U's case in St. Louis, the university was founded in 1853. The endowment today is about $14, $15 billion. Now, a lot of that – it's not like there's $14 billion of gifts. A lot of that is small gifts over many, many, many decades that compound over many – at moderate rates over extremely long periods of time. The purpose of the endowment is at a high level to be a permanent source of income uncorrelated to tuition, grants, hospital revenue for universities that have affiliated hospital systems to support whatever mission the university has.

So the vast majority of those funds are actually earmarked for specific purposes. So if you wanted to give to your alma mater and say, I want to have the awesome business podcast professorship at the business school, they might come to you and say, okay, that's going to cost a million of CapEx or annual operating expenses to fund that. The endowment pays out about 5% of its asset a year to support those initiatives, so you've got to give 20x that effectively to create the income from that asset to support that initiative. So that's effectively what it is. It's not used, again, it's separate from operating funds. It's not used to pay electricity bills, salaries, things like that. It's generally for very long-term stuff, to support specific research initiatives, tuition relief.

Some of it is unrestricted. You could give a gift to your alma mater and say, use it however you want, I don't care. But the vast majority, certainly of WashU's, but I think most institutions, is restricted for specific purposes. Given that this is permanent capital, very long-term oriented, endowments are different types of investors. What would you say the main differences are

between the way an endowment approaches investing versus maybe other types of market participants? Yeah, I mean, if you think about our objective with this pool of capitals, we pay out about 4% to 5%, and this is similar for most endowments, pay out about 4% to 5% of the assets every year. We have an inflation rate,

long-term inflation rate, ignore the current inflation environment for a second, that's actually higher than what historical CPI or PCE has been for broad consumers. So call it 4% to 5%, 3% to 5%, something like that. And if you want to have real growth on top of that, you're talking about double-digit types of outcomes. So we have to take an amount of risk

that allows us to meet those annual cash distributions to the university, but also enables us to generate significant long-term performance so that we don't spend down the real purchasing power of that pool of assets over time. um so basically uh the portfolio is um it has an amount of fixed income and cash that can support a couple of years of uh distributions back to university we have some medium-term assets that take a little bit uh less risk so that if you were an extreme drawdown scenario you would what you

don't want to do is sell risk assets at depressed prices so you have some kind of medium risk assets whether that could be real estate, cash-generating assets, lower net exposure hedge funds. Those types of things would be the typical things that an endowment would have in that kind of bucket. And then the rest is going to be risk, effectively. I would say WashU is a little bit different, and we can get into that even from other endowments. But generally speaking, endowments are kind of allocating a lot of their capital to alternative asset classes, venture capital, increasingly crypto, private equity, real estate, things like that

where you can have more idiosyncratic or outlier types of assets. A significant part of our capital is also invested in public markets, but zooming out to relative to pensions, insurance companies, family offices to get to your question, I would say we're more risk-oriented. Those organizations often look very similar

to one another, and it's a matter of how much risk broadly defined they take. So with a pension or an insurance company, your liabilities are contractual. WashU has some control over what the distribution rate from the endowment is every year. But if you're a pensioner, you are legally entitled to a certain dollar payment on a certain date

for a fixed schedule. So those institutions just structurally have to take less risk than, say, an endowment, where we can actually cut our spending rate a little bit if we have to in a down environment. I don't think a lot of people quite understand how big these endowments are. Obviously, WashU, $14, $15 billion.

I'll say this so that you don't have to. You guys are one of the best endowments in the world in terms of asset allocation and investment. A lot of the capital is derived from the gifts and kind of from a university focus, but obviously you guys have done a great job investing over the last few decades. There's other endowments that are even bigger, right?

Some are $20, $30, $40 billion in size as well. Many of those endowments are well-known on kind of a similar way of they had gifts, but then they also have been great stewards of that capital. You mentioned having more of an appetite for risk. And one of the things that's really interesting is if you look at a number of endowments, they basically look at diversification.

They're trying to protect the capital that they have and grow it, right? It's concentration builds wealth, diversification protects it. But risk is a very interesting way to look at why endowments are different because in some ways diversification should provide that protection.

But if you diversify into a bunch of risk assets, then how do you kind of think about diversification but also overlaying it with risk assets yeah this kind of gets into i think how wash use application the endowment model is a little bit different than how it's been done historically um i would say if you look at if you were to actually look at most endowment institutional portfolios and actually look through so you're primarily investing just zoom out a little bit real quick the way you're really investing is we're finding what we think are the world's best investors that operate in any asset class or geography

that we think will reliably produce good returns. We're trying to find those that are well aligned with us, where there's reasons that they should continue to be able to outperform and try and concentrate into those, you know, as much as possible. Sorry, I forgot where I was going with that. In terms of, we can edit. Yeah. Yeah. Picking like risk versus diversification.

So actually, if you look at most of these portfolios, they're way over diversified. So if you were to actually look through all these funds across these different asset classes and geography and look at your dollar exposure to every company that you're getting, you're massively over diversified and you, you're overlaying all this active, uh, performance fees on top of all that. So the ones that do really well, you're paying out a big portion of the profits to them fees. And the ones that don't, they don't cross-collateralize one another, right? What are the dangers with too much diversification? Yeah, it's that you can't generate alpha. I mean, just the math is unforgiving. You're

going to pay out 5%, you got a 4% or 5% inflation rate, and we want to grow that in real terms. Like in a zero interest rate environment, I mean, it's not the same today, but like generally speaking, that's a really high bar. And these markets are super competitive. So Yale is the like prototypical endowment that, that pioneered this model in the 1980s. They've done an exceptional job and you can actually look at the dollars that they've added. It's pretty amazing. But what, when they were first starting that and every endowment and institution copied them after that, it's not like there were 10,000 venture managers around the world, 10,000 buyout funds. There was kind of aggregate alpha to be had. There were opportunities that weren't getting

funded in each of those areas, that more capital coming in catalyzed. You can't really quantify that, but I would argue that's not the case today, where you have too much capital in each of these areas, too much competition. There are great ideas, but there's a lot of money chasing each of those. So I think the danger today is over-diversifying. There are fewer great ideas relative to the amount of capital. That ratio is not in your favor anymore. And so you really have to find ways to concentrate capital into the best ideas. The bigger you are, obviously you mentioned we're, we're 14, 15 billion, um, Harvard, Yale, Princeton, MIT, they're all, they're all bigger than us. Like scale is already a massive, you know, challenge for us. And so I think

finding idiosyncratic opportunities that have convexity that have upside that can scale to a portfolio of our sizes is a challenge. And so, um, but over diversification is a much bigger risk than under-diversification. A lot of people, we're much more concentrated than the average endowment. I don't think we're anywhere close in any statistical sense of being under-diversified, not having enough assets to offset one another

when they do poorly. How do you think about concentration? To say, hey, we're more concentrated, is that like they have 200 managers, we have 100, and still 100 is pretty good diversification? How do you think about that? Yeah, it's a couple of different things. One way that makes us different

If you just look at how our assets are allocated and look at others, you'd say, well, it's not different at all. It looks the same. You're in private equity. You're in venture. You're in real estate. You're in all these types of things. What's different about our model is that our board doesn't give us prescriptive guidelines at a very granular level. They don't say, ex ante, we think you should be 7% in real estate.

We all know those are kind of made-up numbers based upon backward-looking data. What they basically say is, if we were to fire you all and replace you with a passive exposure, here's how much risk equity versus diversifying assets we'd be comfortable with. That's roughly a 70-30 portfolio. So within our risk allocation, the guidance that we have is pursue value based upon the opportunity set. Don't pursue it based upon some sort of category that you place on a fund or an asset. go after value where it is and avoid investing capital

where it clearly doesn't compete very well so as a result of that we're all generalists so we each have areas of specialization I've spent a lot of my time historically in venture and things like that you don't discard that expertise when someone has it but the difference is a lot of places will say Pomp you're a venture guy

go out meet every venture fund and come back and tell us what you found and we don't have any way to calibrate what you're saying we're just trusting you so we have to bring each other along for the ride and the conversation that we tend to have around the table is why do we need this

what does this give us that we don't already have we don't want to have 10 early stage enterprise SaaS VCs if there's one really great one, great let's justify that and that's our exposure let's find a way to scale that over time but those are some of the things that make us quite a bit different

we also a lot gets made I think of our co-investing and the scale of that that we've done, part of that is just a way to express our conviction in our partners and their best ideas to a way that kind of normalizes our denominator for theirs. So when we're looking at a manager, we're generally looking for someone

whose capital base is smaller versus larger, who manages one fund versus multiple strategies, who invests cash dollars alongside of us, and who can't get rich on management fees. They have to get rich if we do well above and beyond some sort of market benchmark. So that's really what we're looking for. But a lot of times, just a made-up example, say we're $150 million of a $500 million public equity fund,

and they are pounding the table on one position. This is the best idea we've ever had. It's 30% of the fund. We say, great, put 100% of the fund in it. We don't care. It's 1% position on our endowment. Now, even the most well-aligned manager is probably not going to take a 100% position.

But for us, we look at that, we've got $45 million of exposure. We would actually much rather, if you say that's a 3 to 5x, and we independently underwrite that and kind of concur with the investment thesis and that it's differentiating relative to other assets we have in the portfolio, we want more than $45 million. So can we solve that by letting your investors opt into a side vehicle or an SPV that allows you

to choose your level of concentration in the overall portfolio. So that's part of the answer to your question, I think. It's unique because you have $14, $15 billion, but you're looking for asset managers that have smaller funds. And so is the difference made up with a lot of direct investing

and a lot of kind of SPVs via these managers? Yeah, I mean, the way that we're, you can almost think of it as kind of a scout program. A global multi-asset class, best of breed, global scout program where, but it's almost in reverse whereby, you know, if you were an early stage VC and, you know, a lot of firms have these scout programs now where they put 1% of their capital and allow, you know, these, you know, engineers or executives to use their network to make really small investments. Ours is kind of the opposite where the bulk of our assets, say

two thirds of our assets, three quarters of our assets are invested in these scouts. We're investing in them because all those characteristics I mentioned, we think they're world-class investors operating, you know, fishing in ponds that we think will produce trophy fish. And we want to scale up their best ideas, let all those best ideas across those diverse areas compete for co-investment dollars so that the top part of our portfolio

is really concentrated and really idiosyncratic in, call it, you know, one to three to four or 5% positions at the endowment level. So size them in a way that can really produce a lot of tracking error, we want to deviate from our benchmark and our peers. And that's going to be great in some years, and it's going to be super painful in other years. But we think you can't have your cake and eat it too. You can't hug your peers in your benchmark and materially outperform

them over long periods of time. You can minimize the risk of underperforming in a given year and minimize your career risk. Or you can take that and make sure that your governance structure buys into that strategy and can see it through, you know, the good years and the bad. So that's kind of that's kind of where we look to make those co-investments have an impact explain this more so uh if the entire peer group is plus or minus you know five seven percent from each other uh and you all are willing to deviate from that in either direction is that because you're willing to do things they're not willing to do from a investment opportunity standpoint is it you just take more risk is there leverage is like what is giving you the ability to deviate whereas maybe

they don't want to do. Yeah. I think part of it stems from, because we're generalists, I feel like my sense is that we do less things than we would do if we had specialists on the team. You know, if you tell someone, hey, go develop expertise in oil and gas, like they're going to do that and they're going to come and pound the table and tell you they've got a great idea. So I think over time, you end up being more diversified in those types of portfolios where you have specialists that go off, boil an ocean by themselves and come back and say, here's, here's my best idea. And no one can really calibrate those opportunities. So I mean, we're investing in early stage venture in the U S you know, in Asia, in Latin America,

we're investing in, we have crypto dedicated funds. We have a hyper concentrated public markets investors in the U S and frontier markets in, in sub-Saharan Africa. So like calibrating those things against one another uh high quality investment opportunities it doesn't really work in a spreadsheet you kind of all have to be there um and be sharing and part of the conversation to understand how these things fit together it's kind of a you know finger in the air type of exercise but you just have to get reps uh doing it so you know it can be it can be a challenge at times uh but i think overall we differentiate one by just not doing a lot of things that you do in a more specialized model. Like we just, we can do private credit or real

estate or real assets, but we just don't do very much because when a team of generalists looks at them, you have a better sense of your opportunity crop, opportunity cost across those different areas versus if you're just a specialist looking in one direction, you're going to have a harder time calibrating whether what you think is the best idea really is the best idea. Let's use this as an example. So real estate or private credit, right? If you were to evaluate those and let's say that you all said hey it's interesting but it doesn't fit what we're trying to do yeah is it more likely to get written off as an investment opportunity because it doesn't provide enough upside there's too much risk is it a combination of both like what are some of the

major reasons why you would avoid investing in a certain strategy yeah yeah it's a great question i a simple way to put it would be they don't really have that much convexity um you know the return distributions tend to be much more normal. In real estate, and private credit in particular, you tend to have income-oriented investors that are willing to pay a higher price than someone who is letting it compete against something in venture. And we're willing to accept a lower expected return

if there are tighter bands around it, but only to a certain degree. And so you look at some of those assets, like J.P. Morgan may have a strategic non-financial reason to own XYZ building in New York. It's core to their business. We're not going to compete with that. That's an extreme example.

Pension investors want to match assets and liabilities and are willing to lend to things or fund things at a lower rate of return than we would when it's competing against all these different assets that have more upside. We tend to be more focused on things that have absolute upside and they may have higher levels of risk, higher probability of permanent loss of capital,

but they're uncorrelated with other assets in the portfolio. And when I mean uncorrelated, I don't mean on a day-to-day, month-to-month basis. I'm talking about over our time horizon. Whether the space launch company versus the Brazilian fintech versus the biotech platform, the Asian e-commerce business,

those things, they can be affected. Their prices can move in tandem with each other based upon GDP prints and inflation and macro shocks and Russia invading Ukraine and all this type of stuff. But over a five, three, five, 10, 20-year time horizon, that stuff kind of washes away for the most part. So I would say that's kind of a key aspect

that goes into those decisions for us. Given that the team is all generals, which is rare, when you see a new market or you see a new potential strategy, what's the process to actually underwrite it? It's not like you're saying, hey, we have oil and gas opportunity in Mexico. Let's go get our Mexico oil and gas expert to go and underwrite it. So given some of it will be simple, hey, it's venture capital

and we've underwritten 100 different funds and we understand how to do that. But when you see something new, what is the process that you all try to pursue to get your heads around it? Yeah, I think ultimately we're trying to get at the underlying assets. We're almost trying to abstract away certain aspects of the investment thesis at the manager level and get to what are the underlying assets this is going to give us exposure to. If we're going to be able to directly invest in something, what are those opportunities going to look like? Does that fit our needs for our absolute return goals? Is it different than something that we already have?

Is it better? I would say a couple things especially in venture and crypto and things like that the world's best founders the world's best executives, owners, managers always have a choice of who to partner with you go to market and you effectively choose your cap table so we always have to answer the question in those situations

well why would a critical mass of founders that kind of fit these characteristics choose their capital over 10,000 other people that would choose to give it to them It can be a harder question to answer, but we do spend a lot of time talking to founders. We really plumb the WashU alumni network as much as we can. There's tons of great alums at venture capital firms that are software developers. We spoke with one yesterday that works for a company in town here.

You just get really high fidelity information on like, well, who did you raise from? What was that like? Who did you talk to? Who did you not talk to? What partner did you know? That can be really valuable and insightful. um so i would say generally speaking the underwriting process is case study driven like we just want to understand soup to nuts uh how did you find this company what was interesting

about it what did the negotiation process look like do you understand the business what does it do what what is your expectation for what the company how the company is going to perform what metrics are you watching? And, and how it's going, you know, thus far. So it can be a little bit different in say early stage venture versus public markets versus, you know, real estate where there's maybe a redevelopment opportunity or something like that. But for the most part, our entire underwriting process is case study driven. And that continues after we invest with a manager as well. Like we actually don't spend much of our time looking at new potential partners. We have a pretty small number we think we're better off getting to know a smaller number of partners best

ideas really well and creating a prepared mind for there's a washout in the market there's a co-investment opportunity and we've already done some work to know whether we think this is interesting we're a 15 billion dollar pool of capital but uh we only have a small amount of incremental dollars available at any point in time to invest so we kind of have to have a good sense of what in our portfolio is interesting because I'd much rather be able to deploy $50 million in a single asset that we know alongside a partner that we already have trust

than spend my time boiling the ocean for an incremental partner who's probably just going to add diversification to the portfolio. So we tend to spend time with our partners and their companies. We were in Boston last week, spent two days with a company

that we're heavily co-invested in, early stage venture firm. we own almost 20% of the company directly and indirectly and we're effectively treated like a board member so we just think that's a much better use of our time than continuing to ocean boil How do decisions get made?

There's some venture capital funds that say actually we don't want consensus we want any one individual partner to be able to make a certain decision up to a certain amount maybe if there's a bigger decision you need some but not all other venture capital funds are hell bent on We need consensus in order to do it. How do you all make decisions?

I would say the generalist model has actually been really helpful for that. So anything that, the way it kind of works is we all go out and it's undefined. Hunt for things that you think might be interesting. So find where the Venn diagram between portfolio need and absolute interesting overlaps and go spend time there.

So the way I typically approach it is I will do a lot of intro calls, meetings by myself, or if I'm traveling with one colleague this week, you know, we'll meet a few, a few groups. And then you slowly kind of say, that was interesting. Let's do another call and walk through one or two case studies, you know, in greater detail. And then you just kind of essentially repeat that with a broader cross section of the team. So everyone just hears directly, right? And then we were constantly driving together or meeting together in kind of a team format and the conversation just unfolds over whatever the underwriting period is whether it's a couple weeks or six months or whatever the case

may be a lot of times the gating factor is more like this is actually really interesting we just we don't have capacity to do this like or we we just don't need another uh venture firm in the portfolio today is the default no you have to be convinced yes absolutely yeah yeah i mean um you The way I count it is we have roughly 30 partners across early-stage venture, late-stage venture, public markets in every geography around the world, crypto, real estate, real assets, everything that we can invest in. It's a pretty small number. So, yes, the default position is no. and we when we do look at new opportunities like we could all sit back and never leave st louis and spend all day meeting with partners who are asking us for money and we just think it's a much

better use of time you get higher fidelity information to just go out and hunt and travel especially in emerging and frontier markets you spend a ton of time on the ground in those places you just meet more interesting people you develop better trust with people you meet people that you otherwise wouldn't um the the conversations are richer in person than they are on zoom or something like that breaking bread all that all that type of stuff um and really honestly the the alumni network has been has been a really interesting thing as well and that's just it's just better in person so i would say the the direct answer to your question is it just evolves from a conversation of everyone being involved in the underwriting process um we're trying to be better

about, you know, killing things early, you know, we want to have a really good anti-portfolio. It's okay to say no to good things. And you just have to be comfortable with that. There's way more interesting people and strategies out there than, than we want to have positions in the portfolio, because again, we, we want to have enough partners that are world-class investors in every area, but not so many that we can't pay attention to what they're doing. Walk me through like an emerging market, right? So do you send part of the team there to travel? you just walk around you try to get introductions to people

how does it work in terms of you're literally going geographically somewhere different but there also may be a difference in types of investment opportunities capital structure I always tell the story that I traveled to India a couple years ago and every founder I met was like

I have 100,000 users and I was like oh my god that's incredible and then they were like no that's like equivalent of like a thousand in America so there's some kind of society and cultural things that may just be different how do you break that down?

Yeah. Typically, again, we're leaning on our partners. So we had, I wasn't on this trip, but we've done this before. We had a team go to Brazil this spring, you know, markets are melting down. Brazil in particular is getting absolutely hammered. So we have multiple partners that are active investors across both public and early stage venture in Brazil, in Latin America generally. And so we'll reach out and say, hey, we're looking to go. If you all are planning to be there we'd love to travel with you and do some meetings with you so oftentimes we'll try and center it with a partner travel hand in hand go to meetings with management teams with them uh and then add in other uh meetings so we may we i think in that particular case we traveled with one of

our kind of public crossover partners that's done a lot in brazil met kind of re-underwrote every single publicly traded beaten up you know fintech uh name out there uh and then leaned on some of our early stage venture partners that have assets in the region and met with a bunch of those companies as well. Like, Hey, if we're, if we had slots for three meetings, who are three management teams that you'd be comfortable introducing us to that you think are, are really high conviction bets for you. So that's, that's kind of the way that we do it. And then, you know, you just network grows, you know, we know some family office LPs down there. So you get some market color and things like that. There are other venture firms we haven't invested in that, you know, are always

happy to take, take meetings and just get market color. So that's kind of the, the framework I'd say an anchor tends to be an existing portfolio company or partner and increasing, especially in markets like this, it's really helpful to travel with them and it increases our, well, hopefully it increases our conviction in what they're doing and their relationships with the management teams and ability to assess the business, things like that. In some ways it's no different than if a journalist wants to write a story, they kind of go and they start to network. If you're an individual who's trying to sell into a corporation. Hey, who do I know who can introduce me to somebody?

And so in some ways, you're just investigating the market and trying to understand it. Is that fair? It's a very good analogy. I hadn't really thought about it that way. I think that makes a ton of sense. It's fascinating to think about that. I guess maybe even like the police

trying to do an investigation or something would kind of be similar. I don't know. It's like you're on this journey and you almost don't even know what the answer that you're looking for is yet, but just go learn. That's exactly right. And it's like that with sourcing.

It's like that with trying to spend our time on, you know, the existing portfolio versus the prospective portfolio, fund managers versus companies. All of it is unknown. There is no playbook. The markets are constantly changing, you know. And the interesting thing about our portfolio, too, is there's always a cycle somewhere. So a lot of our, you know, partners might show us a co-investment opportunity or something like that. And it's the best idea that they have. And they're really pounding the table.

But we have this interesting perch where if we're doing our jobs well, we have a really good sense of how that best idea and that opportunity set competes with what's going on in Brazil or just China or something like that. So our actual opportunity cost is from a different opportunity set than most of our partners. And so it's an interesting place to be. It's hard to stay on top of all of it, but we really have to lean on our partners and just be quick and reflexive. And again, prepared mind is a word that you hear a lot or a phrase that you hear a lot in our office. Like, how are we preparing for what could come? Explain prepared mind. Yeah, I would say proactively investigating things in our portfolio that, like the prototypical example would be, it could be private or public.

but a business that we've gotten to know over a period of time that is organic in our portfolio through one of our partners where we have some reason to believe and it could be a bunch of different situations that this could be a really big position for us if we position ourselves correctly to participate in a future financing. There could be tender offers and things like that. There could be secondaries

or it could just be a stock is getting decimated in the public markets. And so we're always trying to have, I don't want to say a shopping list, but have a good sense of where the most interesting opportunities are. We don't want to wait for a global pandemic to hit and everything to wash down and then be starting from square one in terms of, well, we have capital to rebalance. We could just buy equities, but we could also load up on individual assets that really have convexity or are misunderstood by the markets. So the initial COVID drawdown was a pretty good example of that. We actually were fortunate to go into that with significant both cash and fixed income, but also in a perfect world, we'll always have some passive equities as well.

Just a few points that can always serve as a source of funds for idiosyncratic opportunities. You're happy to trade passive for active exposure if you find the right active names. We went into that drawdown with a lot of firepower. And in hindsight, you wish you would have used more of it, but I think we did a pretty good job of using a lot of it. But that was, and we're all transitioning to work from home, right? And basically on Zoom 24-7, can't travel, stuck in your homes, but re-underwriting the entire portfolio.

And there were some cases where, so this market is just really beaten up, let's just add to this fund, or this name in particular is totally misunderstood as to how this is going to affect it. Let's put some capital into this individual name alongside one of our partners. So that's the kind of environment that you want to be prepared for. So explain this more.

So COVID is probably a great example. You guys have some dry powder, right, that's sitting there and you don't expect COVID to happen, but you're just kind of, hey, if something happens, we've got some money. As that unfolds, you've already done some work or maybe even a lot of work. How do you decide what is the best opportunity?

Because that was a unique situation where the macro environment was uncertain. There was also uncertainty around how certain assets would respond was the fed going to step in were they not public health how would be effective you're not allowed to go to the office right there's a lot of moving parts but uh it's the quintessential like when there's blood in the streets yeah lean in and get greedy uh how did you guys kind of think through what actually to do there yeah uh yeah it's it's a good question i mean i think in especially in that environment it's almost hard to put yourself back in those

shoes even we lived it in in it was easy right right yeah exactly but at the time i mean we had one of our buyout partners who buys really small like local services businesses calling us and saying i mean kind of in panic mode like i might have to mothball these businesses and how do we come out on the other side and what do we how do we pay people and keep the business intact because all of our weak competitors are going to go away if we really shut down for 18 months or two years and that didn't really didn't really happen um but you just didn't know and so i think in that environment whatever decision you make you have to not necessarily be as aggressive as you you might want to be you have to you have to hold you have to have some humility about the whole thing

and what you can know and what's knowable and all those types of things i think i know who that partner is i think i've heard him publicly talk about that exact conversation yeah and so maybe Brent's actually probably a pretty good example where I'd heard that story from his perspective which was hey he's been public about it so it's not news there was uncertainty I called somebody who I thought was a trusted partner

and was like essentially just like what do you guys think help what do you you know how should I think about this or whatever and from his side it was like they were really great partners right I think was like take away from the way he told the story and you've used that word partner a number of different times

How important is that partnership and how do you think about when you first enter it and then also almost deepening the partnership and trust over time? I think people respect people that do the work and we try and do the work. I think LPs can have a reputation of you come in, you're invested with someone, say, what's the update?

You haven't done any work, you're just in consumption mode, you're not really invested in the portfolio. There's a lot of disadvantages that come with our size. one of the advantages is that you tend to be one of the bigger partners and you tend to be a higher profile partner and people you know want to do well it's reputationally bad if you sour on them or redeem from the you know those types of things um so it's extremely important to us i mean everything's a relationship business right and it's amazing how small these worlds are you just have to treat people uh you know really well and it comes back to you in direct and very in

in direct ways. Um, so partnership is very important to us. We're only as good as our partners. I mean, we're, we're generalists in every sense of the word, like we're fluent in business models and how to underwrite a business, but we're, we're generally, uh, starting with a stacked deck when we do that in terms of, we already have what we think are the world's best investors curating an idea for us. And, and we're more validating that and seeing how it fits with our overall portfolio so the way that we um you know the way that we build is we try and be there early you know we're not investing in the mega global cap uh you know global you know uh private equity or public equity firms we're generally trying to find people that are young people that

are hungry one of our partners uses this in reference to management teams are looking to back but record and runway we want people who have long runways but also have you know a track record or credibility or some sort of reason but they also have a chip on their shoulder so you know we've done a few first-time funds this year. In both cases, it was people that had been investing at other firms and decided to go out on their own and do something a little more specialized. Absolutely love that because, you know, they always get the problem of like, well, are you actually good? Or is it just that you worked for that firm and that's it? And, you know, so they're, even though they have a track record, they're, I wouldn't want to say insecure, but they're eager

to prove themselves right um so absolutely love that uh and they're all young they're in 30s you know things like that so if it works we can be there for a long time but we want to be there early want to be there first we want to develop that trust and just support them along the way like if you've ever met scott scott it doesn't get rolled over on terms doesn't doesn't lay down um is an extremely hard negotiator and gives very blunt feedback we all do but that's our mo like hey we're going to tell you if what you we think you're doing is a bad idea whether it's a company that you're investing in or something you're doing with fundraising or fee structure or something like that um but we're all that's your decision to make and you know we're here we're here to

support you so i think we differentiate ourselves just by doing the work by coming into a meeting and and skipping over uh right to the things that really matter um and getting into actually we want to underwrite these businesses alongside them because that's what we're signing up that's what we're getting is exposure to the companies that they invest in. And that's what they're going to show us in return is an opportunity to size up in one of those things on occasion. Yeah. One of the things that's fascinating to me is Warren Buffett obviously gets a lot of credit for being one of the best investors in the world. And people think that living in Omaha is like this great advantage. You guys being in St. Louis, how important is that to having such a great track record? Or is that

just kind of not maybe not as much causation as people want to it's interesting on the investment team any any way we don't have anyone native to st louis but most of us are midway i'm from wisconsin uh mike's from chicago andrew is from you know iowa scott's from alaska uh so it's a very kind of like midwestern-y you know kind of um kind of interface i think where it helps is that And I'm not, I haven't lived in an office, worked in an office in midtown Manhattan, but there's a high volume of things you can look at that just come through your door. And people come through St. Louis. It's a big enough town. There's enough institutional capital where companies and managers come through St. Louis.

But for the most part, it does create an extra incentive to go out and hunt. And so we can't just sit back and if we do, it's just adverse selection all day long, right? And so we have to get out of St. Louis. It's a pain in the butt to travel from St. Louis. You can't travel direct anywhere. You can't even travel to San Francisco direct anymore. So I think it just creates more of a front foot forward. You've got to be in an athletic stance.

You've got to be going after things. So that is definitely a cultural element to us. And I just don't know whether that exists or how differentiated that is versus other peers. But we definitely don't get a ton of noise in St. Louis. So there is a little bit of, you know, aspect of, of why Warren thought being in Omaha was, was an advantage. As generalists, what kind of background do folks have when they join the team?

Is it, I'm a generalist that was just at another endowment and I'm coming over, or do you go find people who are working some random job and say, Hey, do you ever thought about being an investor? Hey, yeah. We have done some of that, but it's, it's different. I probably, myself and Mike door on the team probably have the more traditional backgrounds out of school, finance, economics, worked in asset management

or institutional investment consulting, something like that, and found endowment management as a more interesting place to allocate capital within that broader ecosystem. No sales, no marketing. You're just going to work for one institution where you know the fruits of whatever you bring,

you know what it's going for. Like that's a pretty, you could make more money, probably a Goldman or something like that, but who cares? Like that sucks. um but other than that scott is really interested you you heard some of his background if you've heard him on other podcasts but he's from alaska went to school in iowa played basketball

incredibly smart uh very um very sharp intellect very good with numbers but went off and ran uh derivatives trading desks in san francisco chicago london and tokyo like lived in tokyo speaks fluent japanese he would say it's not fluent but it's pretty good his kids were all born in tokyo and then moved back to iowa to take uh a senior investment person job in endowment had never worked in endowment never thought about it got the call didn't really know but that was his alma mater so he's interesting because cornell was much smaller in terms of assets small team so you had to be a generalist there were no choice but to be a generalist but because he wasn't kind of bogged down with the way we've always done things you know mindset uh he would have done it

that way regardless and so he's he's really kind of discarded a lot of these you know institutional norms and more is that that that you're supposed to do in this environment and just said well that doesn't really make any sense why would we invest in this even though it's a bad idea because it fits in this bucket and we need to fill this bucket like let's not do that um so there's a whole bunch of of stuff like that that i think you know to whatever extent washi's model is is interesting or different that's what a lot of it is driven by by having someone who's really sharp um uh very talented investment mindset that didn't kind of grow up in in that environment yeah talk to me about bitcoin and cryptocurrencies you guys have obviously done some stuff there

uh there's some endowments or other types of institutional asset managers who think greatest thing since sliced bread let's go put a bunch of money and you know there's a lot of convexity and like we're all going to get uh you know uh great uh kind of uh pats on the back because we're so smart we invested in crypto yeah others have 180 degree different mindset and like we're gonna lose all our money let's stay as far away from this as possible and like this is going to end in disaster what was the process like in terms of you all just evaluating the market and what have you chosen to do there so far yeah i mean one thing that is very fortunate about our model in allocating through what we think are the world's best investors is they can educate us.

They can be the first line of education for us on our behalf. So going back to 2014, 2015, we had one kind of generalist, I'd say mid-stage global VC partner, really concentrated, very different not not not um very high profile on on purpose uh that kind of got the bitcoin maxi bug very early on participated in the u.s marshall's auction bought a boatload at whatever that was 700 a coin or something like that that was kind of our start of like okay i don't know it sounds stupid sounds interesting we maybe we should learn a bit about a bit more about it so they were very invested in that ecosystem and i'd say my sense is similar to you although i don't i don't know quite as well like very bullish on kind of just the store of value digital gold you know

type of long-term thesis for for something like bitcoin and open to you know ethereum solana and you know things like that and use cases but maybe that that's not the majority of it right so that's the use case of high conviction in gonna hold it never gonna sell a coin uh that investment was actually made not out of a traditional fund, but like a permanent capital vehicle where we were shareholders, we weren't limited partners. And the goal was it was supposed to be around forever. Small number of investors are on the table.

You could imagine, and this is a Bitcoin 5,000 or something, grew to be like a very significant percentage of the fund. And not everyone liked it equally. And so there was some conflict in terms of, you know, should we have this? Should you sell it? Like this is, you know, bull crap. They were having trouble getting an audit.

This is before the auditors figured everything out and how to do this. Like I remember hearing the story, like they have a very sophisticated, this is before institutional custodians, before NYDIG and things like that existed or were super prominent anyway. You know, doing this private key ceremony

for these KPMG or whoever it was, one of the big four auditors, just like blank stares, like, I don't get it. Like we can't do it. A lot's changed. uh, since then, but that was kind of the start of our educational journey. Eventually that particular conflict became big enough where they said, fine, like, we don't want to manage this for you if you're, if you're so intent on hating it. So you have a choice. You can, we can either

liquidate it for you and send it to you in cash. Um, give us your wallet and we'll send it to you and you custody yourself, or you can opt into our private custodial solution that we've set up and we can walk you through all that and all that stuff. So we said, well, what are you going to do? They said, same thing we're always going to do. We're never going to sell any of it. We said, great, just hold it for us. We've since diversified custody, but that, I mean, it's obviously come down quite a bit, but like a not immaterial part of our portfolio, you know, at, at, at, yeah, at BIC was Bitcoin. And since it's still a very material position, haven't sold any of it. I, I really highly doubt we will. And we've had other partners that have organically

had material positions in it. Some of them have traded it a little bit more and liquidated and distributed it. So that was kind of the start. I would say also, was it like 2017, the ICO boom? It was actually helpful timing for that to happen because our prior CIO left at the end of 2016. That was the year they hired Scott

and Scott was getting on board. And so there's all this stuff going on. You're really not going to invest in it when you've got an, especially something like that. You have a new CIO coming in who may love crypto or may hate it. You just don't know. So that stuff wasn't going to happen,

but it was a great time to just investigate. So met every single manager that was out there, spent a bunch of time diving into the ecosystem, really, I think, started to understand the potential here. Wasn't obvious what the real world use cases were, what was actually working and being used and solving a real problem, but you started to build it.

Some of those relationships that we met then have converted into actual relationships today where over time we've just gotten there. So we've had a couple other generalist firms that have gone down various rabbit holes and we've done some directs. It's typically been infrastructure, picks and shovels types of things,

maybe an exchange outside the US, something in gaming, vertical applications, things like that. So I would say, I haven't run the numbers recently, but including those types of things, custodians, exchanges, the gaming infrastructure, picks and shovel stuff, it's multiple, multiple points of the endowments. That's pretty aggressive, right?

In the sense of, again, going back to kind of the start of our conversation where it's a new area, there's convexity to it to some degree. And it's either going to end up going really well in your geniuses or you end up losing a lot of money. and that helps pull you away from the peer group in either direction. It's very clear though, like I said earlier, a lot of the conversation around our table is like,

why is this interesting in an absolute sense? How could this go really well and provide material alpha at the endowment level? And how is it different from other things in the portfolio? And it's actually pretty clear in this case that this is different, this is diversifying over a long-term time horizon. And I think where we struggle with a lot of this stuff is even if you believe, and there are a whole host of different personal opinions on our team, even if you believe, yep, blockchain, crypto is going to eat the world.

JP Morgan's gone, you know, all the exchange, like it's just going to take over everything. I think where we want to be compensated or want to be thoughtful about it is what's going to, when is that going to happen? And what do you have to believe the adoption curve is in these different verticals? fund size matters a lot and the stage at which you're investing so you have to believe to invest in a billion plus dollar fund that's going to deploy in 18 months and they own 5-10% of 50

the math is pretty unforgiving in terms of what you need to believe in terms of market cap creation to generate a 5x or whatever the number is on that fund so we have done some dedicated crypto funds they've tended to be smaller, tend to be earlier stage. Because we don't want to have to believe that to be true for that to be a great return.

Yeah, how do you balance? You meet somebody that has a small fund today, $10, $20, maybe $30 million. They find success, so kind of it validates, hey, we made a good decision here, and it looks like we're going to drive some returns. They then go out and they raise the $50 to $100 million fund. Fund three is $100 to $250.

and the next thing you know they're on their fund four and you're oriented in a way where you want to build long-term relationships with partners but to your point the financial kind of um potential return on a 500 million dollar fund is a lot different than on a 20 million dollar fund totally and so how do you kind of think through um maybe continuing to invest with great partners where you've got a lot of conviction and you've built a great relationship versus are there times where you say hey we love you yeah 500 million or a billion or 5 billion or you know we've seen 100 billion dollars whatever type of fun like at some point do you tap out and say look we just can't get there in terms of how the math gives us a great return yeah absolutely and it happens it

happens a lot and we have to balance you know there can be the the anchoring you know well 60 million is three times 20 million so you know is that is that material so you kind of have to look it looks it looks like a lot in terms of percentage increase but you have to understand like what are they investing in what could they have invested with the same um you know value proposition to to founders in the case of crypto or venture or whatever uh you know being kind of a uh you know fill out a round check in a seed or series a uh is is a lot different than leading a Series A is a lot different than leading a Series C and the analytical frameworks versus backing a founder

and some qualitative market-oriented things at that stage. We really have to step back and do the bottom-up. What do we think they're good at? What does that imply about the number of investments, the size of investments that they can make? There are many cases where you're investing in something early And you're saying, hey, we actually think if they do the same thing, they can raise a $500 million fund and still do a great job.

And this is more of a proof of concept. You can think about the first couple of funds as maybe one kind of bigger fund to prove the thesis in a staged manner. But a lot of times, it just becomes an asset gathering exercise. And you can just look at the management fee dollars based upon the legal documents of these funds and say, okay, this is a profit center now. And it can change the dynamic, right? So you want to have those people that are, that are super hungry, that, uh, that are not taking whatever management fee dollars they get and, you know, buying vacation homes and things like that, but are investing in the team. Do you ever ask, Oh, did you guys ever like, as part of the

diligence, are you ever, uh, trying to get at, like, we see you raised a $500 million fund. There's a 2% fee. We're not mathematicians, but like we know how to do that math. Uh, where's that money going and how much of it is like being reinvested into the firm versus going into people's pockets? Like how does that conversation happen? Yeah. I mean, you can just ask it right.

Um, and just have a conversation about it for sure. The craziest thing someone's ever said back. Um, yeah, that's, uh, I don't know.

I don't know. I don't want to reveal too much. Are there, are there like crazy things people have responded with? Like almost like extreme honesty or is it usually just like, eh, that's not exactly what we wanted to hear. And so,

yeah, I, it sounds like there's a really ridiculous story that you're thinking so don't say lunch i guess but um all right yeah uh my last question for you is just long-term orientation of endowments in general what is long-term for the endowment itself right like the endowment technically is forever right how are you going to measure that uh but you have a team and uh it's amazing to think that everyone's going to be there forever and let's say okay everyone's going to be there forever but that's 30 year maybe 40 if you're really lucky you all are working together for 50 years right

which would be incredible right but even 50 years versus forever is still somewhat short term and so how do you think about what is the timeline that when you think of long-term orientation is that a five-year 10-year 20 30 50 like what how do you think yeah i mean i i think it's you know three plus years, I guess would be the, I think you have to be honest about what you can know and how far into the future you can know it. And so, you know, where this kind of comes into play in our conversation a lot is particularly if you have like a director, say a size up in a publicly traded company and it rips and runs, you know, it's very easy to say, Hey, we're permanent capital investors. Just let, let your winners ride, you know, all that type of thing, all those types of

things. And that's true. But I think we try our best to balance like, okay, yes, great business, but let's be honest with what we underwrote initially, what our partner underwrote initially. Like, let's take some money off the table because we always have, we have this great opportunity set and very high opportunity costs where if you can redeploy, you know, 3X your basis and something that's up, you know, 5X or 10X and keep your cost in the business and fund another investment that's earlier in its investment thesis playing out. We have to be honest about those things.

I mean, there's only so many incremental dollars we have to deploy every year. So I think we're always, this has been an interesting environment as well, just simply because so much has been pulled forward. And so it's very tempting to think, yeah, everything's going to be up and to the right forever. And it's like, well, I don't know,

this is like 2026 types of stuff that already happened. And so I think, I think we did a good job. Probably not. We'd probably, again, in hindsight, you can always look back. Everyone wished they sold more Q4. Yeah, exactly. But we have this kind of infinite buffet line problem where you have a limited amount of plate space and you have this, you don't want to fill up on, on salad, you know, because there's prime rib at the end, but you don't really know when it's coming. So we always have to be taking chips off the table

where we can and reserving room for something that we haven't seen yet that comes down the table. The worst thing that we can possibly do, maybe not the worst thing, but a bad scenario for us is having an exceptional 5, 10x opportunity with a high conviction partner

and not have the capital to be able to invest in it. So we want to always make sure that we have that while also maintaining that long-term orientation. So I think it comes down to just being reasonable and conservative about what – and you just have to recognize, too, that market cycles are super violent. And so take some chips off the table, and that's where the big debate tends to come in. Yeah, I mean, which is irrational for the world, right? Where can we send people to find you on the internet or if they want to get in touch with you or your colleagues, where could they go? Yeah, I mean, all of our emails are on endowment.wusl.edu.

I'm on Twitter as well, AJKurki, A-J-K-U-R-K-I. so always reach out there it's been a great place for us to find new ideas and what was the URL the URL to send folks endowment. endowment.wustl.edu

W-U-S-T-L dot E-D-U awesome well I appreciate it very much thanks for having me I'm incredibly impressed by what you guys have done and unpacking the thought process behind it

usually is a good way to prove although some people may not agree it's not luck right there is some intentionality and so excited to see what you guys do next appreciate it

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