0:00

Hello, I'm Ted Sides, and this

0:02

is Capital Allocators. This

0:10

show is an open exploration of

0:13

the people and process behind capital

0:15

allocation. Through conversations with

0:17

leaders in the money game, we learn

0:19

how these holders of the keys to

0:22

the kingdom allocate their time and their

0:24

capital. You can join

0:26

our mailing list and access

0:28

premium content at capitalallocators.com. My

0:32

guest on today's show is Anna

0:34

Marshall, the CIO for the William

0:37

and Flora Hewlett Foundation, where she

0:39

oversees a $13 billion pool of

0:41

capital. Anna joined Hewlett

0:43

18 years ago after spending the same

0:45

amount of time as a direct investor.

0:48

She was a past guest in 2019

0:50

describing her approach, and that conversation is

0:52

replayed in the feed. We

0:55

caught up to discuss what's on Anna's mind going

0:57

into the new year. We

0:59

cover inflation, private equity

1:01

secondaries, liquidity management, China,

1:04

emerging markets, and

1:06

ESG. We close discussing

1:08

where Anna is looking around corners, what's

1:10

filling her basket of worries, and her

1:12

plan for the next five years. Before

1:16

we get going, we've just released

1:18

the last episode of season one

1:20

of Private Equity Deals on the

1:22

Private Equity Deals separate podcast feed.

1:25

If you're an allocator, private equity

1:27

manager, banker, or student of deals

1:29

and businesses, this show is for

1:31

you. Search for Private

1:34

Equity Deals on your podcast player and

1:36

subscribe. As soon as

1:38

you do, you'll get access to eight

1:40

conversations with leading brand name private equity

1:43

funds, discussing an individual deal and the

1:45

way they practice their craft. The

1:48

last one is a gem

1:50

from CDNR, describing a business

1:52

with aspects of venture, buyout,

1:54

and growth equity investing alongside

1:56

their operating partner model. Enjoy

2:00

conversation with Anna Marshall. Anna,

2:05

great to see you. Great to see you too, Ted. I

2:07

thought we should dive right in

2:09

on whatever you were finding most

2:11

topical on the investment side of

2:14

the business. Everybody loves to

2:16

become an armchair economist, so

2:19

we can skip the armchair economics if you'd like,

2:21

since I don't think any of us have a

2:23

crystal ball, including the Fed. So we can all

2:25

stop there. Well, before we fully

2:27

stop there, let's just talk about inflation.

2:29

Okay. Not a projection, but

2:32

given the potential for

2:34

a very different macroeconomic environment going

2:36

forward for a number of years,

2:39

how do you integrate that into

2:41

your thinking about your portfolio? I

2:44

think one thing that's super helpful

2:46

is to try to forget the

2:48

last 14 years

2:51

and try to clear your mind of

2:53

anything that you thought was a rule

2:55

of investing in the last 14 years. Because

2:59

what we're really doing is going back to a

3:01

world that existed starting in sort

3:03

of 1991, 1992, through up into the crisis. So

3:10

it was more of a normalized

3:12

economy. You had inflation, you

3:14

had rates at 4%, you

3:17

had mortgage rates at 7%. The

3:19

world didn't stop. No one

3:21

fell out of their chair. It was fine.

3:24

We all lived fine. We all invested. We

3:26

all made money in the 90s. We just

3:28

have to forget the paradigm that we lived

3:30

in the last 14 years is completely artificial.

3:33

And I think once you erase that, you

3:35

start taking it with a lot more

3:37

call. What are some of

3:39

those rules that you've told

3:41

your team need to be unlearned

3:44

or forgotten? This whole

3:46

concept of the math works for any deal

3:48

at any valuation because the cost of capital

3:50

is near zero. I think that is probably

3:53

the most pernicious thing that was learned by

3:55

a generation of people, the fact

3:57

that you can invest internationally without ever getting into

3:59

the market. every thinking about effects risk

4:01

and the cost of hedging and how

4:03

that affects your expected return of an

4:06

asset. The fact

4:08

that illiquidity premium had been completely

4:10

obliterated as more and more money

4:13

poured into private markets and

4:15

how you need to demand an

4:17

illiquidity premium to really be able

4:19

to construct a healthy portfolio long-term.

4:22

So those are just three to take

4:24

as lessons that were great. They were

4:26

fabulous. They made lots of money for

4:28

the institutions that we all represent. I

4:31

mean, it was a great time to

4:33

really grow our endowments and

4:35

we weren't then able to do a lot of

4:37

really good work. I mean, we doubled the

4:39

grant budget of this organization really

4:42

in the last six years. All of

4:44

our institutions and the world was able to be

4:46

a better place. It wasn't

4:48

wasted, but for us

4:50

to be good stewards of capital, I think we just have

4:52

to unlearn some of those. Are

4:54

there actions you're taking over

4:57

the next couple of years on

4:59

your portfolio based on the

5:01

belief that we have to unlearn some of

5:03

these things? So we're having

5:05

a lot more discussions with our

5:07

managers about how are they

5:10

adjusting their cost of capital? How are they

5:12

adjusting their valuations? How are they

5:14

focusing on free cashflow? What

5:16

are they doing in terms of DCS? In

5:19

case of inflation, how are

5:21

they putting in price increases? How are they

5:23

growing their top lines? How are they adjusting

5:25

their budgets? Because if you're a buyout manager,

5:27

you bought a company, even if you thought

5:30

you were gonna get growth of whatever, eight,

5:32

10% out of a company, but you

5:34

have 5% inflation or 7% inflation. Well,

5:37

8% doesn't really look that exciting

5:40

anymore. That really is 3% real. So

5:43

how are they adjusting their expectations? And

5:45

then how are they making sure that

5:47

once the most of buyout

5:49

has floating rate debt? Like

5:52

can these companies pay their bills when their

5:54

interest bill is now 2x? So

5:57

how about you focus instead of on EBITDA? in

6:00

case you focus on cash flow

6:02

before the eye doubled. And

6:04

I think for a lot of the generation and of the

6:06

kids doing the models, they just haven't lived through that. So

6:09

it's about asking them what they're doing. I'm

6:12

really curious to ask you what

6:14

the range of responses you're hearing

6:16

to that set of questions. Everything

6:19

from hope that nothing

6:21

is going to change because by this

6:23

time next year, the

6:25

rates will be coming down again and therefore

6:27

the cost of financing will be an issue.

6:30

That's one end of the spectrum. There's

6:32

the other end of the spectrum that basically

6:34

says, well, we're all pencils now because nothing

6:36

works at these prices anyway. And

6:39

we're just making sure that our companies can

6:41

pay their interest bill first

6:43

and foremost. And everybody

6:45

from doing spreadsheets at work

6:48

is now sitting in portfolio companies

6:50

helping our portfolio company management teams

6:52

really sharpen their pencils, pay

6:55

their bills, pay their interest bill and make it

6:57

through. So that's the other end of

6:59

the spectrum. When you were writing your

7:02

next set of checks, somewhere in that

7:04

spectrum, you have to decide what resonates

7:06

most for you. So where are you

7:08

fitting in on that range? I

7:10

think you know where I would fit in on that range. I'm

7:14

a big believer that the people

7:16

who we trust with our capital

7:19

need to be penciled down and

7:21

really working with the portfolio companies.

7:23

We have had five to seven

7:25

years of massive amounts of capital

7:28

going into buying private firms and

7:30

taking companies private. And

7:32

it's time for everybody on the field to really

7:34

go work those companies. This is

7:36

not about playing evaluation flip game. In

7:39

your portfolio, everyone's made

7:41

investments in the private markets, whether it's venture

7:43

or buyouts, that have done really, really well

7:45

for a while, at least until recently. How

7:48

do you think about assessing your allocations

7:50

to these areas when you feel like

7:52

things have gotten a little frothy? I'm

7:55

unusual in that we use secondaries

7:58

as part. of our portfolio

8:01

management process. When you see a

8:03

market that is getting frothy, and

8:05

again, we make commitments to

8:07

our managers, and then they have

8:09

three years to invest funds, for four years. We

8:12

were seeing the velocity increase so

8:14

much that we started getting concerned.

8:16

When you start seeing that, you

8:18

start seeing your portfolio construction get

8:20

distorted. So one way to do

8:23

that is to actively manage your private

8:25

portfolio. In doing so, what you do

8:27

is you start looking at

8:29

secondary markets, and there is

8:31

an art to doing secondary. You can't

8:33

just throw things out there. You can't

8:35

just say, oh, it's these five guys

8:37

I don't like. I'm gonna throw those

8:40

guys out of the portfolio. You really

8:42

do try to construct a portfolio that

8:44

somebody else will find useful, and that

8:46

also when you take it out

8:48

of your portfolio, you haven't completely left a

8:50

hole in your portfolio construction of your own

8:52

buyout portfolio. I speak about

8:55

buyout. We've done it in real estate.

8:57

We've done it in natural resources. There's

8:59

nothing wrong with the managers themselves. It's

9:01

rarely performance related. You can't just sell

9:03

your duds. That never works in a

9:05

secondary. It is about whether

9:08

and how that fits into our

9:10

portfolio strategy. I'd love to

9:12

dive in a little more on this, because

9:14

it's a different concept than many in this

9:16

space. It is. Let me

9:18

add the materiality of it. We don't do secondaries

9:20

every year. We do secondaries when

9:23

the strategy calls for it. For example,

9:25

the classic case is you have

9:27

to change in your asset class director.

9:30

Every asset class director has to be

9:32

able to walk in day one and

9:35

own a certain amount of their portfolio. And

9:37

then they might find that the strategy in

9:40

which they want to take the portfolio is

9:42

different. They want to go down

9:44

market. They want to go up market. They want

9:46

to go international. They want to not be international.

9:48

Whatever it may be, as a CIO, you have

9:51

to respect that there is an

9:53

actual asset class director, a managing director,

9:56

that you want to hold

9:58

accountable for delivering on a strategy. So

10:00

as a CIO, you have to be able to give them the

10:02

tools to be able to do that. And

10:04

the only way to do that is to carve out part

10:06

of it as a secondary sale

10:09

and then be able to reinvest that

10:11

and provide room in the allocation on

10:13

the portfolio-wide basis for them to go

10:15

do what they want to do. So

10:17

that's sort of the cookie cutter first way of doing

10:20

it. The less preferred way of doing

10:22

it would be if you find

10:26

yourself overcommitted. Now,

10:29

I think everybody who is a

10:31

CIO today that was a

10:33

CIO in 2008 learned their lesson well.

10:36

So fortunately, I don't think we have a

10:38

lot of people that are overcommitted. But

10:41

usually, if you get overcommitted to a certain

10:43

asset class, then that would be

10:45

the other reason to sort of call your portfolio

10:47

and try to get your exposure down. And the

10:49

third one is simply for risk management, which

10:52

is from a risk allocation, your

10:54

private assets are taking so

10:57

much more of your risk budget that

10:59

as liquidity constraints come into your portfolio

11:01

and let's say your public assets sell

11:04

down, you find yourself ever

11:06

higher in the risk spectrum on your portfolio.

11:08

And so one of the ways that you

11:10

can look at this is to call the

11:12

allocation and say,

11:14

okay, we'll keep committing because usually

11:17

you don't want to stop committing, but

11:19

we can take 100 million, 200 million

11:21

here or there. Secondary

11:24

sales can't really happen in

11:26

a world for like under $100 million. They

11:30

don't really go out in more than books of like

11:32

200, $300 million. And

11:34

so you try to time the market, you try

11:36

to be more clever than most, but

11:38

it's not a bulk of our

11:41

portfolio we're selling. We're just trying to

11:43

manage around the edges with the secondary sales.

11:46

So you almost have three different scenarios. The

11:48

first is this internally generated because there's a

11:50

change in someone on your team. The

11:52

second is say a scenario where there's

11:54

a public market sell off increasing the

11:57

allocation of private markets. And the

11:59

third are when private markets sell off. market have done really

12:01

well and therefore people have gotten excited and

12:03

the allocations are higher. So two are market

12:05

driven and the first is a little more

12:07

internal driven. Are there differences in

12:10

how you think about how to go

12:12

about the secondary sale in those different

12:14

scenarios? If it's a risk focus,

12:17

then you almost have

12:20

to be really quick-footed because

12:22

by the time you're sensing

12:24

that you are going

12:26

to have a risk issue,

12:28

then you're going to be too late because

12:31

it does take time to pull together a secondary.

12:33

I mean, it takes your internal team to pull

12:35

together all the stuff. You need to hire a

12:37

banker. You need to shop it

12:39

out there. I mean, you need to talk

12:41

to all your GPs. You have to have

12:44

really close relationships with your GPs. So this

12:46

is where the concentrated portfolio that I have

12:48

really is helpful because we

12:50

do have those working relationships with the

12:52

GPs where we can have the conversation

12:55

to explain to them why we're doing it. The

12:57

conversation, for example, at the beginning of this year

12:59

was we think the Fed's going to raise rates.

13:02

We think we're going to find ourselves with

13:04

a declining equity market. We think we're

13:06

going to find ourselves over our skis

13:08

because your returns have been so great.

13:11

My NAV has gone up so much. I'm

13:13

finding myself beyond where I want

13:15

to be at risk. I

13:18

need to cut risk. This is part

13:20

of the way I'm cutting risk. Please understand that

13:22

this is a risk management thing. It's

13:24

not you. We need to manage our

13:26

fiduciary duty. And so

13:28

you just need to be handling it in a

13:31

more proactive way. And that gives you the room

13:33

to be able to continue to commit because I

13:35

think not being able to

13:37

commit because you are already over your

13:40

NAV is actually a really big

13:43

mistake because some of the

13:45

best funds are actually invested

13:47

during down years. And so you don't

13:49

want to miss those years. So

13:51

there are a lot of people that wouldn't

13:53

broach their GPs because they probably live in

13:55

perpetual fear that they want to make sure

13:57

they're in the next fund. found

14:00

that receptivity to be over time when you've

14:02

had these conversations across the board in your

14:04

portfolio? They usually come after

14:06

years of a really strong

14:08

relationship and transparency. We tend to be super

14:11

transparent and I think also the fact that

14:13

we have such a stable team. I've been

14:15

here for 18 years, the GPs

14:18

know me and they know my word and they

14:20

know that if I'm telling them

14:22

that I need to bring down risk or

14:24

that I have a new director and who

14:26

wants to see things a little bit different,

14:28

I think they understand that. We're constantly evaluating

14:30

them on how they manage their firms and

14:32

their teams and I think they

14:34

have a healthy respect for knowing that

14:37

I also have to manage this place

14:39

and the portfolio. You mentioned at

14:41

the onset that there's a bit of an

14:43

art to putting together this secondary sale so

14:46

that it's attractive and works for someone who's

14:48

buying it. What are some of the features

14:50

of what's worked for you in that regard?

14:53

Usually if it's partnerships that a lot

14:55

of people know where

14:57

people don't have to do an extraordinary

14:59

amount of work in order to understand

15:02

the assets. At the

15:04

end of the day, yes, they're firms and they're

15:06

funds but they're a bunch

15:08

of assets so people need to be

15:10

able to underwrite the assets and the

15:12

easier you make it the better it

15:14

is. That doesn't mean that's all you

15:16

sell. I mean you can sell other

15:18

things but I would say we're in

15:20

the fortunate position where we haven't had

15:23

that many funds that don't stand up

15:25

for themselves. In a different

15:27

situation with a new portfolio, I probably

15:30

would have been the buyer of

15:32

a lot of our portfolios that I saw. I

15:35

just happen to have a very mature portfolio. In

15:37

the optimal sale that you've done, how

15:40

much lead time does it take to

15:42

go from the idea that we need

15:44

to trim through a secondary to actually

15:46

executing? From the idea of

15:48

portfolio management to actual getting together

15:51

list is probably a month

15:53

and then a month

15:55

for the banker and then depending on the

15:57

workflow of these bankers. and

16:00

when they can do it and

16:02

then the workflow of the buyer

16:04

universe. And I mean, the buyer

16:06

universe has grown tremendously in the last 15 years,

16:09

but even they have a cadence as to

16:11

when they're super busy and when they're not

16:14

and when they can take a look at a new deal or not. So you just have to

16:17

be mindful of that. And

16:19

so start to finish, how long does it take? So

16:22

the fastest I think we've

16:24

ever moved is

16:26

six weeks, eight weeks. The

16:29

longest has been five months. Are

16:32

there other ways that

16:34

you've thought about liquidity management across

16:36

a multi-manager portfolio outside of the

16:38

traditional way of thinking about investing

16:40

in and redeeming for managers and

16:43

making commitments and getting distributions? The

16:46

one thing that we all forget is

16:48

that cash has a great

16:50

deal of value and the more illiquid

16:52

your portfolio, the more value your cash

16:55

port has. At least now you

16:57

have a yield on your cash, which is a huge

16:59

benefit now, but it has

17:01

option value, learning the lessons from away.

17:03

Many of us have credit lines in place to be

17:05

able to fund the granting parts of

17:08

the organizations, but you can't use credit

17:10

lines to lean into a dislocation for

17:12

lots of tax reasons. If

17:14

you think a dislocation is coming, you need

17:17

to have cash to be able to even

17:19

get a chance at that. And I just

17:21

think it helps to bridge the cash flow

17:23

because cash flows are episodic. We

17:25

all solved these beautiful cash flow models,

17:28

but we've all lived through periods where

17:31

we get distributions well in excess of those models,

17:34

and then we've lived through periods where you're just

17:36

like, oh my God, where the hell am I

17:38

going to get my next distribution? In organizations like

17:40

a foundation that don't have incoming cash flows, that

17:43

means that my cash flow for

17:46

granting an expenses for next year, if

17:49

I don't get anything from the private portfolio, it has to

17:51

come out of the public portfolio. And

17:54

so they're not sort of paying in their fair

17:56

share of outflows. So

17:58

you have to use that. cash as that

18:00

sort of buffer to help

18:03

bridge the cash flows or you're going to

18:05

distort your actual asset allocation much worse. What

18:08

have you found as the appropriate steady

18:10

state allocation to cash? We

18:12

have probably about 50% of

18:14

the portfolio in a liquid. So

18:17

we have about, I would say, 4%

18:19

to 5% in cash, some

18:21

so that we can bridge what

18:23

should be the contribution to

18:26

pay out and some so we

18:28

can lean into dislocations. And will

18:30

you flex that 4% to 5% higher

18:33

if you sense that there may

18:35

be dislocation opportunities on the come?

18:38

I tend to not be that

18:40

tactical. I mean, I'm moving

18:42

around a super tanker here, but it

18:45

really comes to trying to

18:47

preserve the intended asset allocation

18:49

more so than providing the

18:51

opportunity. As it turns

18:53

out, because usually

18:55

the dislocation comes in public markets

18:58

first, you're going

19:00

to not want to sell your

19:03

public assets in order to fund payout as it

19:05

is. And so the more

19:07

you can defend even your existing

19:09

allocations, I think is a really good use

19:13

of cash. How does your turn do where you're

19:16

seeing opportunities? So

19:18

far, not much. The private markets

19:20

have done what they do, which

19:23

is they take forever to actually

19:25

get reality checks. For

19:27

the most part, the marks have been way

19:30

slower and way less than

19:32

I would have expected, even

19:35

for this stage, given the increase in the cost

19:37

of capital. So I think those

19:39

are still to come. So I don't think

19:41

there's any bargains to be had. And I think

19:43

that's why you've just gotten paralyzed markets. Even

19:46

if your cash flow model is wrong

19:48

on distributions, you're probably not going to

19:50

get any capital calls anyway, because

19:52

no one can really fund anything in the debt

19:54

markets. So for the

19:56

time being, it won't be a huge

19:58

squeeze for people. there won't

20:01

be any capital calls. You still have

20:03

the period of sort of adjusting down

20:05

valuations that hasn't happened.

20:08

I would say the opportunity set to

20:10

come will be good. That has implications

20:12

for the actual values of everything that

20:14

was bought in the last five years.

20:17

But that's still all

20:19

to be played out in the future. Public

20:22

markets, the rotation seems to be, I

20:24

don't know that it's almost complete, but

20:27

it has been fairly harsh. And

20:29

so do I feel like we

20:31

can jump in and take advantage? I

20:34

think there will still be people who

20:36

need to source their payouts and their

20:40

capital calls from public markets. I mean you

20:42

still have institutional investors

20:44

that whether they reallocate back-to-fix

20:46

symptom or they

20:49

have to fund cash flows or they have

20:51

to fund private market capital calls without there

20:53

being the benefit of distributions. I still

20:55

think that hits your public credit and

20:58

public equity markets. So you've

21:00

spent a lot of time in your life in emerging

21:02

markets. It does feel like it's become a tale of

21:04

two, China and the rest of the world. We'd love

21:06

to get your take on both. So why don't we

21:08

start with China? The cyclical

21:10

China bounce as it reopens,

21:12

I think is

21:15

well deserved and I hope it

21:17

lasts. The

21:19

secular tension with the

21:21

US just hasn't been

21:23

fixed. And I

21:25

don't think there is any intent on

21:28

the US side to fix

21:30

it. So I think it is

21:32

a different market from the market

21:34

that we so enjoyed. I mean

21:36

when we started in 2004 investing

21:38

in China, we had a wonderful

21:41

run for 15 years and

21:45

great global companies were created

21:47

and I think more global

21:50

companies will be created in sectors

21:53

that the government really wants to

21:56

sponsor. I think it will become ever more

21:59

challenging for for us

22:01

to be able to benefit from that, just

22:04

simply because from the US side,

22:06

there is greater consensus of

22:10

whether it's containment, whether it's competitive edge, whatever

22:12

it is that we want to call it

22:14

as policy in the United States. So

22:17

how have you approached your existing

22:19

investments over there? Much

22:21

of our exposure is in illiquid venture.

22:24

So there isn't much I can do

22:27

to the process. We only have two

22:29

venture firms there. Our two

22:31

venture firms there are actually quite entrenched

22:34

in building the self-resilient

22:36

sectors that the government wants. So

22:39

I think they will create really

22:41

interesting companies. So we're quite excited

22:43

about that. It's sort of like the FX

22:45

risk. When you've been

22:47

investing without thinking of geopolitical risk

22:49

as one of your main things,

22:52

you then have to add it into

22:54

your underwriting. So that just makes the

22:56

hurdle rate higher for a China investment.

23:00

And when at the same time

23:02

your US investments start to correct in the

23:04

US in the private markets, then that will

23:06

look more interesting without taking that FX or

23:09

geopolitical risk. We all have to put the

23:11

money to work. It's a relative game. I

23:14

guess the tough question that then has to

23:16

get asked is when these two firms go

23:18

to raise their next fund, do

23:21

you feel differently about the

23:23

investability of those firms in

23:25

China given what's happened over the last year?

23:28

So fortunately they had just

23:30

raised. And so

23:32

we have three years to

23:35

figure out what happens in the

23:37

US-China relationship and whether some of

23:39

these structural shifts

23:42

can actually be broken,

23:46

even if it's just getting more working groups going

23:49

between the two countries. That's

23:51

an improvement. So there are things to

23:53

watch out for more than just

23:55

the headlines over the next three years that we'll

23:57

be focused on. From

24:01

a relative valuation, they're the

24:03

cheapest they've ever been. Part

24:05

of the thesis in China was always about

24:07

relative growth. Once you break that, do you

24:09

then get a market similar to

24:12

Korea, where it's

24:14

a market that is always cheap,

24:16

it just goes through stages of relative cheapness

24:19

to relative less cheap? And you can trade

24:21

those markets super well. In the 90s, we

24:23

used to do it all the time. And

24:26

those are the markets where you look

24:28

at a trading range. The companies are

24:30

doing fine, you can track the companies,

24:33

they're still earning. So you can actually

24:35

have a fairly high conviction in the

24:37

valuations as being real. And

24:40

then trade it, what

24:42

I call from knees to shoulders.

24:44

So let's say if Korea was a four to

24:46

eight times market, you trade four and a half

24:49

or five to seven. And you

24:51

just play that game. It's a different market

24:53

to be honest than what we've expected in

24:55

the last 15 years. So are

24:57

you participating today? No, I'm

24:59

not participating today, because that takes

25:01

a very different type of portfolio

25:03

manager. And it's

25:06

hard to understand

25:08

if a generation

25:11

of investors that has invested in

25:13

a different type of

25:15

market can actually play that kind of a

25:17

market. So we have to figure that out.

25:19

I mean, we have one or two public

25:21

managers, and that's what we're

25:23

just waiting to see how it is that

25:26

they adjust their strategies to this new environment.

25:28

What are you seeing in emerging markets outside of China? I

25:31

would say Singapore is trying to position

25:33

itself as sort of the Switzerland of

25:35

Asia. There's a lot of excitement about

25:37

Indonesia and Malaysia. I am

25:39

probably more skeptical than most given

25:42

that I invested in those

25:44

markets in the 90s. And therefore,

25:47

I get the supply chain argument and

25:49

the moving of supply chain to Indonesia

25:51

and Vietnam. I think we all forget

25:53

that Vietnam is also a communist country.

25:56

And it also doesn't scale very well.

25:58

And the Chinese ran into scalability

26:01

problems on wages pretty fast. So

26:03

I think of always of would

26:05

I put a plant there? If

26:07

I were a board member, what

26:10

would it take for me to decide where I would

26:12

put my next plant? My

26:14

manufacturing center. And you

26:16

have a lot of geopolitical

26:18

concerns still. You have

26:20

a new government in Malaysia. You've

26:23

got only two years of the

26:25

current governance in Indonesia. And so

26:27

it's really difficult to

26:30

make 10-year capital decisions

26:32

on manufacturing plants and

26:34

the ensuing supply chain that has to follow

26:37

you into those manufacturing plants. Because remember, when

26:39

you build a manufacturing plant, you have to

26:41

have all the other little subcomponent people also

26:43

move with you. It's a lot to ask,

26:46

which is why the supply chain trend has

26:48

been slower than people I

26:50

think expected. So I'm a little

26:52

bit more skeptical than most on

26:54

Asia. Latin America. Brazil has a

26:57

new president. We'll see what his

26:59

finance minister comes up with. It's

27:01

a really hard problem they have

27:03

because the last time he was

27:06

in power, he benefited from

27:08

a huge tailwind of Chinese

27:10

demand for both soybean and

27:13

iron ore. And

27:15

this time he doesn't. It still is a

27:17

really large country. And so

27:19

it has scale, but it doesn't

27:21

really have a workforce that can take a

27:24

lot of the manufacturing capacity, supply

27:27

chain kind of stuff. India, you

27:29

know, oil continues to be

27:31

the sort of their Achilles heel

27:33

as far as their current account. And we're

27:36

seeing the reserves come out. And

27:38

it still is a market with a ton of

27:40

corruption. And so it's from an

27:42

ease of doing business for foreign manufacturers, it

27:44

still is a really hard thing. We don't

27:46

have any exposure on a public market basis

27:49

to any of these markets. Let's

27:51

see some other topical things that have

27:53

come up a lot this year. Your

27:55

take on ESG. ESG

27:58

was great than ESG. was

28:00

greenwashing, then ESG is trash. It's

28:02

like a religion that is trying

28:04

to be debunked. It's really

28:07

emotional too for boards, for investment committees,

28:09

less so I would say for the

28:11

CIOs, but we have to implement whatever

28:13

it is our governance bodies actually want

28:16

us to do. And so that's sort

28:18

of where the rubber meets the road

28:20

for ESG for us. I would say

28:22

there's two paths. There's the path of

28:25

only go and invest in like the

28:28

ESG good people, like the companies

28:30

that have the good ratings, the

28:32

companies that are shown and

28:34

proven to be on someone's list that they

28:36

are actually doing the right thing. Or you

28:38

can go down the path of

28:41

change in ESG. So

28:44

why don't you go down the path of

28:46

it's the rate of change that matters and

28:49

maybe that's the way you're going to create

28:51

value. So I've seen those two divergent paths.

28:54

The how to capture

28:57

the ones changing their

28:59

ESG ratings requires a lot

29:02

of fundamental analysis, but I

29:04

think more than anything else I think the

29:07

confusion in the

29:09

corporate sector on what

29:11

to measure, how to measure

29:13

it, what's going to be

29:16

compliance approved, and

29:18

the fear I would

29:20

say that exists in the

29:22

legal department of every S&P

29:24

500 company that you

29:27

will in two years time or whenever

29:29

the SEC decrees it, you

29:31

will now have to disclose your

29:34

GHG emissions, scope one,

29:36

scope two, scope three, in a world

29:38

where measuring them and actually

29:41

assessing them let alone verifying them is

29:44

a fuzzy science. And

29:46

so I think we're kind

29:48

of putting the car before the horse, but

29:51

I think we'll eventually get there. But

29:54

I think having that as

29:56

a prism by which to invest is

29:59

fraught. We don't think this will stop

30:01

at public equity, by the way. We think it'll

30:03

go through to all SEC registered investment firms, because

30:06

that is the intent of the SEC in all

30:08

of their working papers. So we're

30:10

working with our private equity firms on

30:13

100-day plans for

30:15

any industrial buyout, really

30:18

tracking where are their emissions

30:20

coming from? Do you have the software? Can you

30:22

put the software into all the portfolio companies? Can

30:25

you aggregate it and show viable

30:27

metrics of improvement? So working

30:29

with them a little bit on that, on

30:32

just trying to be a

30:34

neutral party, because there are at

30:37

least two dozen software companies,

30:40

startups, all saying that they

30:42

can measure. Every consulting firm is trying to

30:44

get its business up and running, but

30:46

everybody's new at this. And

30:49

GHG emissions are the

30:51

harder thing to see. How do

30:54

you verify evidence-based approach

30:58

and reported in

31:00

an SEC financial statement?

31:03

How does PwC basically

31:06

sign off on your financials that include

31:08

this as part of a footnote without

31:11

being able to verify it? It's

31:13

gonna be complicated and the estimated

31:15

cost of compliance for

31:17

scope one, scope two, and scope three

31:19

is expected to exceed Sarbanes-Oxley. And

31:22

Sarbanes-Oxley was a bear. Have

31:25

you glommed on to any

31:27

particular, either one of these

31:29

startups or set of measurements

31:31

that you're seeing more broadly

31:34

adopted than others thus far?

31:37

No, everyone is looking

31:39

at the decision made by the

31:42

buyout firm. And so it has

31:44

to be something that's adaptable as a dashboard

31:46

across all their portfolio companies. And

31:48

so there isn't anything that I've

31:51

seen so far. And do you

31:53

have a bias towards the good ESG

31:55

companies versus the getting better companies?

31:58

I think the getting better. is

32:01

what we should be aiming for. I

32:04

mean, the point isn't to

32:06

reward the ones that already are good.

32:09

A lot of the point of our

32:12

granting dollars is

32:14

to improve conditions.

32:17

And so I think from a philosophical

32:19

perspective as part of Hewlett

32:21

Foundation, I'm more in the

32:23

camp of, let's provide good

32:25

incentives for people to

32:27

go down the path to improve their

32:30

ESG ratings. What I try to convince

32:32

the CEOs of portfolio companies is that

32:35

you will have a lower cost of

32:37

capital, and you will have a higher exit

32:39

multiple. So the incentive structure should

32:41

be aligned to doing the right thing, not because

32:43

it's the right thing, but because you're going to

32:45

make more money. So how

32:47

about the S in ESG, which

32:50

is even harder at times to

32:52

measure that for actionable outcome and

32:54

align economic incentives? The

32:58

S is something that many

33:00

people track. Because Hewlett

33:02

spends an extraordinary amount of its

33:04

funding on climate change, that and

33:07

governance are far more important to

33:09

us than the S. Not that

33:11

the S isn't important, but if

33:13

you look at the ratings of,

33:15

let's say, female participation in

33:18

your employee base, if

33:20

you're a biotech investor, you're going to have

33:22

a very low rating. And even if you

33:24

improve it by 100%, you're

33:27

still going to be in a very

33:29

low rating. If you're

33:31

an advertising company, where you

33:33

probably have a significant amount of women

33:36

in your firm, you're always going

33:38

to look good, even if you've never made an

33:40

advance. Just like the E still needs work, I

33:43

think the S, what exactly are

33:45

we measuring? Are we measuring decision

33:47

makers? Are we measuring employee

33:49

workforce? I would like to think that

33:52

we are measuring decision makers, because

33:54

what you really want in the S is

33:57

to have more senior professionals.

34:00

other people of color or woman, but

34:02

in many industries that will take

34:04

decades. And so to give

34:06

a score today, I don't know that it means much. One

34:09

of the things we talked about, I guess a

34:11

couple of years ago when you were on the

34:13

show was seeing around corners. And

34:15

I would love to hear what it is that

34:17

you're seeing. Seeing around

34:20

corners is, again, the

34:22

art of the guess. I would say

34:24

that it's going back to the

34:26

basics. It's going back to the

34:28

playbook that worked. It's more

34:30

like a back to the future than seeing around corners.

34:34

Going back and understanding what worked in

34:36

the 90s and sort of think of it as

34:38

1991 to 2006,

34:41

what worked there. It's not the exact same thing.

34:44

But what is different today, what different

34:46

monetary tools, what different leverage levels, what

34:48

flexibility there is. That's one of

34:50

the things that we're really spending a lot of time

34:52

on and sort of the analog versus the differences and

34:54

is there something we can learn. We're

34:57

also doing a lot of what

34:59

has really changed. So

35:01

standing today versus where we were

35:03

five years ago, how has the

35:06

way we interact with things changed?

35:08

It's bizarre if you have a

35:10

conversation today about your behavior in

35:12

April of 2020. You

35:15

feel like what

35:18

was somebody else living a different

35:20

life in a different world. And

35:23

so I think sometimes when you're in

35:25

it, you don't remove yourself enough to

35:28

be able to zoom out and

35:30

really understand quantum changes. And

35:33

I think we're spending a lot of time on

35:35

quantum changes on how it

35:37

is we interact with the world and

35:40

the ramifications that that could

35:42

have on the way we

35:45

spend money, invest money and

35:47

that eventually make money doing

35:49

so. So as you're

35:52

thinking about those potential higher

35:54

level changes, what's changed and

35:56

maybe improved in the way

35:58

you go? about your investment process

36:01

over the last couple of years? What's

36:03

improved is I think we take both

36:06

a very holistic approach and

36:09

a very bottom

36:12

up approach. We have had

36:14

the fortune of concentrating

36:17

our portfolio with some of the best

36:19

thinkers in the world. And

36:21

so we invite them in.

36:23

We literally say, okay, here's

36:25

five topics. Come and

36:28

tell us where you

36:30

think these five topics will

36:32

be. Let us ask questions.

36:34

Totally unprompted because we know

36:36

that eventually whatever they're thinking will

36:38

be reflected in their portfolios. So

36:41

it's going to end up in our portfolio anyway. It's

36:44

just do we have enough diverse

36:46

thinking? If all

36:48

of a sudden we're having conversations with 10

36:50

managers and 10 managers are telling us exactly

36:52

the same thing, we know

36:55

A, everybody's already including that in

36:57

their portfolios. So the ability to pay

36:59

money from that is not that great. And

37:01

then also we have a risk that if they're

37:03

wrong, we've got a lot of the portfolio writing

37:05

on the same things. And that's

37:08

a risk. So it's a risk management tool.

37:10

And it's a future positioning

37:12

tool. So it works both ways. So

37:15

when you're sitting down with your managers today, what are

37:17

those five topics you're asking them about? We

37:20

asked them really random stuff. I mean, we

37:22

don't want to lead the witness. Like

37:24

we ask people who are

37:27

in buyout about crypto, we ask crypto

37:29

guys about industrials, we ask public people

37:31

about privates. Everyone has

37:34

an opinion about somebody else's asset

37:36

class, for sure. And

37:39

so we tend to get them

37:41

rolling on that. We're always looking

37:43

for the highest return on a

37:45

risk adjusted basis. And so trying

37:48

to really calibrate that risk is

37:50

important, especially in a foundation that

37:52

doesn't have any new sources of

37:54

income other than what we can

37:56

compound over time. So

37:58

when you distill the conversations, what

38:01

is filling your back

38:06

to my basket of worries? I

38:09

would say my basket of worries,

38:11

number one, is that our NAVs

38:13

don't really reflect what

38:16

the reality of the situation is

38:18

and I understand the reasons why

38:20

the buyout and venture and

38:22

all the private firms they're being careful

38:25

with the marks but all of the

38:27

clients are creating budgets whether your pension

38:29

plan, endowment or foundation, you're creating a

38:32

budget with your treasurer or your CFO

38:34

that you know deep in your heart represents

38:37

an NAV that

38:39

is too high and so the

38:41

potential cash flow and the potential

38:43

gain from a base NAV

38:46

that isn't actually correct is

38:48

a real danger because you're basically overspending

38:50

in a sense until values

38:53

adjust and I would

38:55

say that's my biggest worry. Our

38:57

job is to compound endowment

38:59

wealth for generations to come to

39:01

do good and I feel like we're eating

39:04

to these endowments how to real basis let

39:06

alone the inflation hit so that would be my

39:08

biggest of my basket of worries but I can't

39:10

do anything about it I can worry but I

39:13

can't really move it. What else is filling

39:15

up that basket? I think the

39:17

other basket of worries is that

39:20

we now have to include

39:22

FX and geopolitical

39:24

risk in every single investment

39:27

decision we make. I think it was

39:30

a gift that

39:32

for 15 years we

39:35

didn't have to do but you

39:38

know these costs are real and

39:40

that and the cost of financing will

39:43

just bring us down to the

39:45

expected returns of asset classes that

39:48

we all put into our models that we

39:50

know are the true ones but

39:53

we've just lived in a beautiful Nirvana for

39:55

a really long time. So

39:57

when you assimilate that what

39:59

is comprising as we turn towards the

40:01

end of the year into a new year, your

40:04

five-year plan? My five-year plan?

40:07

Well, my five-year plan is to make

40:09

sure that this team and the team

40:11

at our managers understand

40:13

inflation accounting because even

40:15

five percent inflation, four percent

40:17

inflation, three percent inflation makes

40:20

an impact, especially in a world

40:22

where growth is going to be lower than

40:24

it was in the 90s. That's

40:27

one of the biggest differences between now and the 1990s is that,

40:29

yeah, you could have three percent inflation

40:31

and four percent rates, but you also have three to

40:34

four percent growth. Right

40:36

now, we're going to struggle to get

40:38

that. How

40:40

do I prepare this team to be the

40:42

best athletes on the field? To be the

40:44

best partners to our partners and

40:47

really get it. How about you

40:49

personally on your five-year plan? I'm still

40:51

going to be here five years from now

40:53

trying to compound the wealth that

40:55

we were

41:00

fortunate to inherit and continue

41:03

to support this organization in doing its

41:05

great work. I think everybody

41:07

on the team is committed

41:09

to that and committed to the compounding.

41:12

We understand how much of a privilege

41:14

it is actually to be able to

41:16

do what we love, which is investing,

41:19

and be able to do

41:21

it for mission-oriented organization. It is the

41:24

best job in the world. All

41:26

right, Anna, I have a few closing questions that

41:28

are new from the last time we did it

41:30

at this program. Oh, look at you. Okay. Which

41:33

two people have had the biggest impact on your professional

41:35

life? Chris Han and

41:38

Lajian. And why? Because

41:43

Chris taught me the value

41:45

of there is no detail. That

41:48

is too much of a detail. You've got

41:50

to know things inside out, backwards, forwards, or

41:52

you're never going to have conviction. And

41:55

you have to leave your portfolio managers

41:57

be and not second-guess.

42:00

And he and I have had a two decades

42:02

long relationship. So we've learned this together.

42:06

Lei because he really

42:08

taught me that you should not waste

42:11

your time with anything but quality people

42:13

and quality firms. And

42:15

the ability to be able to

42:18

not waste time and

42:20

to be super efficient with where

42:23

I network, how I am a partner

42:25

to people and being present to them.

42:28

I think it's super interesting

42:30

gift that I learned early on

42:32

from him on making sure

42:34

that unless the person across the table

42:36

from me was truly somebody that I

42:38

thought was top quality that

42:41

this portfolio just didn't need that. What

42:43

type of investment do you gravitate to like

42:45

a moth to the flame? If

42:48

I can find it, I

42:50

would say it's a company

42:52

that's misunderstood that has some

42:54

sort of angle

42:56

that matches the way I think

42:59

is disrupting the world in

43:01

some way or shape or form. So

43:03

that it has a good long lead

43:05

time before its competitors catch up to

43:07

it and therefore can expand market share

43:09

and expand profit margins. Those are my

43:11

fav. And how do

43:14

you apply that love for

43:16

that type of investment to

43:18

a group of managers? It's the same

43:20

thing. When I got into

43:23

this job after managing money for 18

43:25

years, it was basically translating that skill

43:27

set of stock picking and knowing whether

43:29

a management team had the expertise to

43:32

implement a strategy and have the vision.

43:35

And it's exactly the same skills that I look for

43:37

in a manager. In other words,

43:39

it has to be somebody that really

43:41

understands what they own and that they

43:44

own companies. Yes, they own

43:46

stocks. They need to trade the stocks.

43:48

But they own companies in which they have

43:50

to be capable of implementing the strategies. That's

43:54

how I translate it. There are

43:56

very few really consistently

43:58

excellent stocks. There

44:01

are very few consistently

44:03

excellent bond investors, just

44:06

like in venture and just like in buyout. The

44:08

last 15 years have massively

44:11

expanded the universe of funds and

44:13

firms that weren't

44:17

excellent. Not everyone can

44:19

be excellent, even though

44:21

everybody shows up as top tier in presentation

44:23

and pitch deck. So I don't understand. But

44:26

not everybody is excellent. And

44:29

you need to really find the excellent people

44:32

that you trust, that their firm values

44:34

are aligned with you. If

44:36

their firm values aren't aligned, we're

44:39

going to go through some tough times over the next

44:42

decade. You really need

44:44

managers that you feel are properly

44:46

aligned with you, that have a

44:49

clear objective. Otherwise, it's really tough

44:51

to navigate those conversations. But

44:54

once aside, at this point, that's the least

44:56

of my issues. It's really

44:58

do they have what it takes to be flexible

45:00

enough to understand that they're in a

45:02

new environment. And on the last one

45:04

for you, what are your biggest blind spots? My

45:07

children would say my biggest blind

45:09

spots are that

45:12

I like to

45:14

be efficient with my time and

45:17

that perhaps instead

45:20

of considering 20 options, I will only

45:22

consider whatever they say are the top

45:24

three options. So I force

45:26

them to come up with options ahead of time and

45:28

don't listen to the 20. My

45:30

work children would say the same thing. My

45:34

other blind spot is while I try to look forward

45:36

as much as I can, the reality

45:39

is my investment experience is rooted

45:41

in two very distinct periods of

45:44

time, of two

45:46

very distinct monetary policy periods, two

45:48

very distinct geopolitical periods. And

45:50

so it's hard to not

45:53

draw analogies. And so the

45:56

reason why I like diversity on my

45:58

team to be also generational. is

46:00

I need the young people on the team to be

46:02

like, yeah, no. Like

46:05

that's so dead and gone, like that couldn't

46:07

even happen again. I love when people tell

46:09

me I am flat out wrong in

46:12

my thinking and then walk me through

46:14

their logic and open up a

46:16

whole new way. Ana, thanks so

46:18

much for sharing this update on your thoughts. Great

46:20

to see you. Great to see you. Take care.

46:23

Thanks for listening to the show. If

46:25

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46:28

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46:35

a good one and see you next time.