Allison Thacker – Different Perspectives and Different Assets at Rice University (EP.348)

27:01And so we must build knowledge and expertise in order to underwrite the portfolio in order to choose the manager in this area. It's just not that easy. Where else have you seen that deep dive expertise help you in manager selection? So we've seen it absolutely help us in real estate. And I think it has helped us take a less risky portfolio of assets with fewer air pockets because we understood the product types and the markets. It's one of the reasons we don't do much in biotech because we have not managed to hire that onto our team. And the more time I spend on it, the more convinced I am that without that knowledge, I just don't believe that we can be successful choosing managers in this area.

27:45Because especially when you go through these areas that are volatile, and you mentioned there's volatility in oil and gas. There's obviously volatility in biotech. When there's volatility, you need deep understanding. So you hold your trade. You talk to the managers about co -invest and you can convince your board that you should do them in the time when it feels terrible. And that requires expertise at the team level. So there's a lot of people, particularly if you take biotech as an example, that would say, if you're going to invest directly, you have some real estate expertise and assets in the oil sector and natural resources.

28:19But biotech is the place you want to hire a manager because you're never going to have that expertise. How do you think about what you need to know to underwrite a manager doing that for you? It's a really good question because it's almost like your portfolio manager or a very experienced portfolio manager or maybe a headhunter or maybe a sell -side research analyst because what you're doing is you're digging through all the tea leaves and the work that other people have done in order to validate that work. You don't have to do it yourself necessarily. That's why we're still a big believer and this idea of partnering with managers.

28:59And some of the time that looks like a co -investment, right? Because we want to add more capital along one of their themes as opposed to all of their themes. Where do you draw the line between here's an area of expertise? You know, for you, let's just make it easy and say you're a growth stock investor in the old days. You can understand value investing, even though you're not going to do it compared to, well, biotech is too specialized, but maybe you can pick the person who can do that for you. We're currently staying away from an area that has a lot of growth because we can't quite figure it out.

29:35I'm not sure that's a viable long -term answer though, because our job is to find the best investments for the university's endowment that'll compound capital over time. And honestly, the light bulb moment for me was when the COVID vaccine came out with mRNA vaccine in the timeline that they managed to do that in absolutely boggles my mind that we could accomplish something that quickly. It caught my eye and it added urgency to the thought that this is something that I, as CIO, have to find a solution to. But I've been looking for that right person for five years, and I have not found that person.

30:12And I haven't been looking in a dedicated, super hard way, but I have had this conversation that you and I are having right now with many other people in the institutional and manager side of the world and said, I'm looking for this. And yes, they have to live in Houston. That limits your audience. It is a challenge. You have to find the right person who doesn't want to be the player, who wants to be the coach. And that's not everybody. Because if you want to be the player, you need to go to a manager and you're picking stocks and that's what you love. And if you're a doctor, you want to be doing the level of deep research that you're going to get if you're at a specialist manager or on Wall Street.

30:46That's not what we're going to do. So it's like looking for that person who is interested enough, but not to that level of the detail. How big is your team? We have overall just a little over 30, and that's roughly half investments and half operations. The fact that we have a large operations team and we do all of our reporting and performance reporting in -house, which I love because we get immediate, very fast turnaround on the eclectic questions that I wake up thinking about. Secondarily, we have a handful of people that are vital to us being able to manage those direct investments or scaled co -investments that we have.

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32:21Learn more at srsaquium .com. That's S -R -S -A -C -Q -U -I -O -M .com. And now, back to the show. How do you balance breadth versus depth on the investment side of the team to be able to have that expertise, but you're also multi -asset class and global? It's a really big tension. I think our industry tends towards this asset class orientation and not towards the thematic or sector specialization. It was one of the first debates I had with the board because when I came to Rice, they had real assets was one sector head. and what I saw when I looked at the numbers, because I always go back and say, numbers don't lie, let's look at the numbers, was that the portfolio was excellent in one area and not as excellent in another.

33:07And interestingly, of course, it was excellent in the area where we had expertise. And I said, I want to split both these roles. It's enough capital that we can afford to have two people. And I believe the reason we can afford to have two people is because we can have substantively better manager selection and outperformance if we do that. And so the board pushed on that as is their job, but ultimately said, yes, let's go for it. And 12 years later, I think the data is overwhelming. That was a very good decision for us. And so I'm debating it within other areas of our portfolio, but it's not very complimentary.

33:40Think about biotech. How could you execute it? Public markets, alternatives, a private vehicle, venture capital, I suppose there's buyout. I don't know. But that doesn't work very well when you have sector heads. That's an issue. That's part of why I said you're looking for that coach, not the player, when you're thinking about an allocator, but that also is really interested in the company level details. It's a hard combination to find. I would say, ideally, if the person is only interested in biotech, they're not the right fit for us because I might wake up and say, hey, you should want to learn about data centers.

34:13And if you're not interested in learning about anything other than your one specialty area, my team's not the right place for that because that's how we work. We do all have multiple specialty areas. It makes you a better investor. I saw this back at RS. So I probably took this from RS. One of the genius things that my portfolio manager did was he said, everybody should have more than one sector once they can handle it, because sometimes one sector will be totally cold and you can go work on the other one. And I cannot tell you how many people have over the years said, oh, I just want to specialize in energy.

34:46And I'm like, that's such a mistake. Only energy, that's just too narrow. And it goes really cold. And you'll need something else to look at. So there's a corollary in saying you need to get close to the investments, but you're the coach, not the player in your time at RS, which is there's some people that say, well, you really should have operating experience to invest in stock. So how did you think about how you want to spend your time? That's such a good question. And I'm quite sure some of the CEOs thought, why is this person allowed to ask me questions anyway? Right? I mean, that's the nature of those conversations always.

35:22You can get too close to the situation, right? There's the hammer nail problem. And some of the time in being a portfolio manager or a stock picker, you have to just let something go. And I think the closer you are to an operator, the less you've been trained to let something go. You're at one company and your job is this one company and make it work. And the reality is you're a portfolio manager. You have at least a hundred choices across the sectors you cover and many hundreds if you're at the portfolio level. And now at Rice, it's a global, anything goes that it wouldn't do harm to the university type of mandate.

35:58And so I almost feel like being too deep into one industry or company could be a disadvantage. I have to ask you about your public equity portfolio, given your experience. So what do you believe about how you should execute in the public markets? world's most frustrating market ever. In general, we believe that it matters what you pay for investments. And from that statement, you can assume that our public equity portfolio has not outperformed over the last three to five years. It's just a mathematical reality, which is if you believed in any value or GARP orientation, you have underperformed.

36:38You needed to be a momentum investor in your asset allocation, as well as owning those type of managers. We have struggled with that. And we're actually revisiting our public equity portfolio strategy right now, because it just continues to be a giant issue, which is most managers do not outperform the indices. And therefore, why would you not be better off paying two, four, six, eight basis points and just indexing. On the other hand, one of our most successful and impressive managers has managed to outperform the S &P 500 consistently every year. So I do believe it's possible, but it's very hard to find the needle in the haystack.

37:20How about outside the US? So in Europe, I really believe in value, partly because I don't see a lot of growth in Europe. Asia is in transition right now. My deputy CIO and I just got back from a trip over to Singapore and Hong Kong just to think, can you invest in Asia if China doesn't work? I'm interested in this question. We do not have a resolution to that topic, but it feels like it's too large of a part of the world to not have as a key strategy within your investment portfolio for the next 30 years. But right at the moment, it's pretty opaque about how to be a U .S. institution and succeed paid allocating capital into that area.

37:59What are some of the other asset classes or categories you're investing in that are on your mind? I love the tech rec story, right? Maybe everybody loves it. I don't know. But for me, it's not really about the magnificent seven tech stocks, even though I think it's important for them to have done what they've done, the year of efficiency and really show smaller cap companies and show all the private startups that you can run your business more efficiently and do well for yourself and do well for your customers. What Meta did this year is pretty important as a signpost. But for me, I look at that sector and I say, all right, we went from five to seven times EV to revenue multiples for enterprise software companies to 20 times, and now we're back to five to seven times.

38:43But over the, say, 23 years dating back to 2000, software is eating the world and software is gaining share and technology is continuing to become a deeper and deeper embedded part of all of our lives. And so I cannot help but believe that there are some babies that were thrown out with the bathwater in this pullback. And so we're looking across our portfolio where we have the most tech and saying, how do we take advantage of that? So Publix and Alternative is a little bit, but also a venture capital and saying, how will we position ourselves? So we've done literally hundreds of meetings on this topic.

39:21Where have you come out? I think we're likely to add a couple of managers. We're looking to be solution capital because I don't think the music is going to look the same. And the traditional money management business is not really in the solution capital model, right? Because it's just much easier to be a large, publicly traded or large, very private, but profitable money management business and just keep serially raising 20 % larger funds every time you go to market and clipping your management fee coupons. That's just what the incentives are in the industry. In order to be solution capital, you have to find someone who is creating a new idea.

40:00You have to be willing to back a newer manager, a spin out, a person who has less of a track record than you would like. You have to a little bit underwrite the opportunity as opposed to the team and then figure out how to structure your legal around your structure around it so that you can be comfortable with the fact that you're not at an institutional money manager for this idea. Most of the time people think about, oh, we need to get yield. They immediately go to private credit. It's not hard to envision some headline of private credit being on your wall of the apocalypse. So I'm curious where you come out.

40:32I'm going to do one of those on the one hand and on the other hand. I think the absolute deluge of private credit funds that have been raised over the last seven or eight years is overwhelming. You're just pitched it so often and you can't tell what the difference is. And you think, why isn't this just in the banking system? And it doesn't feel like something that can bear a one and a half and 20 or a two and 20 fee burden and yield anything when you were in extremely low interest rate environments. And so my view was if it was achieving those returns that they were targeting, you were taking way more risk than you thought or levering.

41:11Because mathematically, in a low interest rate environment, how much spread could you get over the 10 -year? It just didn't feel quite right mathematically. On the other hand, our portfolio right now from a fixed income and cash perspective is yielding close to 6%, which is the highest it's been in my memory, certainly the highest it's been since I've been at Rice for 12 plus years. So it's catching my eye to think that these are actually quite attractive yields. And so I'm trying to test all my assumptions this fall about private credit and about credit and think there are probably things that make sense for rice to do that might yield us 12 % that aren't extraordinarily risky.

41:53And maybe we should go look for those. But once again, I don't think the off the shelf flavor is probably what we're looking for. Are there anything in that area of trying to find that 12 % that seemed attractive? Some of the structured funds that firms are offering are interesting, right? You've got the core problem in venture capital that people have raised capital on their E round or whatever at evaluations. It's completely irrational. No connection to what current value is or long -term public company comp multiples. There are ways to go in and offer them capital that is maybe in that range of 12 % plus an equity kicker and have that be attractive to the company for governance reasons in addition to pragmatic.

42:40Shorter -term debt is less expensive than equity. It's supposed to be. I do think it's intriguing having these shorter -term yields gives you the ability to negotiate, I think, with companies also a more attractive all -in outcome for us as investors. Those are intriguing products that we've seen a few people offering. The question is just how many deals are there to go around? Is it a big enough opportunity? Will the manager do right by you, which is when the opportunity is over, stop doing it? Or will we continue to do basically march down the quality spectrum into companies we shouldn't be lending to because it's a good product and they fall in love with it?

43:17So an opportunity like that, how do you balance the idea of wanting to be a solution provider, which might lend itself to an earlier stage fund with, well, if that manager has their eggs in that one basket, it's harder for them to have the incentive to move on to the next opportunity. It's a really big challenge. In some areas we've done, let's pre -specify what you're going to do. It needs to look like A, B, C, and D. And within it looking like A, B, C, and D, here's a soft circle tranche of capital. And once you've spent that, come back and we have the next tranche of capital. And once you've spent that, come back and we have the next tranche.

43:53So that we didn't give them the whole thing up front. But then that might mean you need to pay higher fees on the beginning. The purpose of this is not to starve the manager. The purpose of this is just to make sure that you don't end up with a bunch of investments that aren't in your box. But I think what I've seen over the longer time period that we've been doing this is that that's hard and managers wanna just raise an institutional, delegated, authority, blank check vehicle if they can. And so they will. And so you need to know that I think it's a continual state of looking for those newer managers, those great idea generators, because the ones that you have today will not be the people who take you to the next opportunity for five years from now.

44:37It just won't be the same people. If it is, great, but it probably won't be. One of the other areas when you think about this return profile, the yield, as opposed to the growth, is this whole area of hedge funds. And it's changed a lot. How are you participating in that space? This is like, you're the expert and you're asking me. I don't know, Ted, how should I deal with it? We have, for the good or the bad, really not participated in the pod model, multi -manager model. And so I'm intrigued by it. I always want to learn more. I think this is one of those things where I'm like, we haven't done it.

45:11It doesn't mean it was a bad idea. The numbers are good. Let's look at it again. But at the end of the day, if I cannot explain it to my board, it's pretty hard for me to participate. Right. Hedge funds are the least liked asset class by the Rice board. And so I think it's a hard asset class to defend, too, because it's every flavor out there. Private credit is sometimes in there and unloved loans is in there and royalty structures are in there and then long short is in there and long bias and macro. I find it one of my more challenging conversations is to say, here is what we are trying to do at Rice in this portfolio and what you as a board should expect from it and what we as fiduciaries should target from a return standpoint in the bucket.

45:55One of the unresolved questions that our team has is how does a higher rate environment impact the hedge fund industry and the managers more specifically? You would think that's a simple question and I have not gotten a simple answer. When you roll up all these different areas that you're looking at, there's some themes, there's some growth, there's some solution, there's some yield. How do you think about the construction of your portfolio? Some ways it's very simple. If you think about it, you have 25 % real assets and then about 15 % really ballast that will always be there. And some of that is in fixed income, cash, a little bit of it is in some truly hedged alternative managers, which is, I think, the minority of the alternatives bucket for most institutions.

46:44It's a pretty small group of managers. But that gets us to about 40%. And then the other 60 % is you could really think about it as equities and as all different business models and flavors of equity and styles and sectors, but it's equities. And the most amazing thing is when we run our sector allocations and we run our global allocations, it's pretty representative of what the world looks like and what the market looks like. And it's just not that different on a read -through basis. In some ways, I think maybe it should look more different than it does. One of the things you've done as well within the university is manage the debt of the university.

47:18How has being involved in the fixed income markets for the university impacted how you think about the endowment? What we do very well is we interface with the outside world and we negotiate with them. Our job is to make sure that the outside world is not giving Rice University a bad deal. And that's not a core skillset that most people on the university administration side have. They're mostly running the internal operations of the university. I think that's one role that we get to play. I had a very visceral view of the university's debt portfolio when I came in. And I think the president and others agreed with me, which was, look, we have a fairly simple and stable business.

47:57And we use debt financing to finance very long dated capital projects like dormitories. We should have the most boring portfolio of debt ever. It should be long dated and it should be fixed rate to provide budget certainty. If we're going to take risk, we shouldn't be taking it in our financing structure for the university. And so we have unwound variable rate demand bonds that someone sold us once and all sorts of things that were good at the time, but added complexity to the university. And so we now have an extremely boring portfolio at a great fixed rate. And that is what it is. As you look out over the next, say, 10 years of your time at Rice, what are the things you'd like to be diving into that you haven't yet?

48:42I'm personally very interested in the governance topic. I thought at one point while I was at business school about going to get a PhD and got as far as applying. And it really wasn't the path for me because they said, you need to drop out of your MBA. And I was like, why would I ever drop out of my MBA and not complete it? And they said, that means you don't really want a PhD. And I said, OK, I guess that's true. If those are the conditions, I don't want one. But people very much do what they're incentivized to do. I think one of the things that makes your institutions unsuccessful over long periods is governance.

49:14And I think that's true at companies, too. And so it's an interesting area that I would be intrigued in learning more about. How does the governance play out in the management of the endowment? Maybe what I really mean is incentives, right? Because it plays out everywhere in the way that I think about it. It's about what does our board think about and want? Why are they even serving on a board? Why do they say yes to serve on a nonprofit board? What is their want and vision for the university? What is their term? How does that translate into how they oversee the endowment or the university in their giving of advice, in the initiatives that they would like to see happen during their term.

49:50But it's the same for me. What is the incentive of a person like me? How do you set up structures and compensation and oversight processes that incentivize your CIO to do exactly what it is that the institution needs and wants? And then that layers down to my team. And so everywhere that you are within the university, I think we often have set up processes and systems that aren't necessarily incentivizing the core behavior that we want to have. And it's a very difficult thing to do, unintended consequences and such. But that was the area of most interest to me, I think, when I was studying at Harvard and thinking through that, how do incentives drive behavior?

50:31And I think Michael Jensen was one of the professors there. And they all did a lot of the early work about why does private equity work, right? And it had to do with setting their incentives up correctly. So it's still an area of interest to me. How have you created the incentives for the people on your team? So I don't believe in silos, whether that's good, bad, or indifferent. My view from watching it at RS was it incentivized not sharing of information. And the more that you have a diffused team that is getting information from wildly different sources, but that needs to collaborate. If you manage in silos, there's no incentive for collaboration.

51:09And our team is too small to, in my opinion, to have those information silos. And so we have incentives that are much more around one team, one portfolio, right? So if you and I were on the team and you had a great year and I didn't have a great year, we do the same. And because most likely next year I'll have a great year and you won't. And I want both of us motivated all the time, but it's also hard to make sure that you don't have the free rider problem in that type of situation. How does the collaboration work for your team in practice, say, when you're looking at either an investment opportunity or a manager?

51:45We have a lot of in -person meetings. We are four days a week in the office because at the end of the day, we did not find that we could share the casual information. We shared the 911 and we did not share 411. We shared the emergency, everyone has to know this information during COVID over Zoom. But all of the interesting random thing I heard today that isn't material, but is part of your mosaic of understanding never got shared. It just didn't seem like it merited an email. So no one would write it up and it just didn't get communicated. So we were a heavily in -person sharing of information and we've gone back to that.

52:25But I was with a manager a few weeks ago and they showed us their Slack channels for each company. And I was like, I love that. because one of the things we want to do still is lower the burden of sharing the 411 information that you think is intriguing and not make all of the people on our team think that the work has to be perfect to send it out because it makes us slow and it makes us not communicate. What does a fully baked work product look like for your team? It depends on who the head of the asset class is a little bit. So people have their own style and what they want to see, but it's probably somewhere between a eight and 25 page memo.

53:05But what's so important to me is the work that went into creating the memo because the memo is one we share with our board. None of the things that you in general would be uncomfortable if the manager read. And so it's all the dialogue that goes on in internal notes and email that get archived in your document management system, the conversations, the phone calls, the references that are discussed during weekly meetings. And so we have Tuesday as our big day for research meeting and idea training and staff meeting and senior team portfolio management meeting. And then on Friday, we have another portfolio management meeting to close the week out and say like, all right, what's happening next week?

53:46How do you think about the culture of the organization and what you're trying to create? We're going through a bit of an evolution now. I think the word that I would have used 10 years ago was stewardship. And we all really liked it. You are the oversight function guiding and managing the endowment for the good of today's students and researchers, but also for the good of the students and researchers of 2050. And our team really liked that stewardship word. But over the last few years, we've come to believe that we need to be a bit more active and that when we are more active and more opportunistic and a bit more aggressive, good things happen.

54:29So we are leaning into that and trying to say, what are the barriers to being that way more often in our culture, in our processes, in our tools, and in our systems? And let's systematically try to get rid of some of them. So when I say that the memo's in flux, one of our debates is, what does the end product need to look like? And if it could be great at 12 pages, should we just say it's 12 or 8? And it's never going to be 25 because we have all of the documents in the document management system from the manager. And so we don't need to recreate those. We're trying to free up space so that we can lean in opportunistically to where the best areas of opportunity are.

55:11And it's always going to be changing. She spent a little over a decade working at a manager, a little over a decade investing in a bunch of managers. What have you taken as best practices that you're trying to implement? That no silos, close team, all pulling the boat in the same direction was one of the core tenants. No yelling, no bad behavior, no bad actors. It's just so disruptive to a team dynamic. The communication is one that I haven't seen a lot of great best practices on that one. And so it's one of those that we're working on on our own. One of the other things that I learned being a direct investor is that the information can change and you need to be flexible enough to change your mind.

55:56So this is always be curious. You're always looking at the data and reserving the right to change your mind because sometimes you're just wrong. I do think it's something the allocator community maybe doesn't have as much experience with as a direct investor would, right? Because when you're a direct investor, you have a faster cycle time because it's not in a portfolio. You get one investment, one P &L for each investment. And it's much more clear to you more quickly that you have made a mistake. And it's clear to everyone else that you'd made a mistake. Whereas when you're allocating to a portfolio, so it takes a longer time for the portfolio to look bad, even if there were some things in it that were bad.

56:32And honestly, what's bad? What if it is a 1 .6, but it should have been a 2x? You can't really prove that it wasn't as good as it should have been. And also you can blame the manager. And so I think that fearlessness that you learn by being a direct investor and being wrong and then getting back up on your feet and doing it again the next day is a very valuable life skill. All right, let me turn to a couple closing questions. What's your favorite hobby or activity outside of work and family? Gardening and the ballet. So I garden and grow herbs and vegetables, which teaches you patience and calmness.

57:07It's a very Zen thing to do. Even in Houston, it's very Zen. We have herbs year round. And then you struggle against nature sometimes. And I think it's back to that setbacks thing. Sometimes it just doesn't work and that's okay. And you try again. I love to watch the ballet. I'm very involved with the Houston Ballet and it's just an amazing thing to see humans go after with a hundred percent of their soul, something that is so foreign to the rest of us. And the making of art is quite extraordinary. What's one fact about you that most people don't know? I'm an avid reader of mystery novels and thrillers, and I can't really explain it.

57:44I'm sure I should be more like Bill Gates and just read nonfiction all the time. But at the end of the day, it's very relaxing to take a break from your brain and go off into this other world that someone else has written about or lived and you just get to escape and take an experience in it. What's your biggest pet peeve? Lack of transparency. It is amazing to me how often managers say, oh, I can't tell you that because that is a trade secret or that's our secret. It is not a secret from anyone. All of your competitors know it. Let's say that Apollo told me that. I could call Carlisle and they'd be able to tell me what Apollo is not telling me about that deal, which is insane.

58:25So why are the managers making it hard on me who's totally aligned and is their customer? I don't talk to anyone. And so it is a really interesting thing. It's not clear why they think it's a secret. Which two people have had the biggest impact on your professional life? My husband has had the biggest impact. And I do often tell students at the university and young people, choosing your life partner is the most important decision you are going to ever make because a supportive partner who is all in on your career will make you more successful and more happy and more fulfilled in your life. And it was actually Troy, my husband, who told me, you're more like the people on the other side of the table.

59:04You should think about the buy side. And whenever things are more difficult, he's there with good advice and support. And so me being a working mom with three children and both of us having jobs would just not have been a thing without him. And I sometimes joke to my team, I'm like, you've never seen a board deck that he hasn't reviewed. We do this for each other. So it's just a pretty tightly intermeshed decision that you're going to make and it's important. And then the other person is Andre Proll because he's the one who taught me about investment management. He's the one who guided me to go to RS.

59:39And he's the person I called when I got the call from the headhunter about the rice job. And I said, do you believe that I could do this? That I would be good at it because I don't want to do it if I wouldn't be good at it. And he took a long pause and he's like, a priori, I see no reason why you couldn't be good at this, Alison. Would you be better if you went to Stanford for a few years and were number two? Of course, but there's not time for you to do that. And it was just so amazing to have a person who answers your calls and takes seriously your career decisions when you're at those inflection points.

1:00:12And then also just a great teacher. What's the best advice you've ever received? The most interesting recent advice that I've gotten, and I think it will make me happier, and I've put it to work in a little ways, but not completely is only say yes to the things that you know are an absolute yes. I struggle with saying no because I care because I'm at the university because there's just so many things people ask me to do that I want to be able to say yes to. But I think I need to ration things out a little bit more and then I could be more enthusiastic and have more energy for the core things. And Allison, last one, what life lesson have you learned that you wish you knew a lot earlier in life?

1:00:54Don't burn any bridges is an important one. I don't think I've burned a lot of bridges, but I think I didn't go into situations thinking as much about the other side's perspective as maybe I could have. And so early on, more things were very black and white to me. And honestly, we work a lot of the time in shades of gray. And so if there's a way to have a graceful parting of the ways when it's necessary, it's a really good thing. You'll be very surprised how many people resurface in your life and in your career. And sometimes being the bigger person is the better place to be. Allison, thanks so much for sharing your insights.

1:01:31Absolutely. Thanks for having me and thanks for doing this. It's a great service to the allocator industry. Thanks for listening to the show. To learn more, hop on our website at capitalallocators .com where you can join our mailing list, access past shows, learn about our gatherings and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more. Have a good one and see you next time.