Jenn Birmingham – Organizational Alpha at PRINCO (EP. 336)

29:37It's really important that you have experts that can help you work through what are best practices, what is the best way to get an organization culturally set up for success as it relates to their D &I, having experts to lean on, knowing what you don't know. Has it evolved into more of a legal area over time? I think there's always a little legal aspect to employment. It's been more just organizational dynamics is what we spend a lot of our time on. You touched on it earlier, but just would love to hear a little bit more about the integration and collaboration with the investment team itself. We started very small in ops, so there were only two.

30:24And I would say those folks were really just keeping the engine going. And really what we wanted was to be a team that could leverage the investment team, not just keep the lights on. I had a vision as to the people and the skills I wanted on that team. I was very lucky in the people that I actually found and we actually have on the team now. What they have done is built true confidence. they understand the managers and the data better than anyone they just really know what's going on on a day-to-day basis with managers where we've leveraged the investment staff the most has been in that regard so when investment teams see something or they're on an investment call they had a reference call and they hear something they'll often go to the ops team and say hey hey, they were talking about guarantees on debt with XYZ.

31:28I didn't know that. Did you see that in the financials? The ops person who covers that manager, I can guarantee knows off the top of their head or can find it very quickly. We also serve as what we call an auxiliary investment team. It's not a secret, but we had built up our private equity portfolio pretty significantly prior to the global financial crisis. Then that happened. And then there was a realization that we had this thing called FBS, Fewer, Better, Stronger. So we were pulling that portfolio down a bit and anyone that got into it had to be amazing. We still had a lot of managers on our books that had market value, but that we weren't re-upping with their next fund.

32:11And so because the operations team understood, dealt with these managers so frequently, they are actually the people who are attending the AGM. or the advisory board calls for those managers, making sure that any risks that arise or any issues are brought to the investment team right away. We call it paths to exit. They'll also keep documenting this is the path to exit. Two portfolio companies left looking good, and we'll give all the data as it relates to those. But that's an important component that the ops team has served that has really provided a significant amount of leverage for the investment team.

32:52Is that unusual or atypical compared to, let's say, your peer group? Yeah, I've not heard anyone do that. The other thing that was critical, and this was part of our technology and automation, but also critical in terms of what is the golden source of data, was getting to a golden source of data. And this could have only been executed through the investment team's trust of the operations team, because if they didn't, they wouldn't of felt comfortable with where we were going with this and which was the ops team is the only team that can edit or put in data into our systems. No one else can touch it.

33:31And so that was huge because then I could control it. Your audit hat is shining. Exactly. They just made sure the data was very good. So that is the source that we got the investment team to use. And that's what we use now. That has been a leverage for that team. I'd love to hear more about the tech piece about manager data. Could you talk a little bit more about that? Many folks might still be in the Excel world where you use Excel as a database, but Excel is actually a calculation engine. It's not supposed to be a database. I also have this aversion to what they call end user developed applications, because it's very dependent on the end user or someone who created these files.

34:21And I'm very much a proponent of being able to pick something up and do it yourself, or really understand what's behind it. if you can't do that, then it's probably not good. And then also if someone can break it pretty easily, it's probably not good, which by the way, was what we were working in. We were had a ton of end user developed applications, all these files with different sources of data. And we were still able to get things done, but it just wasn't the excellence that I wanted to achieve for us. It actually took us a while to find too, because we really wanted something specific. We wanted something that actually could hold our entire portfolio.

34:59And a lot of these applications as they existed were either grown from private investments or grown from a marketable. And they came from the GP side. So they were a hedge fund application that then the LPs started using or a private investments or private equity application that the LP started using. But there was no one thing that did it all. And I think the idea was that people could run two systems, but we really wanted one. And so we found these folks that I believe it was an investor that they came from. It was Solilus. It was the software that they created. And it was the first time we heard someone who understood what we wanted to do because they were allocators themselves.

35:42It was a risk because they were a startup, but we thought, hey, if they can work with us to develop this software to something that we want it to be, this might in the end be a win-win. And so that was one of our major accomplishments in terms of solo lists. Another one was just in the beginning stages was document management. That was probably when I started. Everyone's strongest pain point was our shared drive, which we call the F drive was no one could find anything. No one knew where anything was and it wasn't working. So we implemented document management system as well. Those two things really helped the process and then market data tools we were able to implement and things like that.

36:24This all just kept elevating the analysis, which is my vision. the investment team should be doing analysis they shouldn't be afraid that row 223 got cut and messed up their spreadsheet now that's what they're doing they're doing much more analysis and then digging into the data in ways that then come back to us and say really want to see it this way is there any way we can cut the data or create some report that does it there are a lot more value add activities going on than before. And I can't even get into also just the nitty gritty of technology, security network things that were just cleaned up by the tech team and just made us a much more, I'll call it adult organization as it relates to ensuring that we're secure and the network is what we want it to be.

37:19How does that portfolio management system run? Will you have mostly external managers. How does that data actually make its way into the system? That's all the operations team. So we have a process. There's all cash flows, market values, everything is run through the ops team. That maker checker or four-eye principal, someone enters, someone interviews, and we're ready to go. And so that's the process that we go through. We do have a custodian, which is technically our books and records, but it's really the shadow book because we enter all the data into our system and then we feed that to our custodian.

38:04And so they're just double checking really that performance and flows are the same as what we have, but really we gave it to them. So it would be weird that it wouldn't be unless they had issues with some of the data. That was the golden source idea, just having a few individuals who understood the idea of four-eye principle, attention to detail, knew when to raise their hand when certain things didn't make sense, like market values, and we read every single financial statement. So these folks are doing a ton of what I call desktop diligence that feeds into how the data makes it into our systems.

38:45In order to identify, you look at a number and say, oh, that's wrong. How important is it to actually know the manager in question? Very. Not everyone in the operations team knows every single manager. We have folks focused on real assets. We have folks focused on venture. We have folks focused on the marketable side. So there's a subset of the portfolio that they are focused on. So you know where to go to when you have a question on a certain manager. So they have in their head ideas. They also see all of the activity that is happening with that manager. So if it's a private equity manager, you just got 331 market values.

39:25It's a hundred million. They just sold some investment and you get it. And that a hundred million doesn't make sense anymore. And yet they're still reporting that say for 630. That's when you're like, I know they sold XYZ portfolio company. This doesn't make sense. Let me go back and look at the unaudited financials and see what's going on. Having that knowledge is important. And that is what I had mentioned is how we can leverage the investment team because the investment team will also see things, that interaction of data. It's something actually that I like to see with some of our managers, particularly on the private side, when you have the investment team sitting on the boards of companies and getting information.

40:12I think it's a best practice and a very cool thing if the CFO of the private equity gets the data in a different way, because then when they meet, they should be speaking the same language. And sometimes it isn't. Sometimes the CFO will get different information that the board got. And that's when issues can bubble up and get resolved. Using that example, in terms of what we do, the investment team will hear certain things from the managers. They'll come back to us and then we can actually triangulate the data and figure out what might be going on here or what looks off. Adoption of technologies is difficult.

40:52How are you able to get people to adopt to new technology? For this particular one, I was coming at it as automating that particular spreadsheet. I had an aha moment where I said, no, we're not going to automate that. I'm going to automate what feeds that. And then they'll see how good that works. And then this will just be an output. So that's what I did. And it literally was an aha moment. So all of the cash flow information, I basically was like, let's automate or adopt this new technology for that component. And I knew that the performance actually would kick out of that. But they didn't need to know that per se right away.

41:40I just needed to show them how well this first automation went in adopting this technology and how efficient and effective it made us. And that it just was great. We then introduced, oh, and look, we can actually do our performance calculations from this data. Amazing. Sneaky. Yeah. But then people started realizing, yeah, that actually is helpful. So that's how we got there. Not only do you have to have a sense of urgency, but you have to have milestones along the way where you've proven the worth of what it is you're doing. And you have to be able to do that. One of the first things that I did when I came here was force the analysts to document.

42:29There was no documentation for anything. I forced them to document the benchmarking. So if you saw our benchmarking, you'd understand why. But basically, one of the analysts who is now an MD, I sat down with her and I said, describe the decision tree on this process. It took her two to three hours to describe the decision tree on all of the benchmarks that we use. And I was like, can you now write that down? She was very mad at me. I still have the email. It's the document that we use to train staff as to how our benchmarks work. That was actually a huge undertaking to show them that putting in that work to document something is actually going to help years of people learn the process.

43:18So there's little wins that can basically add up and then people start seeing, oh, actually, this is an overall improvement for us. This is an overall value add. And I think you just have to keep adding to that list. What are the skills that you look for if you're trying to fill an operations role at Prinko? Not everyone came from public accounting. Most did. So someone who has some experience in public accounting, it might be a horrible association, but I think of private equity firms that take their analysts from investment banks because they have learned certain things that it's just done. They've learned how to do a valuation model.

43:58I don't have to teach them. It's less about that. And it's more about they've learned how to work really hard and they've learned attention to detail. You cannot work in the big four if you don't have an attention to detail. You can, you're not going to be very good. You want the good one. Not afraid of huge volumes of data. That is also something you get exposure to in public accounting. You just said my auditor hat was glowing. Just having an audit mindset, trust but verify, just having the internal control. You learn that in a very systematic way, in a fundamental way when you come from public accounting.

44:40And I just know that they have that. Then all I test for is how they communicate and how I might see their future here. Are they wedded to this mission, which is super important to everyone that works here? So we can test for those things. Also, how they can read financials. It's important that folks know how to read financials and know what to look for in footnotes. Have you found anything from reading the footnotes that was not obvious to people? Yeah, you'll find litigation that might come up. You'll find debt that you might not see. You will find other entity structures that you might not have been aware of.

45:26We do see when we review valuation policies and procedures, we find different things. But I would say from the footnotes perspective, debt litigation, an entity and or related party. That's where you see those things. And is that an operational function? We do read every single financial and we do call out those types of items into files and systems so that it is available. But we come at it at different ways. The investment team also does a debt survey every single year with our managers. So those two things should match up. It should be no surprise on either side. What do you mean by debt survey?

46:08We go out to our managers and basically ask what debt they hold. Is it at the fund level, the portfolio company level, what maturities are? Because you don't necessarily get all that data. And so we pull that together just to see what the debt market is like and what if we see any industry risk or maturity. Everyone's maturities are up now and interest rates are skyrocketing. So is there going to be trouble rolling or getting more debt, things like that? Are there any other surveys that you do? We do a diversity survey. We actually just shared this with our peers at the OpsDD conference recently.

46:48We modified it to actually really gauge not only where managers stand in terms of their diversity, but also what we call the faucet, because that's where we feel the biggest impact's going to be. It's going to be hard to change the bathwater, but if you change the faucet, it'll ultimately reveal itself. We focus on attitude, efforts, and results. That's how we think about things as it relates to diversity. And there's also a huge qualitative part to the diversity, as well as a very partnership focused. So we didn't just send out an email. Here you go, please fill it out. We have done that in the past, but we felt like that was not helpful.

47:33So what we did is we actually reached out to managers, said, hey, this is coming your way. This is why we're doing it. This is what you're going to see that's different. Let's talk about it once you look through it. And that was the investment team actually doing all of that work. So that was a huge effort on their part. But managers actually really appreciated some of the feedback was that they appreciated that it wasn't, and this is no offense to HR, some HR person calling them saying, hey, do this. It was the person that they deal with constantly on the investment side. They really appreciated those interactions.

48:10Hopefully will result in results as it relates to diversity, but also resulted in some really great ideas being shared. meeting with certain managers that are embarking on some uncharted territory as it relates to trying to improve their diversity, maybe in really smaller fields. What's your view on that data coming out of those managers? There's definitely been a mindset change over the past few years that this is not a survey done once a year. Everyone's going to be asking you this, which means you need to do something about it if there are issues. Many managers have really taken it seriously in that they are trying to really think of different ways to change how they do things, be it people who never had interns.

48:59If you're a five-person shop, which some of our managers are, you never thought to have an intern, but they'll have an intern. And it might not be to convert to a full-time employment. It might just be to educate someone who might not have had the opportunity to work in a firm like that, that they can actually do investing or be in finance. And Prinko has a fairly robust intern program. Yeah. So we basically recruit primarily from Princeton University, but also have programs at Howard and MLT. Every single summer, we have summer analysts who work with us, who by the end of the summer, we either send an offer or not.

49:45And those are usually the individuals that will start with us the following summer as full-time. Before, we might have two interns, maybe convert one to a full-time and then have to go out and maybe hire again. Whereas now we're a four to six interns and then having four to five offers for the following year. It's been a hugely successful program. They have a ton of training. So they started June 5th. Even before June 5th, they actually get assignments to read a lot of CFA material because we recruit from all backgrounds. So it doesn't matter. You don't have to be an Orphe major. You don't have to be an major.

50:30You can be a religion major. We assume that coming in folks might not have the same quantitative background. And so we provide them with the materials to help them get on the same footing once they start the internship. So they'll do that work. We offer office hours with our current analysts so that they can talk through any of the issues that they have before they start. Then they start and then they have a whole host of training. They're still doing training and it's June 14th. So we will do intro to finance. We will do intro to marketable. Managers will do private investments, ops, and technology.

51:06We pretty much run a whole host of trainings for them so that they really feel like they understand what is needed. This is reinforced throughout the summer, but just so that they have an idea of what it is that they're hearing. And then they are treated, to be honest, as full-time employees. We don't give them any special projects. They do have a capstone project, but in terms of what they're working on, they're working on actual diligence projects. They're traveling to managers. So they're just treated as part of the team right off the bat. And I think that's a unique experience for them that a lot of their friends doing other internships actually don't get.

51:44Talk about sitting on the open floor. You're an intern, you sit two steps from Andy. That's pretty remarkable and unique, and you probably don't get that in an investment bank. Anything on the soft skills? We talk about what it is to work, how you should pack when you travel, carry on only, how to communicate, meaning how to update someone on your work. And if you're having trouble with something, should you spin your wheel? Should you ask questions? If you ask questions, what kind of questions should you ask? Who should you ask? We always say reach up rather than down because we want them to be asking the senior people what they should be doing so that they get that quick burst of information and not this, well, I think I heard you should be doing this.

52:30They're all assigned mentors. It runs the gamut. But yes, we do have that specific training as well. Looking back at the portfolio, you're mostly managers. Do you do any trading in-house? Yes. So we have a derivative portfolio. That's mainly the trading that we do in addition to trading in-kind distributions that we get. And we have a whole process behind that as well. So on the in-kinds, it's fairly simple. A manager distributes a public company securities to us. We then have the view in nine out of 10 cases that we typically sell pretty quickly. And then on the derivative side, there's a team, it's mostly the senior team, as well as a few folks on the marketable side, as well as Andy, who sit and basically manage that derivative book.

53:20So what they're hedging, how they're hedging, what the market's doing, et cetera. And so they will basically trade that with our counterparties. And we also have within operations one or two individuals who are specifically dedicated to trade operations. So we are moving margin and validating settlement and calculations and so forth within that team as well. So back in 2021, you had a 47 % gain. Did that impact the organization at all with that big of a movement in terms of liquidity or other factors? Well, it was great. It impacted us because it changed the way we think about future commitments because the portfolio had grown so large.

54:02So that will impact that. But in terms of how we ran things or covered certain managers, that aspect did not change. where I think the most change happened or will be happening because it can't happen right away is with the university. This probably goes to the collaboration with the university in that now you have a huge endowment and we have always professed the idea of intergenerational equity. So you should be spending in a way that promotes that idea. So the university is undergoing capital projects. The entire, I think, footprint of the university is under construction. If you look at our websites and so forth, they're truly trying to change access to education, and part of that is growing.

54:53They changed the threshold for financial aid. Over 60 % of our students are on financial aid, which is no loan. And then also the endowment provides over 65 % of the budget because you can only do so much on a campus. And you can appreciate that if you're on it now, that there's a lot going on. I do think that that perhaps did change in terms of how the university's vision will happen over the next few or many years. With the changes going on, is there anything at Pringco that you guys are taking on as a operational project enhancement? I'm going to use it loosely because I'm not convinced it's AI.

55:34the way they're promoting it. But there are certain automations of reading data that can be used by the ops team. We'll call it AI, but using AI to read K1s, using AI to read capital calls, but more for data capture than it is for anyone to do an activity on it. It's more things that get manually entered. I'm seeing some possibility to automate that. I wanted to turn to managing CIO expectations. Any advice on somebody sitting in the seat like yourself and trying to manage somebody who doesn't have that operational lens? That's hard because Andy did all of this. So he has it. If someone didn't, I would say that having all your facts.

56:28I can go back to when I was trying to influence Andy and the senior team to automate what they really held as this Excel spreadsheet of performance. Everyone loved this thing, loved it. And I was like, I really don't think this is sustainable. We really should have a system. I can ensure that we know the nuts and bolts. It isn't going to be a black box. That's something that Andy and I have worked through and that my appreciation for the balance of efficiency and effectiveness. And when I say balance, I mean what I think Andy's balance is, meaning it is okay to be inefficient sometimes if you are more effective in the learning process.

57:19So we have huge meetings. One might say that would be much more efficient if there was just five of us. We'd probably come to the same decision, be done with it. However, you're not teaching anyone. No one is seeing how, as Andy says, the sausage gets made. So that is a really important inefficiency that we hold dear. And there was a lot of pushback on automating because people learn. If you had to manually figure out how all these calculations work and how it worked through these gazillion spreadsheets, you had to do this file. And I had to convince them that we could teach people the important aspects of what this learning was without having them scared to death that they were going to break this file, which every analyst was up until this point.

58:12So that took some convincing. And I think what one needs to do is actually make your case. Also highlight the sense of urgency. Why is this important for us to do? And what could go wrong? And what are the risks? I want to turn to the advice of someone in the CEDAR looking to get into a similar role. What are your thoughts on that? I think it depends what stage the organization's in. But I think being patient, willing to listen, not having your own agenda, having an organization agenda, I think is super important. If I have people on my team that want my job, I'm doing a good job. I want people to want to be in the seat.

58:56I want them to be functioning at that level because that means that I've done a good job. And so that's really important to me. I think you do have to be a good manager of people. They are what makes everything work here. Having the ability to motivate, influence, be direct, be honest, transparent. Definitely, I was also afraid that I wouldn't know answers to certain things and then came to realize that I don't have answers to certain things and that's okay. I think if you're someone who feels like you should always have the answer, it's probably not a good spot because this place is ever changing.

59:42There was just so much more to this role than I had ever dreamed. Jen, this has been a really exciting and in-depth conversation. We have two questions I'd like to close with. And the first one is, what advice would you give an emerging manager from an operational perspective? Plan for zero plus five. Don't plan for today. Plan for five years ahead because infrastructure needs are not going to decrease. They are going to increase. Also plot your organizations what you think the framework needs to be. I would say rely on trusted advisors. Do not try to do everything yourself. If you need to outsource, outsource, and then you can change that as needed.

1:00:33Also partner with helpful LPs. We always say to emerging managers that we engage with, and we don't hire all of them, and we will actually offer this advice. We'll give them best practices. We want them to be good in the industry. We want them to be great partners, even if we don't partner with them. But if we do partner with them, that is our goal. If they're great, we're great. And so the idea is we want to mitigate infrastructure risks to zero because we are not compensated for that risk. So that's a really important thing. So that means that we work together with them. We do not have a checklist mentality.

1:01:11We do not give them a checklist. We don't give them a survey to do nothing. It's an agenda that we sit down and we talk through with them in terms of how they think about the growth of their firm, what kind of people do they want around them, what kind of skill sets, what are they thinking about what their risks are, what are going to be their challenges, maybe what they don't have experience in and where they are going to need to fill the gaps. We just talk through that with them so that they have an appreciation. Because sometimes we're talking to the PM. Sometimes they haven't even hired a CFO or a COO yet or a CCO even.

1:01:48We talk through that with them. And also don't build in-house. I always say buy the best of breed of something and work from that, but certainly rely, particularly as it relates to compliance, because I feel like compliance sometimes is that I got to do that, but I don't really want to do that. But you have to do that. Yeah, exactly. So I always remind them of that fact. I would say it's mainly use us as a resource. We have a huge portfolio. We're happy to help you. We provide not only best practices, but we provide managers with vendors that we see across the portfolio that we think would be great for them, not only in the fund admin space, but in the technology space, particularly as it relates to security.

1:02:32We help them with their valuation policy. We'll actually help them write it if they want because we see a gazillion of them. And so that's something We've actually even helped with job specs and interviewing some people. So there were a few literally emerging market managers who were SEC registered. And so they wanted a sense as to what kind of caliber of person should sit in that seat. And so we helped them with that and they did get theirs. And then the last question is, what is the one industry resource you most commonly refer to people? I'm going to say ILPA just because it has everything that we want and ask for, and it's an easily digestible format for these managers.

1:03:18It helps them not only with their reporting, but also with how they arrange their data. Jen, thanks for the time. Yeah, absolutely. Thank you for having me. Thanks for listening to the show. If you like what you heard, hop on our website at CapitalAllocators.com, where you can access past shows, join our mailing list, and sign up for premium content. Have a good one and see you next time.