[REPLAY] Roz Hewsenian – Helmsley Trust’s Chief of People and Process (Capital Allocators, EP.63)

29:44And he called me up and he said, now that you're not working for anybody, we'd really love if you could come to Old Mutual's annual meeting and with no restrictions, tell us what you really think. So I went into the meeting and I gave my speech. and after the speech was over, the head of old mutual asset management pulled me aside and said, I'd like you to have breakfast with me tomorrow morning. I said, okay. So I had breakfast with him in the morning and during the course of the breakfast, he said, we have a subsidiary, Clay Finley, that's in need of a turnaround and in need of someone with gravitas in the industry to replace Francis Finley, who's retiring.

30:34So I said, sure, why not? They had no idea whether I could run a money management firm, but they thought that they would be able to help me. So I got there and the situation was a little more dire than what they had led me to believe. And my first day actually was the day of my birthday. That's why I remember it. It was November 7th of 2007. heaven. Well, guess what happened? So within six weeks, I had a business plan on Old Mutual's desk for what it was going to take to turn Clay Finley around. That blew them away. Apparently, none of the other affiliate money managers had ever delivered a business plan to the parent.

31:16But I gave them a business plan with staffing, revenue projections, cost savings, the whole bit. I just put the whole thing together and one about executing the business plan. And then Old Mutual blew a hole in its balance sheet, having nothing to do with Clay Finley. And it needed capital from wherever it could get it. And so a decision was made way high up to just shut Clay Finley down. But the benefit was that I stuck to my business plan. And part of my business plan was for me to go out and start telling the outside world about what we were doing. And my message, because I was an investment consultant, I went to all the investment consultants and I said, we're not ready for you to hire us yet, but watch us.

32:06I'll tell you when we're ready, but watch what we're doing. And I explained the plan. The benefit of that was when we were closed, the battery acid splashed all over Old Mutual. And that meant everybody at Clay Finley were viewed as the victims, not as the perpetrators of the problem. And so virtually everybody landed on their feet in the middle of the financial crisis, including Josh Fenton, who's now working for me here again. So what brought you to Helmsley? Aha. So Clay Finley gets closed. And now I'm thinking, all right, I was lucky once, what's going to happen a second time? I had no idea.

32:53So I just started having lunch with my friends and talking to people. And one day, Tom Stevens, who's the founding partner of LA Capital, who was one of my former partners at Wilshire, called me up and he said, Linda Strumpf, who was my client at the Ford Foundation, but she's now retired, is chairman of the investment committee at the Helmsley Trust. It's a brand new foundation that's getting off the ground. And she's looking for somebody who could be a chief investment officer who's really good at dealing with difficult boards. And I thought to myself, you've dealt with CalPERS. So Linda and I met, and I had always known of Linda, and Linda had known of me, but we had never met.

33:42And when we met, we hit it off immediately. And we met a couple of more times, and I don't know how she did it, but she convinced the trustees that they needed to hire somebody like me. And then she brought me in to interview with the trustees. and she had already laid the groundwork. And I was in the supermarket a couple of days later. I'll never forget this. I was in the produce section and my cell phone rang and it was Linda offering me the job. And that's how I ended up here. So you've had all these experiences at this point. You've worked for active managers. You worked at DFA, you worked at Wilshire.

34:21Now you have a single pool of capital. So you can put forward an investment strategy. What were the key tenants of what you believed worked for a pool of capital like this? Number one, no boxes. The Frank Russell company was famous for coming up with boxes, growth, value, large cap growth, mid cap growth, small cap growth, boxes for everything. And I recognize right away that the box approach to investing was a disaster. It forced you to fill a box because you had one, and then you had to pass on an investment if you didn't have a box for it. So one of the things that became clear is that opportunistic investing has a place and should be celebrated.

35:04So the way that we manage money at Helmsley is that the biggest risk we have to manage for a foundation is liquidity risk because we have to pay out 5 % of our assets every year. And we have no say in that. The IRS requires us to do that. Otherwise, we lose our tax qualified status. And I might remind you what happened to our beneficiary. So needless to say, we at Helmsley are quite sensitive to the desires of the IRS. Why don't you tell that story just in case people don't know? Leona and Harry Helmsley were prosecuted by both the state of New York and the federal government for income tax evasion and specifically for having paid personal expenses from business accounts, deducting that from income, and then paying tax on the difference.

35:54So Leona Helmsley went to jail on the federal charges, but she was acquitted on the New York state charges with a different legal team. And Alan Dershowitz represented her on the New York state charges. So anyway, needless to say, we're very sensitive to that here. And her grandsons are trustees. Great guys can't say enough great things about Mrs. Helmsley's grandsons. They're young guys, well, relative to me, but I would follow them into hell. I mean, I have a great deal of respect for them. So when I got to Helmsley, it became clear that liquidity was an issue in managing the 5%. And the benefit that we had is that the money came out of Mrs.

36:42Helmsley's estate after the financial crisis was over. So we had the value of her estate that had not been marred by the financial crisis. That gave me an opportunity to talk to all of my peers to understand their lessons learned having come through the financial crisis. And out of that came opportunistic investing. If I was convinced of it before, I was really convinced of it now. And number two, that managing liquidity was critical. So we have four liquidity tiers, safe, liquid, semi-liquid, illiquid. And they're defined simply by how quickly we can get the money back. Because in a crisis, I have to know where I can get money in order to get that money out the door.

37:31And then do you have percentages that you ascribe to each of those? Yes, we do. And what are those percentages? The safe assets category is at 20%. The semi-liquid is at 22%. The illiquid category is at 25 % and the balance is in the liquid category. We put the plan together. We presented it to our investment committee. they approved it. We paired it with a committed standby line of credit. And the committed standby line of credit can actually fund the grant making so that we can fund the investment side. Because one of the things that happened to Ford, Carnegie Mellon, Hewlett, Packard, is that in 2007, all of their private capital managers raised big funds.

38:24and then when the market sold off, they started hitting them for capital calls. At the same time, they're trying to get money out the door for their grants. That fight for cash left some of them still permanently impaired. Some of those foundations still have not gotten back to their 2007 high watermark. So we recognized, having learned from their lesson, that if we can fund the grants from a committed standby line of credit, let the markets recover, use our safe assets category to fund the capital calls from our private capital, then we could take advantage of the market sell-off, investing at the low, fund our grants, and not impair the financial health.

39:07And when markets recover, pay back the loan. Can you talk about how a governance structure works with an opportunistic strategy? Effectively, our investment committee is responsible for overall strategy. They approve our broad policy, so the liquidity tiers and the allocations. They're also responsible for approving new managers. So the way that we bring opportunistic to them is that we have broad themes that we develop. So a member of our staff is our director of strategy and research. It's her responsibility to identify broad themes. And we're not looking for her to forecast the themes. We're looking for her to identify the themes that exist, and we want to ride the wave.

39:55So what are those waves today? Health care is a big one. Longevity in health care. As people are aging, their consumption of health care is increasing, and their consumption patterns are changing. What people in their 60s and 70s consume are different than what people in their 20s and 30s consume. So people want less stuff when they're older and more experiences. And younger people who are building their families and buying homes and buying furniture and buying stuff. So it's different. And the baby boomers are a major segment of the poor population. So that's a theme that we've been developing.

40:35Technology and disruption is another one of our themes. And that's an extremely rich one. And we've been investing in that to the hilt. So you can see that we're not forecasting these things. The marketplace is showing us these themes. And we're just taking advantage of them. How do you think about how much of the portfolio goes into healthcare, technology, and disruption compared to sort of more broader things that you might miss if you're just focusing on the themes? First of all, we don't have set target allocations to those themes because they're opportunistic. We use the themes to help us narrow down where we're going to look because we can't invest in everything.

41:18And the themes represent those areas of the economy where we have the highest probability of success because the market is rewarding them right now. So instead of having a specific allocation, we look to find what investments are available and invest in the best of the investments. So that's where the opportunistic comes from. If I had a specific bucket with a target, I'd have to fill it, which means that not only am I investing in the best, if I can get into the best, I might have to invest in the second best and maybe even the third best to get my allocation filled. So the fewer target allocations I have, the happier I am.

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42:44So leave the days of disjointed deal management behind and define your future with SRS Aquium, the smartest way to run a deal. Learn more at srsaquium.com. That's S-R-S-A-C-Q-U-I-O-M.com. And now, back to the show. If I put on a traditional lens to think about the structure of the portfolio as opposed to, say, the liquidity lens, which is one. What does it look like? So somewhere you have a sheet of paper, you have to understand your risk. You have a couple themes, maybe a bunch of themes. What does it look like and how do you decide that you're comfortable with what you own? We have a director of risk and operations whose job it is to ensure that we're taking the risks we want to take and we're not taking the risks we don't want to take.

43:36We have the broad targets. We have themes that help us within those targets figure out where we're looking for investments. And we spend a lot of time on looking at the incremental impact of every investment that we make. The second thing is, and this may help you a little bit, is that we have a maximum of no more than 50 managers, 5-0, for$6 billion. That makes us very different from our peers. It also makes the situation much more manageable. So we might have multiple products with a particular manager, but it helps us manage our overall risk because we know a manager will have a similar risk profile for all of their products because it's endemic to their philosophy.

44:24And I'm looking for conviction. So to answer your question, that makes it very important for us to look at the incremental risk and return of the portfolio every time we add or take out a manager. One of the things that we're looking at right now, to give you an example as to how it works, is that in discussions with our investment committee, we're looking at the rise of China and how important China's become. And the question is, well, should we have a more systematic approach to dealing with China? Or should we just be dealing with it opportunistically? We've decided that we want to be a little more systematic about it.

45:06We have exposure in our illiquid category. We want exposure in our semi-liquid category. And we're going about looking at how to do that. And the team surfaced all in about 10 managers to look at. And they were all over the place. So our directive to the team was, let's think about this. Let's think about what we have already. We can model that. And then look at adding each individual opportunity that you found and figure out where the best risk return tradeoff is coming from. And let's just say for argument, it's a broadly diversified, long only manager. Well, if that's the best risk return tradeoff, now find five others like that and look at the comparison and see where the best tradeoff is.

46:01So that's how we go about it. When you add it all up, where does your risk profile look compared to peers? We're not radically different from our peers because all other foundations have the same objective we have, which is earn back 5 % plus inflation to last into perpetuity. Where we differ from our peers is that we're a lot chunkier because we're more concentrated as a portfolio. But our returns and our risk profile are not radically different as a result. And we're a little barbelled. So we're higher in the safe assets category compared to our peers. Robert Wood Johnson, Hewlett Packard, if you look at what their allocations are for the equivalent of our safe assets category.

46:49It's more in the 10 to 12 % range. We're higher, but we've been far more selective in the private capital range and more concentrated, and that's actually worked for us. Does that lend more private equity than venture? No, we're actually pretty evenly split between them. That's something that we do look at and we do watch. We're sort of a little heavier on venture capital right now. We want to build up our buyout portfolio a little bit more. So we look at that vis-a-vis how quickly the money's drawn down, how quickly we get the money back. One of the things that's happening to a lot of our peers that we've been able to watch is that they haven't been getting the money back from their venture capital managers as fast as they thought they were.

47:35So those tails are much longer. We monitor and we built a model internally to help us forecast out what we think the allocation of private capital will be. We model drawdowns and return of capital, and we can see how the allocations, if we did nothing, just freeze the portfolio here, the way it would play out in terms of our allocations. And that helps us determine what we need to focus on more. So let's start diving into the investment process, and we'll just start at the top and work down. How do you think about sourcing managers? I allow the staff to follow their natural curiosity. So we have a meeting every Monday morning.

48:18In that meeting, we talk about the things that we're working on, the issues that we have, where we're focusing on. So let's go back to my China example. We all agreed with our investment committee, China is an interesting place to have more exposure. I never said to them, long only hedge funds, whatever. I just said, well, think about this. And I allowed them to go out and find the best managers they could. And then after they came back with a team of managers that were all over the place, now they could see, we need to organize this a little bit better. How many people are out running around looking for those managers?

48:58Six. And they're all some generalists of some? They're all generalists. Everybody's a generalist and they're different levels. And I run a very flat organization. My associates, my investment officers, and my directors, who are all responsible for managers, have equal opportunity for sourcing and doing due diligence. And by allowing the younger people to have the same authority to source a manager, I get some very interesting findings because they're not burdened with sort of the biases that people with more experience have. The other thing, too, is that by not dictating where they're going to look and letting them find what they find, we get much more interesting managers that way.

49:43And as a result, I'd rather have 10 disparate but interesting managers than three managers that are based on what I directed. And then out of that, we see what the opportunity set, and then we can do our analysis and drive home to an ultimate conclusion. At what point in time will you get involved in imparting some of your judgment on the process? I try not to impose too much of my direction because I really want to see their creativity. But my biggest role is to make sure that policy is adhered to. And we have a due diligence policy. I want to make sure that they've addressed the issues thoroughly.

50:29I want to make sure that there have been a sufficient number of meetings, that those meetings are robust. I will go on site with them at a later stage. And when I go on site, I'm watching them, not the managers. I'm watching what kind of questions are they asking? What kind of prep did they do before we walk into the meeting? And my focus is not on them, not on the manager. And they recognize that the pressure's on them to do the work on the manager. Now, if I honestly think that we're going to make a big mistake, then I would step in. But there are too many eyes on the manager. And we staff every manager who's undergoing a deep dive for due diligence with a sponsor, a skeptic, and a director.

51:17That's above and beyond me. So with three sets of eyes on a manager, chances are you're not going to make a mistake. That said, we have gotten surprised. It still happens. I'll give you an example where we made an investment where we missed something and we did not make an investment. Abraj was a rapidly growing venture capital firm focused on the emerging markets. And its founder was a very flamboyant guy. and we were very interested in the emerging markets and specifically venture capital. Three of us flew to Dubai. We did a lot of work on the firm, a lot of work on the firm, but there was something that just wasn't hanging together.

52:09And in talking about it, the tipping point came when the founder announced that he was going to raise a$10 billion fund. We all looked at each other and we said, $10 billion in emerging markets, private equity, venture capital? The numbers don't add up. And so we just thought there's something not right about that. And we walked away. The founder of the firm is under indictment. He's hiding in London because he can't go back to the UAE because there's a warrant for his arrest. The Gates Foundation did invest with them, and they were the ones who figured out that something was wrong. So I'm very proud of the fact that I one-upped Bill Gates.

52:57And by trusting our instincts and recognizing this didn't add up, we walked away. We also invested with another firm. And one day, somebody on my staff comes in and says, there's a New York Post article on the founder. and he apparently was being sued in New York by a spurned girlfriend. And that situation got very, very messy very quickly. Just before that article came out, the manager had an uncharacteristic loss in Puerto Rican bonds. And when I went in to meet with the manager, because the team was telling me, something's not hanging together about this. why don't you go in and meet with the top guy?

53:50So I went in and his reaction about having lost money in Puerto Rican bonds was so extreme, I couldn't wrap my head around it. I'm like, look, everybody makes investment mistakes. But guy, I need you to suit up and go back out on the field. The game's not over. And he was making it sound like he was ready to just pack it in. And then the New York Post article came out and I'm like, oh, I get it. So what did we miss? Or what'd you do in that moment? When I saw the Post article? Well, you don't know. Was his reaction market related or was it personal related? Well, that's just it. And I'll never know.

54:29But I mean, those are my two dots. And I could either connect them or not. And there are many other managers in the world. And I didn't need a manager who was going to be tied up with whatever this woman was doing and the mess that he had created. And when I went in and talked with other people at the firm, it was clear that they all knew about his extracurricular activities. And he was stupid about it. And I sat down with one of his key people and I said, look, I'm not going to pass judgment on what he's doing outside of the office. I said, but here are the top three things he should have done.

55:08One, not use his real name. Number two, make sure I didn't get into the press. And number three, don't make promises you have no intention of keeping. Those are the top rules if you're going to have an extracurricular activity. He violated all of them. So the question was, why was he engaging in such destructive behavior? And this is an interesting thing about truly brilliant people. They typically have a flat side. So when I'm assessing money managers, and I've met a lot of them with huge egos and flat sides, I look for a partner. Do they recognize their own shortcoming and do they pair themselves with somebody who's sane?

55:51So you capture the brilliance of the founder, but he recognizes that he needs a ballast who'll keep him from running off the rails or her off the rails. and in the case i found the ballast it was there here's what i missed they worked out of two different offices so the ballast wasn't there every single day and you didn't know they were in different i did know they were in different offices but what i missed was not questioning well is that really going to work can you be an effective ballast if you're in different offices in different cities, and they're about 1 ,000 miles apart. That's what I missed.

56:35You have your team doing a lot of this due diligence, and these decisions you're talking about are really judgment from experience. So at some point in time, that information either gets filtered or the judgment has to come to you. And so when do you make that shift from the teams doing the work to, okay, I need to be involved in making the decision? I have to meet every single manager before they're hired. And do you meet them once? It depends on the manager. It depends on the circumstances. It depends on whether I've known the manager from before. So there's no set rule about that. Sometimes I do meet them more than once, but I have to meet the firm myself.

57:20Before that happens, there's a lot of information that's coming to me. We have dealt with other situations where it's a small firm, It's a boutique firm. There's a brilliant founder. So I knew in that particular case, I was going to have to go in, meet the head guy, and then go find the ballast. And we talked about this in our due diligence meetings about this manager. So the team knew that that's what I was going to do. And oftentimes the top guy will only meet with the top person, especially if they're boutiquey and they're full of themselves and all this other stuff. They're not going to meet more junior people.

58:02And that's because top man syndrome still exists in this industry. The other thing, too, is that I've been around for a long time and people do know about me in the industry. And so the team also knows how to use me, you know, sort of like, you really want Roz to come in and meet with you? Or do you really want us to handle it? And so there's some of that that goes on. But I'm generally working with the team. I know what's coming down the pike. We talk about what the issues are. We talk about what the pressure points. the two directors of investments who are responsible for managers due diligence in hiring josh venton and al kim have worked with me before this is the second time they've worked with me so we know each other really well and that helps and they're sufficiently secure in themselves to know when to say okay ross we need you to deal with this and i'm sufficiently confident in their abilities to say, you guys can deal with this.

59:10You can handle it. I know you've got this. And so that mutual respect and trust enables us to deal with things effectively and efficiently. I don't tinkle in their Wheaties and they don't tinkle in mine. What happens in time compressed situations? So whether it's capacity constrained funds or short time horizon closings, how do you handle those situations? The big key is not having 40 million managers. So a lot of our peers have 200 to 300 managers, and staffs about the same size, which means that a substantial portion of their resources are dedicated to monitoring existing managers, which means how much time can you spend looking at new managers?

59:57So because we don't have that constraint, I can take people and put them on a problem, a project, or a time constraint situation and get the work done. So by managing that 50 manager relationship maximum, it really allows us to use resources very effectively. The other tool I have in my toolkit is that our director of risk and operations also has a very strong systems background, and he's been able to leverage our time by making sure that we've had the right systems in place to do things as efficiently as possible. What types of systems are those? So we have Backstop as our overall portfolio management system.

1:00:41And we're one of the few foundations or endowments that actually uses that kind of portfolio management system because we went around and we talked to our peers and nobody else was doing it. And we're like, well, how do you keep track of all this stuff? So everybody has access to Backstop. Everything is in one place. It makes it easy for us to get through our annual audits. The auditor has looked at the system. They're really happy with it. So that's one system. We're working on a second system, a workflow system, to actually interface with our master custodial bank, our finance department, and to really leverage our time in the implementation and execution of what we're doing.

1:01:23So Backstop is a static repository. It collects information. There are some analytical tools, but it's not a workflow system to help you get from point A to point B. We're looking at adding that system, which we expect will be in place later this year. So you have 50 managers. What happens in that one time where there's a new manager, a new opportunity that you feel like, for whatever reason, they're a little bit better than what you have? It's called conviction, baby. so the question becomes if it is a little bit better is it enough for you to fire that manager because you have to make a decision you can't hire everybody and the team understands that if we hired the 51st manager then you can hire the 52nd the 53rd and then where does dilution really take over your investment returns so the short answer the question is who goes and how does behavioral bias play into that decision?

1:02:26Oh, God, everybody has their little pets. But the team is large enough that we can challenge each other, number one. And number two, everybody has their eye on the goal, which is it feels really good when we've met our performance objectives. And we're a highly motivated team to meet our performance objectives. And we take a lot of pride in doing that. We want to do a good job. So we recognize that you can have behavioral biases, but to what end? The thing about the team that is so important is that excellence is ingrained in every single individual, and it doesn't matter their level. And when you have that, then people might start out with their behavioral biases, but they'll back away from them pretty quickly.

1:03:14Do you have any particular way that you exit managers when the time comes? I'm not Donald Trump, if that's what you're asking.

1:03:26We start telling a manager they're in trouble. Okay. And we start telling them why. And the reason why is that if they can fix their own problem, they save us a lot of work. So when you only have 50 managers, it makes it easy to be able to work hard, identify the problems, and tell the manager. What are examples of some of those problems other than, well, your performance isn't good? We looked extensively at a manager who was in trouble and found out that there were issues with the sell discipline. And we pointed that out to the manager and basically said, look, you've got to go figure this out.

1:03:59And if you don't figure it out, then this is what we think is the largest problem that you're having. So that's an example of something that we'd focus on. How did you flag that as a problem? The manager starts making excuses for an investment holding instead of just selling it and getting on with it. And you start looking at the investment excuses and you do sub-portfolio attribution and you figure out the investment excuses are really what's accounting for 110 % of the underperformance. So that's a clue. So that's how. Combination of qualitative and kind of data. Right. That's exactly right.

1:04:35And even in private capital, when the manager starts talking a lot about an investment, about making excuses for an investment, that's a clue. And so we are looking at our other investments of the same vintage year, and we're looking at other universe comparisons. And because we don't have very many managers, we can do a lot of work on a company-by-company analysis in our private capital portfolios to really understand, okay, hey, where are the problems? Are they not making their numbers? Is the cash burn too high? And we can get into details with the manager about that. And some of them don't like the fact that we know as much about their portfolio as we do.

1:05:21What have been your biggest mistakes? Oh, and I've heard this from so many other people as well, is not firing a manager fast enough. I've gotten better at that later on in my career, but that's probably the biggest mistake. And how do you deal with the trade-off of the mistake of not firing fast enough versus not firing too soon? People work through problems sometimes. So it's interesting. Going back to my example, two members of my investment committee did not fire their firm. They kept them. I was the only one who did. And we won't know for a while who was right and who was wrong. but our assessment of the situation made them both sufficiently nervous.

1:06:07And my point was, okay, maybe we rode through this, but this guy isn't changing. And if it's not this, it's going to be something else. So we identified a character issue with the founder and chief investment officer of the firm. And how about situations where it's less character based and more some of the subtle things that you're seeing in execution? It's the drip, drip, drip, drip, drip method. And that's where those are the most insidious because you're, well, is it style related? Is it this? Is it that? And so one of the things that we do, and this is an analysis that I do with, so let's do a public equity because, or hedge funds.

1:06:52we look at the top holdings. We all have Bloomberg's. We look at, are the companies making their earnings estimates? Or are they missing? And if they're missing, we actually look at, well, what is the stock reaction to the earnings miss? And we actually sit down with the manager and show them that. We're basically like, what are you doing here? So that has helped us calibrate when there's a real problem or whether we should ride this horse a little bit longer. And that's been extremely helpful to us. So by going down to the company level and using all the tools that we have available to us, we can have a more engaged discussion with the manager.

1:07:41And then it's the judgment call about, are you being BS'd or is he seeing it the way you're seeing it. What are you most excited about in the portfolio or new themes you're pursuing? I'm excited and scared about China. Excited because it's going to be a great opportunity. Scared because their attitude toward rule of law is very different than ours. I'm a little afraid of the extent to which China can dominate. And if we're invested there, we're contributing to that. So all of that factors into making it really exciting. The other thing that has us very excited is that we think that Silicon Valley is only going to last for so long.

1:08:21If for no other reason, California is becoming very business unfriendly. If Gavin Newsom wins the gubernatorial race and he does to California what he did to San Francisco, and I don't know if you've checked out San Francisco lately, but it's become a disaster, then Silicon Valley cannot remain there. Somebody will leave and that will start the exodus. So we've been going around the world, Melbourne, Australia, Budapest, Hungary, the east end of London, and we're finding other pockets of venture capital excellence that are just beginning the way Silicon Valley did. We're a big investor in Israel.

1:09:04Big investor. Now, nobody has seen a triple digit IRR out of VC in a long time. I've got one out of one of our Israel investments. So by looking at areas that are smaller, more up and coming, we've actually been very hopeful that we'll be able to do well. And is it hard to dovetail that with, you know, you run the numbers and you need to get$75 to$100 million with each firm for it to fill one of the 50 slots? So we don't have to do it right away. For example, we built up our Sequoia allocation solely over time. And now we're at those kinds of numbers. By not having a ton of managers and my ability to meet with the general partners directly, I can communicate to them, you're really important to us.

1:09:59We don't have a million of you. And that helps us get bigger allocations than what some of our peers get. And what happens over time? So you've been here eight years. Right. And particularly in the private markets, at some point in time, you'll decide you don't want to continue with that manager, but you'll have a long tail of investments. And then you add somebody else and the 50, if you count the legacy ones, becomes... So two things. First of all, if we decide we're not going to re-up with a manager, that drops out of our manager count. The other thing that we're looking to do is actively use the secondary market to modify our portfolio.

1:10:35So we're developing a strategy to do that. Yeah. And we've already sold an investment in the secondary market that enabled us to hire another manager that we thought would do a better job for us. Do you participate in co-investments? We do. And how do you think about that process? We have a co-investment policy. There are a couple of key criteria. First and foremost, we have to be able to comply with the excess business holdings rule that is visited upon foundations by the IRS. And that says that you cannot own any more than 20 % of an operating entity, a for-profit operating entity. That's number one.

1:11:15Number two, we make sure that the investment is in the manager's wheelhouse, that it's not a fishing expedition on the part of managers. They all have their fishing expeditions. We recognize that. Not every investment fits neatly within exactly what they said they were going to do. They all have their little wild hair. It's what keeps them occupied. So we have to make sure it's in their wheelhouse. Third thing we look for is that they're putting money in alongside us in the co-investment. Once those three criteria are met, we look at, well, if we add this to the portfolio, what is the incremental risk?

1:11:56Because it's typically inside the fund as well. And do we have more like it somewhere else? So there's the overall portfolio analysis that's done. And then we do look at income and cash flow statements because it has to be cash flow positive. So we need to make sure of that. But we're not re-underwriting the investment the way some of our peers have. We don't feel we can bring anything to that party. We underwrote the manager. And that's where our due diligence ends as far as the underwriting is concerned. That becomes a fit. Okay. So before we turn to closing questions, I want to circle back to your thoughts on the governance here.

1:12:36You said you were walking into a governance challenge situation. How has that evolved over the last eight years? So when I first got here, my authority was a sum total of$100. Anything that related to more than$100, I had to go get permission from somebody. And rather than fight that, I recognized, and this was my CalPERS training, that I needed to earn trust. And that if I work to earn trust, that more will be given to me. And so one of the things I'm fond of saying to the team is we'll go for the little yeses to avoid the big no. And so it was very important that we took our asks and broke them into their component parts and asked them in stages so that we never got too far over our skis.

1:13:31So today, I've delegated authority for everything except broad policy and hiring a new manager. We have an investment committee to whom has been delegated virtually all authority. The trustees appoint the members of the investment committee, and that's the governance structure. What percentage of the time when you bring a specific manager to the committee with the recommendation to hire a new manager, does it get turned down? It's only happened once in the eight years that we were here. I learned my lesson fast. And what was that lesson? First of all, we change the process so that we send out a one pager to the investment committee in advance so that they know that this is a manager we're considering.

1:14:15And if you've got issues and concerns, please let us know about this. Or if you know something about this manager or you've got questions, please let us know. How early on does that one pager go in your due diligence process? At least one meeting before the meeting where the manager could end up being voted on. so there's sufficient time for them to do that. And oftentimes they'll say, because we have a lot of chief investment officers on our investment committee, they'll say, I've had an experience with that manager or that manager's in my portfolio, I like them, or so we'll get feedback or we'll get questions or whatever.

1:14:47The other thing that we've done is we have two due diligence memos. We've got an internal memo that is extremely detailed. That's part of our record. we send to the investment committee is something that is no more than five pages and speaks mostly to the fact that we've adhered to our policy. So they know that we had the number of meetings. We looked at this. We checked that. We got comfortable with this. This is how we got. Because they're really not in a position to duplicate our work. What they're really there to do is to make sure that we adhere to policy. All right, let's turn to some closing questions.

1:15:28What was your favorite extracurricular achievement? I am very fortunate to have gone to SUNY Oneonta undergrad. It's a New York State school. And the year that I applied to Oneonta, it was harder to get in there than it was to Harvard. And it was the height of the Vietnam War. And everybody was going to college. And somehow or another, they accepted me. I was eternally grateful to them for accepting me. And I had a great four years there. And I turned around and with my success helped other students. And I was able to financially support 20 other students in pursuit of their bachelor's degree.

1:16:09And last year, Oneonta awarded me, well, the State University of New York, not Oneonta, but the State University of New York awarded me a doctor of humane letters. That's fantastic. So that was pretty amazing. What's your biggest investment pet peeve? That we don't learn from our past mistakes. That's probably the biggest one. The other is when people are marketing to me, like know the audience. I've seen a lot of movies in my career. I probably know how they end. So please respect that. That's probably the other one. What's the riskiest thing you've ever done? I am acrophobic, horrifically acrophobic.

1:16:52And last year, I climbed the Sydney Harbor Bridge. And there were two points in that climb where I had a straight view right down to the water and froze. And I knew that if I didn't get over myself, I was going to hold up the other people in my group and I was going to cause the climb leader to have to deal with me. And I had to force myself through my fear. How'd you do it? I didn't give myself a choice. I just mentally forced myself to do it because I didn't want to embarrass myself. And then I found out, wow, that wasn't so bad, but that was terrifying to me. I was freaking out before I did it, but I didn't tell anybody I was freaking out before I did it.

1:17:39I just forced myself to do it. What teaching from your parents has most stayed with you? Respect. Imagine if we had more respect for each other, for ourselves, for our country, for everything, how much better it would be. The importance of respect. What information do you read that you get a lot out of that other people might not know about? I'm a student of history, but I love to read it through the biographies of the people who are part of the history. So rather than reading a history on the founding of our country, I read the biographies of each of the founding fathers. And that was far more interesting to me because I learned about them as people.

1:18:22And that's what biographies give you. That's great. All right, last one. What life lesson have you learned that you wish you knew a lot earlier in life. Trust your gut. I would say that 98 % of decisions are based on my gut. And I spent a lot of time in analysis paralysis when I already knew the answer and I could have saved all that time. Roz, thank you so much for taking the time. Well, thank you, Ted. It's been a pleasure. Hey, before you take off, I've started sending out a monthly email that shares a small selection of what caught my eye over the month. I get a lot of emails like this, and I'm sure you do too, so I'm only going to send no more than a handful of the very best things that caught my eye.

1:19:07If you'd like to receive that email, hop on my website at capitalallocatorspodcast.com and join the mailing list.