E324: How The University of Cambridge Built Their Privates Portfolio

0:00Sam Sturge:So Sam, you've had an incredible career going from Morgan Stanley to then Partners Capital. But I want to start with, how did you came to run private equity at Cambridge University?

0:11David Weisburd:Six years ago now, our CIO had joined a few months before, was looking to rebuild the whole investment team, and also just looking to increase the allocation to private equity substantially. I think all those kind of factors really kind of married with, I guess, my long term ambitions and motivations, which for some reason I love private equity and the ability to kind of take this brand and use that to leverage to build a world class portfolio was just too good an opportunity to pass up.

0:42Sam Sturge:You were building for one of the most historic institutions in the world, but you were more or less building it from scratch. How did you go about doing that?

0:51David Weisburd:At the core of it, what is the mission objectives for the endowment as a whole? It is to preserve or increase the real value of the endowment for not just decades, but centuries to come. We have a distribution rate of 4 % and we want to have a margin of safety. So that means we have a target return for the whole endowment of inflation plus 5%. I'll admit that's a relatively high return target. And so it's therefore really important for us to have a meaningful allocation to risk assets. Um, we believe that priority should have the highest return out of all asset classes. And so naturally makes sense for us to have a large allocations to the asset class.

1:30David Weisburd:Why do we think that's the case? Um, I think firstly, I'm going to, I think probably for me, and just trying to keep it simple because there's many different strategies. It's kind of focusing mainly on buyouts and venture capital as the two core asset classes here, two core strategies here. Within buyout, we just believe managers have the ability to influence the operations and strategic directions of businesses. And they also have a longer term focus than say in public markets where people are very focused on quarterly earnings and shorter term decision making. And so managers that have that skill and differentiation should lead to kind of longer term revenue and earnings growth and naturally then higher returns.

2:13David Weisburd:on the venture side i don't think we necessarily believe the market will have the highest absolute returns out of all asset classes but we do believe investing in early stage disruptive technologies has the potential to deliver outlier success if you're partnered with the right firms who are investing in the right companies it is a people business a private fund can last for 15 years or more and that's a considerable amount of time to be spending with these people and i I think there is just a fundamental question of, do you want to be in business with these people for that amount of time? And within that, it comes down to alignment.

2:52David Weisburd:Are the managers' incentives and motivations truly aligned with what we view as success?

2:57Sam Sturge:How do you ascertain that? How do you look at incentives and figure out whether you as the LP are aligned with the manager?

3:07David Weisburd:That's a really good question. The endowment is about four and a half billion pounds, which is obviously a lot of money, but in the grand scheme of financial assets is relatively modest, which I think gives us the real privilege that we are focused to deliver the best risk adjusted returns rather than on deploying capital. And so that alignment really boils down to that, which is, are the key decision makers at an investment organization, are they motivated to deliver outlier returns rather than necessarily build a large business focused on asset management and focused on gathering management fees?

3:52Sam Sturge:What do you find psychologically that drives those that want to be great investors versus great asset gatherers?

3:58David Weisburd:We spend way too much time or maybe it is the right amount of time talking about this amongst the team if we look at our managers that have sustained our performance for a considerable amount of time it comes down to she just a inert competitiveness they want to win and they view winning is generating the best returns compared to their peers and they will move heaven and earth to do that even after kind of reaching financial security and in some ways doing doing it more for the love of generating those returns than the economic incentives that flow from that.

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5:57David Weisburd:at alpha-sense.com slash how I invest.

6:01Sam Sturge:It's where the managers get their ego and their ego attachment. Some managers get their ego from, I have all this AUM, I have all these management fees. Other managers actually get it from, I have the best fund. I'm not an asset gatherer. I have the best returns. I have the smartest strategies and I'm doing well for my LP. So it's really about where you get your sense of purpose and your ego.

6:24David Weisburd:That's completely right.

6:26Sam Sturge:So let's double click on venture specifically. Andres Norwich just raised the largest venture fund in history. There's other venture managers that are very tactical and very capacity constrained and focus on having smaller funds. Where in the market is it an asset to have capital and where in the market do you really want to be constrained?

6:52David Weisburd:Million dollar question, isn't it? We believe there are many ways to win. Um, and I think kind of taking that example that you, that you just highlighted with Andreessen, I think at the end of the day, it comes down to people. And so how many exceptional people do you have that are seeking to invest the amount of capital that you have? And that can be in a fund of$20 million through to an institution that's, that's raised$15 billion. dollars um and i think the manager needs to know or any asset owner or manager needs to know what are their competitive advantages and what are their rights to win within venture there is this reinforcing brand effect where people that have a desire to be successful want to be associated with successful brands and firms that have backed those amazing companies before and And in a world which has never been so competitive, having that, the scale and resources to make their portfolio companies heard sounds like a very attractive strategy.

8:04David Weisburd:On the other side, whilst we're living in this era of incredible innovation, there's still how many truly transformative companies are going to be created per year? and how does that then, how many of those companies or what market share does a firm raising that amount of capital need to invest in?

8:24Sam Sturge:For endowments, where does your capital structure give you an advantage and how do you push that advantage in venture?

8:31David Weisburd:Well, I just said in terms of the managers, I think we need to put onto ourselves. And I think, I talk about it a lot with my colleagues where I think we need to look at ourselves and say, well, what is our advantages? And I think, yes, we can go with endowments initially where they are long-term perpetual pools of capital where they should have the ability to be consistent and loyal investors. And I think also another key point is that the returns are going to charitable and positive activities, which I think on the margin will, investment managers do prefer. But I think then we have to look at ourselves and we can say, well, I mentioned our size before, which gives us an advantage where we can maybe make smaller commitments to managers.

9:28David Weisburd:So with those capacity-constrained managers, a$10 million commitment is a lot easier to get into these capacity-constrained managers. And that can still be very meaningful for us. We're also increasingly looking at how can we connect the venture managers with the research centers within the university. In the end, Cambridge is one of the world-leading centers of excellence for artificial intelligence, for robotics, for quantum computing, for material science, which acting as a conduit for that should be incredibly attractive for venture capital firms.

10:10Sam Sturge:right now there's this dpi crisis as some people have labeled it which is before 2024 you have on average 24 dpi per year last two years have been nine percent dpi in alternatives so a lot of lps are asking themselves should we be deploying more into private equity into venture or should we wait until more DPI is made available? The contrarian point to that would be everybody is vacating the space. Why not be offensive and capture market share? Where do you sit on those two sides of the continuum and why?

10:55David Weisburd:I think it's great if everyone is saying not to invest. I think private equity has matured as an asset class over the last 30 years. And I think for us, I think as people kind of, that may be kind of more here for shorter term, I think for us where we just fundamentally believe in what I talked about earlier in terms of the reasons why private equity has a right to generate significant returns above and beyond public markets. I think net fewer limited partners competing for those best general partners and those general partners having theoretically less competition should be a great thing looking forward.

11:40David Weisburd:On the kind of specific point on liquidity and DPI, for us, it's always been very important to manage our liquidity and not get over us as skis on the liquidity and be truly reliant on distributions in any particular year. How much do you trust your nav marks in your portfolio today?

12:02Sam Sturge:How much credence do you give to them?

12:06David Weisburd:It's a good question. We obviously speak to our managers on a regular basis, spend a lot of time traveling and spending time with them in person, reviewing the monitoring, the quarterly reports. And every six months we do a big exercise across the portfolio on looking at the earnings growth and revenue growth and the margins and the leverage and everything like that. So we have very good visibility into the underlying assets that we hold. A job for us is not to question whether or not a company should be marked up or down by 5%, 10%. But I think with that, you get a good feeling of whether or not a manager is more aggressive or more conservative on their marks.

12:50David Weisburd:our general bias has been towards more quality focused managers where they are more focused on i would say they prefer to give good news and so we've generally seen more prudent valuations slower markups as public comparables have risen up and i think on average we see a markup on exit of our buyout companies in the region of 20 to 30%. When we're looking, re-underwriting a manager, we spend a lot of time going through historical portfolios and making sure that we feel comfortable with how they're marking and compare and contrast them to the rest of the portfolio. And so it's always interesting to see when you have a venture-backed company as owned by multiple managers within our portfolio, and we can kind of compare and contrast to see the valuations that each of them are holding at.

13:49David Weisburd:So naturally, if one is holding it at a much higher valuation or even a much lower valuation than the others, that's good impetus to start a conversation.

13:58Sam Sturge:Do you think all things being equal, LPs have incentive for their GPs to actually mark up their book and mark more aggressively?

14:06David Weisburd:It comes back to the alignment point that we talked about before.

14:09Sam Sturge:Because there's alignment with the manager of that pool of capital. There's this principal agent problem that exists on the LP side as well.

14:15David Weisburd:I can see that for us or say for me, where the time horizon looking forward and building this portfolio is for decades to come. I think the underlying value is what really matters. And so, and I think it is a far easier, you build a lot more trust with your stakeholders and with your limited partners and with the general partners. I would say if you are conservative on those valuations and then you surprise on the upside. we do take a lot of notes when say if a manager that is not doing so well on the performance side ahead of it the next subsequent fundraise you start seeing markups in that portfolio and i think that for us then is really important to when you have that underlying data of the revenue growth and the ebitda growth so i think it's a far easier conversation to have with a manager when you say well, you've marked up your portfolio by 30%, but your earnings are only up by 10%.

15:17David Weisburd:Can you please explain to us why you've changed the valuation multiple of these companies?

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