Capital Allocators – Inside the Institutional Investment Industry
Episode: Ed Grefenstette – Bold Allocations at The Dietrich Foundation (EP.437)
Release Date: March 24, 2025
Host: Ted Seides
Guest: Ed Grefenstette, Chief Investment Officer of The Dietrich Foundation
1. Introduction to Ed Grefenstette and The Dietrich Foundation
Ted Seides welcomes Ed Grefenstette, the Chief Investment Officer (CIO) of The Dietrich Foundation, an influential philanthropic organization based in Western Pennsylvania. The foundation was established by Bill Dietrich, a notable industrialist and philanthropist, with an initial fund of $170 million in 1997. Under Ed's leadership of the past 15 years, the foundation's assets have grown to $1.5 billion, with $400 million distributed to various charities, including Carnegie Mellon University and the University of Pittsburgh.
2. Ed’s Journey to Investing and Mentorship by Bill Dietrich
Ed recounts his early interest in investing, influenced significantly by his father’s relationship with Henry Hillman, a pioneer in private equity and venture capital. Ed's academic path included an economics degree from Georgetown and an MBA from Carnegie Mellon University, transitioning from a career in law to investment banking and eventually private equity.
A pivotal moment in Ed's career was meeting Bill Dietrich in 2000. Despite an initial rejection ("I'm not going to give you a nickel. [11:19]"), their relationship blossomed into a longstanding mentorship over seven years of quarterly lunches. This relationship culminated in Bill inviting Ed to take over as CIO of The Dietrich Foundation in 2010, shortly before Bill's passing in 2011.
Ed Grefenstette [06:15]: "This is not a man to be trifled with."
Bill Dietrich [during pitch rejection] [11:19]: "I love the passion, I love the approach, I love the thesis, I love the people."
3. The Dietrich Foundation’s Bold Investment Strategy
Under Bill Dietrich’s vision, The Dietrich Foundation adopted an aggressive investment strategy focusing 90% of its assets on illiquid investments, primarily venture capital and private equity. This approach is built on the concept of “moat trajectory,” aiming to outperform traditional models by embracing higher risk and reward potential through concentrated, non-traditional asset allocations.
Ed explains that Bill sought to maximize the advantages of an imperpetual pool of capital by pushing the boundaries of asset allocation, supported by a governance structure that delegates significant investment authority to the CIO. This structure allows for bold investment decisions, fostering an environment where innovation and differentiation from market norms are prioritized.
Ed Grefenstette [27:42]: "We believe over long periods of time, illiquid is going to outperform liquid... we're pushing the bounds of that."
4. Governance Structure and Delegated Authority
Bill Dietrich meticulously crafted the foundation’s governance to support its bold investment strategy. Central to this was the decision to delegate investment authority directly to the CIO and CEO, bypassing traditional investment committees. This delegation is formalized in the trust documents, emphasizing the separation of oversight from investment management to enable the CIO to make independent, confident decisions without undue influence or career risk aversion.
Ed Grefenstette [25:49]: "There are a fair number of investment offices that do have delegated authority. What's different about how Dietrich is set up is the degree to which we can pursue a quite different investment strategy."
The governance also includes rigorous performance evaluations focused on long-term achievements, allowing the CIO the flexibility to maintain conviction even during periods of underperformance.
5. Managing Liquidity and Portfolio Construction
Maintaining a 90% allocation to illiquid assets presents unique challenges in liquidity management. Ed outlines several strategies employed by The Dietrich Foundation to navigate these challenges:
- Mature Portfolio: With a dollar-weighted average age of about 7.1 years, the portfolio is generally out of the J-curve, allowing for steady distributions.
- Line of Credit: An undrawn line of credit equivalent to 12% of NAV provides liquidity support if needed.
- 509 Supporting Organization Structure: Unlike traditional private foundations, this structure allows more flexibility in payouts, adhering to a 3% annual distribution policy as per Bill’s trust document.
Ed Grefenstette [32:04]: "The portfolio is very mature at this point... our unfunded commitments as a percentage of NAV for us is about 19%."
The foundation's disciplined approach to managing liquidity ensures that despite heavy illiquid investments, operational needs and charitable distributions are consistently met.
6. Private Investment Program: Focus Areas and Themes
The foundation’s private investment strategy is heavily skewed towards venture capital (55% of the illiquid portfolio) and is evenly split between growth equity and buyout funds. A key investment philosophy is a thematic approach centered on innovation and emerging markets, particularly venturing into regions like Asia and Latin America.
- Innovation: Emphasized through venture capital investments in sectors such as AI, healthcare, and consumer technology.
- Emerging Markets: Significant allocations in China (historically up to 38%, now around 20%) and growing focus on India due to its favorable demographics and technological advancements.
Ed Grefenstette [34:59]: "The two major themes that course through our portfolio are innovation in all of its forms and the broad opportunity set in the emerging and frontier markets."
Ed discusses the importance of direct due diligence, especially in complex markets like China, and adapting strategies based on geopolitical shifts and market maturity.
7. Sourcing and Selecting Managers
The Dietrich Foundation employs extensive due diligence and maintains a robust network to identify and partner with top-tier General Partners (GPs). Key strategies include:
- Travel and Direct Engagement: Ed frequently travels to meet with managers and understand local markets deeply.
- Networking Events: Events like the Dietrich Private Equity Invitational foster relationships and provide insights into potential investment opportunities.
- Rigorous Evaluation: Emphasis on integrity, self-awareness, portfolio construction, and repeatability of GPs. Questions are designed to uncover a GP’s ability to self-assess and manage risks effectively.
Ed Grefenstette [50:22]: "It has to be a situation where you are 100% comfortable and happy to be partnering with the people involved."
This meticulous selection process ensures that the foundation partners with GPs who align with its bold and innovative investment ethos.
8. Challenges and Adaptations in the Current Market
Ed acknowledges the increasing competition and elevated valuations in private markets, which tighten the foundation's ability to pursue high-return strategies. Specific challenges include:
- Higher Fees and Premium Structures: Some GPs demand unfavorable terms that necessitate higher returns to meet the foundation’s net performance targets.
- Geopolitical Risks: Shifts towards modern mercantilism and reduced globalization require nuanced risk assessments and adaptive strategies.
- Liquidity Constraints: Maintaining high illiquid allocations while ensuring sufficient liquidity for distributions remains a critical balancing act.
Despite these challenges, The Dietrich Foundation remains committed to its long-term strategy, emphasizing patience and disciplined investment to navigate market pressures.
Ed Grefenstette [62:24]: "This is not an easy game, but we think it's still worth playing."
9. Succession Planning and Future Outlook
As Ed approaches the latter part of his career, succession planning becomes a priority. He is focused on finding a successor who embodies the foundational principles of urgency, work ethic, and strategic boldness as instilled by Bill Dietrich. Ensuring continuity in the foundation’s mission and investment philosophy is paramount to maintaining its performance and legacy.
Ed Grefenstette [69:23]: "It goes back to first principles... Character and work ethic are essential for a CIO in this position."
Looking ahead, Ed expresses excitement about emerging sectors within the portfolio, particularly defense-related investments and opportunities in India, which exhibit strong growth potential and favorable demographics.
Ed Grefenstette [71:00]: "We're really excited about some of the companies in our portfolio that are in defense field... Also, India is on a really exciting trajectory."
10. Closing Reflections
Ed shares personal insights, including his passion for golf, which he likens to life’s unpredictability. He reflects on his career trajectory, attributing much of his success to the mentorship from Bill Dietrich and remains optimistic about sustaining the foundation’s bold investment strategy through thoughtful succession and ongoing innovation.
Ed Grefenstette [73:41]: "Bill Dietrich was a huge part of where my life ended up and I'm grateful for having met him and I'm honored to carry the torch for him."
Notable Quotes with Timestamps
- Ed Grefenstette [06:17]: "Why don't you take me back to how you first got interested in investing?"
- Ed Grefenstette [25:49]: "There are a fair number of investment offices that do have delegated authority. What's different about how Dietrich is set up is the degree to which we can pursue a quite different investment strategy."
- Ed Grefenstette [34:59]: "The two major themes that course through our portfolio are innovation in all of its forms and the broad opportunity set in the emerging and frontier markets."
- Ed Grefenstette [46:34]: "We've taken a couple of approaches. First, we travel quite a bit... We also trade notes with like-minded investors."
- Ed Grefenstette [50:22]: "It has to be a situation where you are 100% comfortable and happy to be partnering with the people involved."
- Ed Grefenstette [62:24]: "This is not an easy game, but we think it's still worth playing."
- Ed Grefenstette [67:50]: "We try to bring historical context around these periods of time where there's something shiny. Over long periods, our portfolio holds up pretty well."
Conclusion
In this comprehensive discussion, Ed Grefenstette illuminates the bold and innovative investment strategies that have propelled The Dietrich Foundation to the forefront of philanthropic investment management. Through disciplined governance, a thematic focus on innovation and emerging markets, and a meticulous approach to manager selection, the foundation continues to achieve outstanding long-term performance. Ed’s reflections on mentorship, succession planning, and navigating contemporary market challenges offer valuable insights for institutional investors seeking to emulate similar success.
For more detailed insights and to access premium content, visit capitalallocators.com.