← Capital Allocators – Inside the Institutional Investment Industry
Capital Allocators – Inside the Institutional Investment Industry
Shannon O’Leary – Relationship Capital Investing at St. Paul & Minnesota Foundation (EP.435)
00:59:50
Shannon O’Leary is the CIO of the St Paul & Minnesota Foundation, where she oversees $1.8 billion for the community foundation that aspires to create an equitable, just, and vibrant Minnesota. Shannon took the post six years ago after twenty...
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- [00:02]
Ted Seides
Capital Allocators is brought to you by my friends at WCM Investment Management. To outperform the markets, you have to do something differently from others. In my 30 something years investing in managers, there may be no one I've come across who does that as clearly and as well as wcm. I've seen it up close. As an investor in their international growth strategy for the last five years, WCM is a global equity investment manager majority owned by its employees. They believe that being based on the west coast, away from the influence of Wall street groupthink provides them with the freedom to live out their investment team's core values, think different and get better as advocates of integrating culture research into the investment process and advancing wide moat investing. With the concept of moat trajectory, WCM has delivered differentiated returns while building concentrated portfolios designed to stand out from the crowd. WCM is committed to defying the status qu by dismantling outdated practices, believing in the extraordinary capabilities of its people, and fostering optimism to inspire each individual to become the best version of themselves. To learn more about WCM, visit their website@wcminvest.com and tune into this slot on the show to hear more about WCM all year long.
- [01:27]
This testimonial is being provided by Ted Seides and Capital Allocators who have been compensated a flat fee by wcm. This payment was made in connection with Capital Allocators testimonial and production of podcasts and is not depend on the success or level of business generated. The opinions expressed are solely those of Capital Allocators and may not reflect the opinions of others. Investing involves risk, including the possible loss of principle. Past performance is not indicative of future results. Please visit wcminvest.com for WCM's ADB and further information. Capital Allocators is also brought to you by our friends at Iconnections. We wanted to share a game changer for anyone hitting the road this year to raise capital. Our friends at Iconnections just rolled out a roadshows feature that lets you set up meetings and travel in just a few clicks. In their mobile app, you can share your schedule visibility with your clients and prospects and sync with whatever third party calendar you choose to use. It's also smart enough to account for travel time in between meetings and suggest optimal times should the inevitable delays and rescheduling arise. It's really purpose built to take the administrative burden out of your day to day and focus on what's important, like being a good partner to your LPs. Give it a look. We're all about highlighting our partners, anything or anyone that's bridging knowledge gaps and helping make valuable connections amongst institutional investors. We're all about and what Iconnections has coming down the pike on the tech side does exactly that. Visit iConnections IO platform to learn more.
- [02:55]
Hello, I'm Ted Seides and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can join our mailing list and access Premium content@capitalallocators.com All opinions expressed by.
- [03:23]
Shannon O'Leary
Ted and podcast guests are solely their own opinions and do not reflect the opinion of capital Allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Capital Allocators or podcast guests may maintain positions in securities discussed on this podcast.
- [03:41]
Ted Seides
My guest on today's show, Jo, is Shannon O'Leary, the chief investment officer of the St. Paul and Minnesota foundation, where she oversees $1.8 billion with a community foundation that aspires to create an equitable, just and vibrant Minnesota. Shannon took the Post six years ago after 20 years working with families. She described herself as blunt, comfortably speaking her mind, including in her LinkedIn newsletter entitled say It Out Loud. Our conversation covers Shannon's relationship driven approach to investing across families, boards, team members and managers. We discussed the value of frank communication in every aspect of the investment process, from setting policy to manager access, research, selection and partnership. Before we get going, after eight years of being told by my friends that I have a face for podcasting, we decided to rip off the band aid and produce video recordings. It turns out that YouTube is the fastest growing channel for listening to podcasts, not Apple, still the biggest, and not Spotify, still the biggest among younger listeners. It's YouTube now. I for one don't understand this at all. It's hard for me to imagine watching two people talk to each other, especially when so much of my listening comes when I'm on the move. But it seems that's not the trend. And the trend is your friend. At least according to Cliff Asness and others with the momentum factor strategy. So we're giving it a shot. That's despite my hesitancy and despite quite enjoying the many times I speak to both friends and new friends who tell me it seems strange to hear me talk while seeing me at the same time. Now I'm not sure if that's a sensory thing, or if my friends were right about my face for podcasting. But either way it seems I'll be a little more visible going forward. The irony of this is most of you hearing this already are listening, so you may be the exact wrong audience to share that we've added video. But regardless, if you do have a friend who's addicted to YouTube, please let them know we're now stimulating an additional one of the five senses. Thanks so much for spreading the word about Capital Allocators videos now available on YouTube. Please enjoy my conversation with Shannon O'Leary.
- [06:05]
Shannon O'Leary
Shannon, thanks so much for joining me.
- [06:07]
Thanks for having me, Ted. It's a pleasure.
- [06:09]
I'd love you to take me back how you first got interested in any of this stuff from the beginning.
- [06:16]
Yeah, I had no interest or knowledge of the institutional investing industry until I got a job in the industry coming out of college. I'm from Minnesota. I grew up in St. Paul. I am one of five girls. So that's a very specific life lens to bring to all of the work. Let's just say that there was a lot of communicating and figuring out the nuances of what was really driving the conversation. Also, I'll say that I don't know of many families where it was required that we needed to have the full set of Encyclopedia Britannicas available to us next to the dinner table so we were all aware of what the true facts were.
- [07:00]
I'd love to ask you about your parents leading into having Encyclopedia Britannica on the kitchen table.
- [07:08]
So my mom was a science teacher and my dad was an MD, PhD researcher in aging at the University of Minnesota. So very sciency background, not a whole lot of money in either one of those careers. So we lived pretty lean and lots of family in town, which was enormously valuable. Probably the formative experience of my early life is that my dad was diagnosed with and died from, over a period of five years, a degenerative frontal lobe dementia.
- [07:43]
How old were you at the time?
- [07:45]
As dementia progresses, you begin to see it, and I remember we'd saw signs of that 8, 9, 10, 11 years old. He was institutionalized when I was 12 and then passed when I was 17. And the five years in between there were marked by the progressive decline, the loss of himself. He disappeared as a person for us, and there's an inevitability while you're over that period of time. A teenager in high school and then also waiting for your father to die.
- [08:21]
How do you think that affected you?
- [08:23]
I think it Infuses everything. I have a very high degree of constant awareness of my own mortality and that of everyone around me. I'm often accused of being blunt, and I think that people mistake rapid honesty with bluntness. And my goal in communication is let's not beat around the bush. We don't know what's gonna happen next. We're planning for a long term relationship with Manage your abc. We're planning for these assets to be available to the community in perpetuity. But I'm going to tell you what information I need to convey to you or how I feel about it right now, because the present can be very, very short.
- [09:11]
When you had that mindset thrust on you at that age, how did you begin to navigate this blend of wanting to think about your life and career early on with need to be very present, need to act now, need to be very blunt because you don't know what's going to happen?
- [09:29]
I could not wait to go to college. That was really the most immediate response of it was needing to just move on in order to process what had happened. So for me, going to college was the greatest thing that ever happened to me. So I went to the University of Wisconsin, Madison. It was amazing. I learned that I'd worked way too hard in order to get whatever I was getting in high school. And I learned that I did not need to work that hard in order to achieve the same grades and then have more room to think and learn more. It was almost the freedom of coming out of that home situation and that degree of anxiety and sadness frees up a chunk of your brain that you didn't know was so occupied with what needed to happen in that moment every day in that situation.
- [10:24]
What was it like when you were at school looking around, knowing that most people weren't coming from the same perspective that you were?
- [10:33]
I'd feel like my first impression was, oh my gosh, I actually got a really good high school education. I am in a lot better of a position here than a number of my compatriots. And also they're really immature. It's kind of sort of the overall feeling. I spent a lot of time running marathons, just processing and running and running and running. I took everything under the sun that I could take. That was intellectually stimulating to me. That's how you end up with all the math classes, all the physics classes, all the econ classes. And then I'm taking combined course that combines history, art and language as a symposium class and then enjoying it so much that I took three More, where.
- [11:24]
Did all of that learning and different fields of knowledge bring you as you're coming out of college?
- [11:31]
Clearly into the investment industry somehow. I mean, I traded physics for investments. What I really enjoyed about that first role and what kept me in the industry was the intellectual stimulation. You get to look at new things all the time. Whether you're analyzing individual securities, there are different ones to analyze, and then things change with them and you have to pay attention to all of that stuff. Then there's the alchemy of putting it all together. Then there's the intellectual adventure of working directly with a board, a committee, individuals on their own wealth plans and investments. That's a challenge too. That is fun.
- [12:09]
So when you came out, what was your first experience exploring that financial world?
- [12:16]
The role was at first primarily focused on public securities. That firm managed both fixed income and equity portfolios. We also at the time had a lot of very large pension clients. And the dichotomy of the different types of conversations you would have with these very, very different clients. Clientele was eye opening to me. And I at the time had a chief investment officer who was terrified of flying. And when that is your boss. And there's a need for folks to be in a different location faster than you can take the train to Arizona, they're sending the junior person sooner. And so coming up, that info curve was really hard, but very stimulating to me. At that age where you need to be able to go to a meeting and present as if you are the senior person on the investment team, how.
- [13:17]
Did it feel at a young age in front of maybe a corporate executive?
- [13:23]
Obviously there's a little imposter syndrome at that age. I'm sure what I was doing was faking it till I made it. And then I come, I think because of my upbringing as an old soul, for better or for worse, informed by all of the things that have happened and then the learning that you get on the job. And I think that allows me come across with, I think, a hefty amount of executive presence.
- [13:49]
What do you mean by executive presence?
- [13:51]
It's the ability to present with authority in a way that engenders trust and care. There are things that we do physically and with voices that can diminish the value of the very hard diligence work that you may have put into this memo that you're presenting to, say, an investment committee or a portfolio presentation to an individual of significant wealth. And so it's watching for those cues.
- [14:23]
What are some of your favorite tricks of the trade?
- [14:26]
Observation and direct Feedback, I think that combo is the most effective. So if I'm watching you present on a panel, if you use small body language, so you're hunched in the chair, you're slouched over, you're talking with your chin up, you're using closed body language, so you're holding your arms to your sides or together, your legs are crossed way too many times. My feedback for you is take up space, take up more space. And the smaller you are, the more space you need to take up because you're making the audience uncomfortable, even if you don't know that you are any other ones. I cannot stand up talk. So a lot of folks have a little lilt up at the end of every sentence. And so a lot of sentences then sound like questions like that, and they're not. And so if you want folks to trust you and take what you're saying authoritatively, can't have the uptalk. Got to salt that out of there.
- [15:23]
As you're talking to management teams traveling around analyzing companies, how did you decide whether to stay with that or to move onto the path of where you've taken it?
- [15:35]
Since after about five years there, I took a role at one of the large family offices in the Twin Cities area. So in Minnesota, there's an evolution that comes with moving from baseline roles in the industry towards the higher level allocator roles. There are some folks that I have managed that are going to be terrific analysts and associates forever. That's the right role for them. And things that differentiate individuals who are going to be a perfect analyst forever do include that presentation ability, that executive presence, and frankly that desire. Managing people is hard. Managing sideways to your executive leadership peers is work. Managing up to boards and committees isn't everyone's secret sauce.
- [16:30]
So there's sort of two aspects to succeeding in these environments. One is how are you dealing with the dynamics of the family or the client? And then the other is the investment side. What did you learn about what it took to be successful in working with your clients in those environments?
- [16:47]
Having a very high emotional quotient is extremely helpful. So in all situations where you're dealing with individuals, whether or not they are foundation board member, foundation committee member, an individual family, a couple, inevitably folks that you encounter are going to be the non financial individual in the room. And probably the most successful thing I ever did was attempt to jettison as much of the investment industry lingo as I possibly could because it was really clear to me that when the investment person comes in and starts talking, people get out their phones because they feel like this language, I don't understand this language. This is the part where I check my email because I'm not, not comfortable understanding what this means for my family. And so exiting that language and then inviting people to stay engaged is the secret sauce there.
- [17:48]
How did you figure out how to do that?
- [17:50]
When I was at the family office, I found myself on the side of the table as the non financial spouse in a number of meetings. And I began paying attention to sort of the vibe what's going on there. You can tell when someone stops listening, you can tell when someone feels excluded or disengaged. It's not just a feeling, you can see it in their body language. And so if you sit and mirror that body language, it informs you that it's time for you to make a shift in your presentation and your behavior in order to reengage this person. And the other thing that I would do is pre identify a series of questions that I thought that the non financial spouse should ask or might want to ask, but didn't feel like they had the words. And so by sitting on the side of the person who feels the least informed when talking about investments, I could then provide. I'm with you, I'm on your side. I'm going to ask that question that you're not going to ask because you don't think you know the language and you don't want to feel dumb. I'm going to ask that question.
- [19:02]
So if you transfer over to the investment side of those two disciplines, so reading people, understanding when people are listening, and then knowing what questions to ask if other people don't. How did you use that in your interviews with money managers?
- [19:18]
Constantly. I have a pretty good radar for when I'm being lied to. I have a high attention to detail to when someone is repeatedly answering a question that I did not ask, but something that they would prefer to answer instead and you can still pick it up in the body language, especially in person. It's also super helpful when you're establishing some of these long term relationships. Most folks in my seat, we're looking at a 10 year relationship with a manager. I want to like you, I want to want to spend time with you because we're going to be spending a lot of time together and if you don't spend a little of that time getting to know folks, understanding how they think, how they operate, that not only informs their investment thought process and how they treat their staff, how they approach their underlying assets, it's a really good sign of whether or not, you're going to be able to make a long term relationship work there.
- [20:17]
When you get past, let's say, the affinity portion of the assessment of a manager, what did you learn in those years about what you liked in your investing?
- [20:27]
That long term partnerships make it safe, that when things go wrong, we're the first call that is of an enormous amount of value. It also puts us in the position, especially as firms go through founder transitions, transitions with underlying staff. Maybe they weren't particularly good at hiring people early on, they get a little bit better at it, but then they forget how to do the succession planning piece or they just choose not to. Being able to go in and say to them like, hey look, we need to have a really serious conversation about how you just presented to my investment committee because you totally have egg on your face. And having the relationship there allows you to have that conversation in a more effective way where it's not necessarily confrontational. And generally what I find with those tough conversations is that this is a huge relief for the IR staff and the business development professionals is they know what the issues are. They would rather they have an allocator come in and be like, hey, I know what the issue is too. Can I have a conversation with this person who you've probably had this conversation with 16 times? Because it might be slightly more effective coming from a different lens.
- [21:38]
When you finished up your time there, what led you to taking over at the St. Paul Minnesota Foundation?
- [21:45]
So I had thought maybe I would go work in philanthropy at some point in my career. I was planning to work in the for profit space for the duration of having to put my four children through college. And so I was not looking. I had an ownership stake in the firm. A friend of mine who knew I would potentially be interested in working in philanthropy in the future showed me the job posting and was like, hey, isn't this your dream job that you thought about doing in the future? I was like, well yeah, hem to nod, but I'm a big believer and I tell my staff this all the time. You have to interview. It's a skill. So following my own advice, I submitted an application and I think 11 interviews later and a full day trip to the shrink and they offer you the job, you don't say no. Plus it's St. Paul Foundation. St. Paul and Minnesota foundation has been in my life and community and we've seen and benefited from the work of the organization over the many years. And so it's an honor to serve my community so directly. What is the foundation so St. Paul, Minnesota foundation is one of many community foundations in the state. We are the largest, we are statewide, which is a bit unique. The role of a community foundation is to we play a critical coalition building role with charitable capital where we aggregate charitable capital and then we help it get invested in the community. Investments can be things like grants, which are an investment that has a purely social return and no financial return. Investments can also be things like concessionary loans where you're looking for a modest financial return while also amplifying your social impact as an organization. To think of your traditional multi asset endowment portfolio, which we do manage on my team, where you're looking for the financial return in order to support that 5% spending policy while offsetting inflation over the long term. And we are also very intentional and active in that portfolio about ensuring that the investments and the managers that we're choosing there are not invested in ways that are in conflict with our grant making.
- [23:52]
So when you came in, what was in place in the investment side of the organization?
- [23:58]
Yeah, it was a little bit of a bumpy ride, Ted. So I came in after the investment team had essentially turned over 100% twice. When those kinds of things happen, there's relationship capital that is fundamentally broken and in need of fixing. And so upon my arrival, my highest priority was really building and fixing those relationships, internal external boards, committees, structure, and then getting to know the different committees and understanding sort of what their needs are was a really high priority for me because very substantially informs what your next steps are. As the head of the investment team, what I came into was functionally a very consultant driven model. And we had an opportunity to shift from that consultant driven model to a team led approach, which is what we've done. And as part of that we got to work through a whole series of governance and strategy steps with the committee that put us all on a better footing to make better decisions.
- [25:07]
How'd you go about that process of repair?
- [25:10]
Yeah, I liked the challenge. Folks asked me, oh my gosh, this is a total shift for you. You're in philanthropy instead of in private wealth. The skills are exactly the same because all of it is talking to the humanstead. Whether you're in a board member who tunes out when the investment person starts talking or you're the non financial spouse. Those are the same responses and I'm going to use the same toolbox to reengage both parties. I like to tell my team a lot of what our job is with investment committees is putting people who are fiduciaries in a Great position to make amazing strategy and governance decisions. How do you do that? Here you have these individuals, they're parachuting in four times a year for board meeting, four times a year for an investment committee meeting, from their regular and extremely busy lives. And how do you get their attention effectively? How do you keep their attention? How do you ensure that they feel safe and comfortable while they're getting informed enough to make a hard decision? And then you also need to pay attention to the dynamics of the committee or the board itself. So how do we put this group of people in the best position so that the dynamics are favorable to them successfully making decisions together? So from an internal and immediate board and committee perspective, my role was really to go on a mission of trust and grace. You're spending time one on one, you're being a keen observer of how folks are operating in the room, watching the committee have a very hard time on the decision making front because of the way the strategic allocation was put together. Very defined buckets, very narrow parameters on what counts as what and the complexity of that at the time too, there was also not a lot of connective tissue between the grant side of the house and the investment side of the House. And I think that's pretty common in philanthropy to see. Again, it gets back to people's discomfort. I think people are just naturally uncomfortable when the money people come in and start talking. Money and fear are like right next to each other and everyone's amygdala, apparently. And so my job is to change the language. So we're open and inclusive. We're inviting board members in to have these conversations. At the same time, when you're doing that, you're building that relationship capital, same way you would with a manager, same way you would with a colleague or a staff member. The approach that I took was very hands on and I don't think there would have been any other way to do it.
- [27:56]
Once you had some of those building blocks in place, what framework did you use to think about how you wanted to invest the capital?
- [28:05]
Well, so I said, we're going to rewrite the investment policy. We're going to also lean into what's the committee's highest and best use. If we're shifting to the staff driven model, as opposed to a consultant driven model, the committee's best work is what it does at the board level, which is strategy and governance. If we're driving outside the lines, this is when we're coming to you. If we're making a significant allocation shift, we're coming to you on that. We've thought through things like benchmark changes. We ended up shifting from the bucketed model to a roles based allocation, which is almost like a total portfolio approach. And so we've got our growth allocation, we have our diversifying assets and then we have a real assets allocation. I'm not going to go through and define all these things because everybody listening to this knows what this is. On the growth side though, because we're trying to support at 5% spending policy while offsetting inflation over time. That's always going to be the biggest chunk of this portfolio. It is a big risk budget. So 65% where we're seeking higher return, accepting a degree of higher risk, that's a huge component of that portfolio. The diversifying assets. We've got fixed income and hedge funds in there, real assets, obviously stuff you can touch. A little bit of an inflation offset there too. And what we were really intentional about in the policy language was incorporating degrees of freedom in the definition of what can land in the three categories, growth, diversifying and real assets. And the reason that's important is because it put us on a footing where we're never in position to have to be making a commitment to something that has a worse risk or return profile, particularly in the private markets, than a number of other things that are available to us. I'll give you an example of degrees of freedom. So we did an Ag credit deal a couple of years ago and what's great about it is from a return profile can totally fit into the growth bucket. From a risk management profile, it can fit in the diversifying category. And ultimately we landed it in the real assets bucket because the underlying collateral fits into the things you could touch.
- [30:24]
Within that growth bucket. How do you think about trading off the different types of investments that you can make?
- [30:30]
It's all a risk management exercise. We're not in a position to go all in on venture. We do need that steady stream. We don't have the flexibility of say a college endowment. So you've got to have enough liquidity built in there. And then obviously we're looking for that return. That bucket is probably 50, 50 in terms of liquid versus non liquid.
- [30:54]
When you're picking managers for the portfolio, what are your desired traits of a manager?
- [31:00]
Desired traits from an investment perspective is going to be largely driven by what we need. And so what I appreciate is when folks come in when they're not fundraising, it sets up a fundamentally non transactional relationship or can, obviously not always. I really appreciate folks that take the time to have the dialogue about how do we mutually assist each other. I know that you, the manager, need my fee income and you want your carry, but you have to make a pitch to me on where you fit in this portfolio. And there's two ways that can happen. It can happen on the manager's side or it can happen on our side. So really skilled folks will come in, meet with us and dialogue about what are we looking for, what is our budget for this stuff this year, understand enough about which slice of the portfolio they're in to ask really great questions that highlight how they are similar to complementary or could replace an existing incumbent position. If the manager is not skilled at asking those questions, they need to leave enough room for my staff and myself to be able to identify that about you.
- [32:12]
How do you go about the process of interviewing a manager that does fit with a need that you have?
- [32:19]
It's a very long term venture. Ideally, we're meeting you when you're not fundraising, so there's no pressure from a needing to close standpoint, a diligence process from when we meet you to when we make an investment decision at the fastest of six months.
- [32:37]
What does your full process include?
- [32:41]
A lot of conversations, a number of site visits. Spending time with the back end folks at the firm is really important to us. Validating their process, getting a very robust understanding if what they've described to us is actually what is happening. Thorough vetting of risk and return. And we learn a lot by interviewing not the top brass. You can learn a lot about a firm by how they treat the staff. And I understand there are some personalities in the industry out there that have interesting reputations in a number of different categories. They can have fabulous returns. But then in a case where you have a problematic behaving founder, we're less likely to be attracted to a firm like that than one where there's like a very clear process where you've got a founder, but there's a very explicitly identified next level team and they have a very clear process.
- [33:43]
How do you approach manager meetings and trying to tease out which managers you think are going to be great for the portfolio and which ones won't?
- [33:52]
Big question. I'll tell you about another fun strategy that I accidentally discovered bringing my daughter. So coming out of the pandemic, having been locked in the house for so many years, she demanded to come on a business trip. And I was speaking at a conference and doing a whole bunch of manager meetings here in New York. And I said to her, you can come, but my expectations are you successfully interpret business casual. You attend the conference and participate. You attend all the manager meetings. You need to ask at least one question in every meeting and I want to read out on what you learned after each meeting. She crushed it, had a great time, fell in love with New York. And what I found was that actually it was beneficial even for me, because the dynamic shifted in the room to have a young person there who folks clean up their language, which you expect a little bit of just as a baseline. But what was so interesting to me was the shift in language, the shift in how they talked about the strategy, the degree of care and interest in explaining it to a 17 year old revealed a lot about the nature of the people that I was meeting with, some of whom were incumbents, some of whom were potential new portfolio managers. And it just was such a unique experience to get them to present to a 17 year old. You learn things about the process that maybe aren't as obvious when they're blathering in investment. Speak at me.
- [35:41]
What's an example of something that you took out of that that you wouldn't have otherwise?
- [35:45]
In many cases you have an opportunity to ask a question that a manager has repeatedly ducked. And in three instances I found answers to things that I had been having a hard time getting an answer to. But. But because there was a teenager in the room, they didn't feel comfortable pushing aside the question. And especially if I re asked it after the first push, they'd look at my daughter and then they would answer.
- [36:11]
What'S an example of one of those?
- [36:13]
I had a question with one group that we never invested with around the risk management aspect of it that was blurry from our previous diligence. And at the end of the day, they just didn't have the right person in that role. This was a solvable problem. If you get that question that many times and it's a clear, you need a risk manager at a hedge fund, someone who oversees all of it and understands positioning and is willing to take traders to task. One, you need to have the right person. Two, you have to empower that person. And that had not happened. And we got a sense of that, but it did really come out, hey, we have the wrong person in this role and we have not effectively empowered that person.
- [36:53]
So when you stumble into a situation like bringing your 17 year old to a bunch of manager meetings and finding out, wow, this was effective in learning things you hadn't, how do you then try to take that and put it into your investment process because you're not going to be bringing your 17 year old around all day.
- [37:10]
Right. Not bringing her everywhere. That was just a brief two year period of time. The experience gets baked into the process by us ensuring that if I don't get an answer, there's two other folks on this relationship that are going to ask the same question, point out that it hasn't been answered. And it basically empowered us to be a lot bolder in terms of extracting information that we absolutely need and refusing to move ahead.
- [37:39]
What are some of the other innovative ways you've gone about interviewing managers?
- [37:43]
I make people very uncomfortable often by pointing out that I am the only woman in the room that can be effective. I don't know that it's always effective. I think holding people's feet to the fire on tough stuff like the conversation around the succession planning, those conversations where this is a safe venue for us to talk about hard things and really having managers understand that and then feeling empowered to actually tell me the hard things that they are trying not to tell me is 90% of the work.
- [38:18]
Where are we in, say, your portfolio of managers in the succession plan issue?
- [38:24]
It's an issue. There's a lot of co founders out there in their 60s and 70s. Some have done robust planning, many have not. A few have attempted some planning and then had to back up the truck and start over again a few times. And so we've seen it all, but I think it's an issue for the industry.
- [38:46]
How does that filter into your decision process with a manager you're invested in?
- [38:52]
Yeah, I mean, so we have spent the last several years spending a lot of time with a firm that we know really, really well, been involved with them in some capacity for probably 20 years. They went away on one direction, on the succession planning, didn't work out, went another way, didn't really work out, came back. And this point we're saying to them, we are with all the other LPs in needing to see real evidence that there is an actual plan. You folks are in your late 60s. We understand that everyone is amazingly healthy and super fit as one is in this industry these days. But accidents happen. You've made some changes, you've a largely fabulous team. Where's the rest of this picture coming together? And please start demonstrating that it is really coming together. And so as a part of that conversation about our ongoing commitments there, there was a fund that was winding down. We were interested in a new product that this firm spun up. We're pretty excited about it. Planning to commit brought one of the co founders to the investment committee to present. And candidly, it was a total fail. Got on. We had preceded this with the team. The committee has an 18 page memo. They are going to come with questions. Oh, and by the way, there are two other LPs that are on our committee that are also in this ecosystem. So you're performing for a bigger audience than you think you're performing for. And just rambled on and on and on and on for entire 20 minutes. People are like shifting and twitching, not picking up on any of the body language at all. Didn't pause for questions, didn't ask if there were any questions. And we finally ran out of time, sort of shut it down. Having pre prepped this, I was very irritated. And so I actually set up a phone call directly with the individual, another member of his team. And I said, hey, you know, I just want to be really clear, you embarrassed me in that meeting. You disrespected the committee's time, you disrespected the committee's questions, which is disrespect for their intelligence and your purpose there was really twofold. One, we talk about the new product, which you largely did not do. And two, give the three limited partners in that room some degree of comfort that you actually have a succession plan. Now they had brought in the chief investment officer with them, this new chief investment officer. And this individual spent the entire time stepping on any comment that person might have made. And I said, when you do that, zero LPs in the room believe that you have a succession plan. And I believe I also said you have two ears and one mouth for a reason. And let me help you figure out how to do this better and more effectively. And that's the benefit of the relationship, is you can have a hard conversation. He actually wrote me a thank you note and our relationship has been very strong. And it also sparked some internal conversations at the firm that have now yielded some really nice results.
- [41:59]
So in a situation like that, how do you decide whether to work with them or say, okay, it's been a great long relationship, but at this point in time, after 20 years, nothing's happening.
- [42:12]
The reason you decide to work through that situation is the next tier of leadership is excellent. Their overall investment process is actually even better than the original co founders. So I have an even higher degree of affinity for the firm because of that. And yet here what I'm saying to this individual is you have this reality right here. You're ruining it by tripping over yourself in this capacity.
- [42:44]
When you go through Your process, say a manager in your portfolio having lots of conversations. Things change. At some point in time, you have to make decisions about whether to exit. How have you gone about the ultimate decision process of whether to redeem from a manager?
- [43:01]
Terminations are a long time coming. Generally, folks get on a watch list. We had a situation over 23 and 24 where performance was poor. This is a public manager. And in interviewing the portfolio managers, there were, I think, three individuals who were listed as portfolio managers. We increasingly became convinced that this process was failing. The strategy that we had invested in had clearly shifted with the change in personnel over time as this firm had experienced retirements. And we got to a true loss of faith in the process. And it became more of a question around what's the timing for us to exit this manager?
- [43:45]
How do you do that with your.
- [43:47]
Team, Team and committee? So once folks are on a watch list, we're definitely lifting that up to the committee so they know they have plenty of Runway. We tell them where we are in the process and let them know on timing for that termination. I have a great team. I have a terrific number two. I have an individual who's followed me around and worked with me for 10 years, who's extremely well trained. We're making this decision as a group. By the time we get to the point of saying, all right, this is going to end. And the question is, just when everyone's there, it's not an argument.
- [44:25]
As you're developing these long term relationships with managers, how do you think about what they want from you?
- [44:32]
You mean fees in addition to fees?
- [44:36]
Ted Seides
Well, your fees are a little smaller.
- [44:38]
Shannon O'Leary
Than other people's fees.
- [44:39]
I know it is. Our fees are smaller. We're not that big at just about 2 billion. I think some of this is a little bit of a push and a pull. The economics are table stakes. And so when it comes to what do we add to managers, it's the conversations, the hard conversations that we've had with groups around succession planning or a founder who has been experiencing some unpredictable behavior while going through a life event. Those are the kinds of things that we enjoy tussling with. We work through all layers of the staff, not just through the senior team or the senior management. Sometimes you're going to get more out of a table full of 10 analysts and one level up from that. In the director type positions. There's been meetings where I've invited the chief investment officer of an organization to stop talking because he's being significantly less effective than I think. If I heard from the staff and being able to have the capital to do that without having folks walk away feeling offended, I think is really what we bring to tables. In that particular meeting where I invited someone to stop talking, we had such a great conversation after that. Everyone in that room participated. And there was one individual who on the way out snagged me and was like, that was the most fun meeting I've ever had with a limited partner. And I learned so much about what you're really asking when you're asking these questions. And we're not talking about like secret sauce type of stuff. It's just that I think a lot of folks don't naturally know how to answer these things. There's a communication void between, I think, the allocator community and the managers. The IR folks generally are pretty well aware of what that gap is. It's that they have a hard time I think sometimes solving for X with whoever the investment professionals are. Sometimes it just takes a really long, very uncomfortably hot meeting in order to sort of suss some of that stuff out. And both sides need to communicate more honestly. So I bump into allocators who do not provide managers with any information of any kind. They don't want to say what they're looking for this year. They don't want to tell a manager that your category is a priority or not a priority this year. They're not interested in indicating what the pacing schedule looks like and what the ticket sizes are going to be. Hugely helpful for managers to know that information. The one that blows my mind is folks that are unwilling to talk about what's in here with a manager to help the manager help you effectively identify who's complementary, who's a potential replacement.
- [47:22]
How have you thought about the advantages and disadvantages of your size at around $2 billion in this market?
- [47:30]
Well, disadvantage from the beginning was access. We just were not on anybody's list to be approached. And a lot of managers are taking a very intentional look at what their clientele base looks like. If you are a manager and you've got 50% of your AUM coming through the consultant channel and one of those consultants gets to be an outside proportion and then you end up on the exiting list, you put yourself at risk of losing a significant amount of AUM as a part of understanding, oh, here's what the pension community is doing. Here's how these mixes of between endowments and foundations, pensions, family office, ria, that alchemy, they're becoming very intentional about it, which I think is terrific. And partly as some of These other pieces are more volatile. They're looking to add endowment and foundation, which tends to be sticky, and particularly organizations that have an in house team because then you're building the relationship directly with the client as opposed to going through an intermediary. So I think that piece has benefited us as some of these seasoned managers are being very careful about that.
- [48:50]
How do you think about building a brand for the foundation? Modest size foundation in a competitive world.
- [48:58]
For talent, it's the relationship piece. And frankly, having nonprofits and squeaky wheels like myself on your cap table is a little bit of reputation laundering. So our willingness to have those hard conversations and to be intentional in saying to managers, we're going to have a really hard conversation with you, I might talk about it on a podcast. I'm not using your name. You have anonymity in this process and I want you to know that because then you feel safe having a tough conversation with me. And so we have folks that have come in and said, hey, we're a capacity constrained closed manager. We heard about this conversation. Shannon heard with this other person in New York. Can we have that conversation? So I think there's some of this and it's that reputational benefit and then again the willingness to just say exactly what I think.
- [49:53]
As you develop your relationships with managers from these deeper, more authentic conversations, I'm curious how you leverage managers to find other investment ideas.
- [50:05]
It's great, honestly, especially if you're looking for stuff that's niche and a little bit different, off the standard radar in the industry. We spend a lot of time intentionally attending conferences for emerging managers. So folks that are on there, whatever the category, venture, private equity to some extent in the credit side, getting those ideas bouncing around in the community is helpful. And then there are a handful of allocators that I'm really well networked with that pretty much only look at new and unique. And so that's a very helpful network for us to tab. We're going to do some of the standard seasoned managers that are going to be, in a lot of cases, core positions in most portfolios, we'll have some of that. And I think that's a fine strategy to have, especially in some of the slices of the portfolio where we're still in build mode. You're going to have an anchor tenant in our hedge fund portfolio. We'll have an anchor tenant in our relatively new private credit portfolio. Same thing is true on the venture side. And then as our connections and network broadens, then we're going to bring in those satellite positions and then potentially consider replacing incumbents over time.
- [51:26]
I'd love to get your thoughts on some of the more topical issues of the day. Private markets, commitments and pacing is on everyone's mind. How are you thinking about it?
- [51:37]
I thought that your middle of January 2025 newsletter on this was extremely accurate. Those numbers. For us, this was a strange period of time where you had basically two years, almost no shift in Marks portfolio is not repricing. There were no distributions. But weirdly we also experienced a dearth of capital calls and so stayed on our commitment pacing schedule in particularly the growth part of the portfolio. Only to have a big cliff of uncalled commitments that now we're sizing down. Obviously our ticket size is going to be smaller in 2025 and probably 2026 as well. I don't know that this is coming back. The good old days of the 10 years where the money was free. The allocators were like hey, number go up, big denominator. And all of the managers are like money is free. I can fundraise until the cows come home. And it's not that challenging. And I just think until we resolve what still looks to me like a standoff between buyers and sellers, it's not going to move. And then you have on top of it the structural issue of the allocators. In a lot of case we're in decent shape but we're having to shave back those commitment sizes.
- [52:53]
How do you think it plays out?
- [52:55]
I think the hope of the industry is that interest rates come way down. I don't know that that's going to be the reality that gets experienced. And at a certain point you're going to have to create liquidity and it may mean that you're going to see marks coming down. It may mean that you see folks willing to show their hand on what the actual discount rate is.
- [53:18]
Have you thought about the challenges in the public markets?
- [53:22]
You know, can we talk about benchmarks, Ted? Because benchmark murder for allocators is real. Particularly if you have a public market benchmark with the spread for your non liquid assets, which we do. So here you have your private market assets not moving. And because we've got this enormous concentration in these large technology securities in the public markets that impacts all of the indices. It's not just the US indices. It's worked its way all the way through acwi, imi, we spent a lot of time thinking about it. The committee's been great in terms of their ability to understand the repercussions and potentially make Some adjustments to those benchmarks. Where it's really challenging is conversations with individuals. So we have donors that have donor advised funds. We also manage assets for more than 200 nonprofits. We're effectively their outsourced CIO. And not all of those folks are necessarily equipped to go back and talk about the nuances of oh, a massive. There's 50% fewer public companies now than there were 20 years ago. And this thing called Mag 7 that is not something that a nonprofit CFO is generally super comfortable talking about with their board. And so it's us providing different education skills in this timeframe. And man, we got to be in the mean reversion business here soon.
- [55:07]
So if you've been at the foundation for a while, built out this portfolio of managers you have relationships with, what do you get excited about over the next couple years as you've built up your relationship capital with these managers?
- [55:22]
I think that we're going to continue to get access to capacity constrained managers who are actively seeking us out. And one of the things that we're talking about with our committee is a slight shift in how we do the decision making process. Because what we're finding is those capacity constrained situations can close very quickly and we need to be more nimble. And so it's us doing the diligence on the team side of pre identifying a few of those folks when they're not open, doing the diligence as much as we can beforehand and then being ready to act. And so one of the things that we're bringing through our committee is a shift from affirmative consent to negative consent.
- [56:11]
What is it about the access to closed managers today that you feel like you're going to have a better opportunity to invest in that you may not have in the past.
- [56:21]
We did not have any access to constrained managers in 2019. I think that reputation and the team is a real testament towards our ability to get in. Folks are constrained for a reason. Generally it's performance related and that is of a benefit to the foundation. And as we continue to serve the community, be here as an institution that's available to provide capital in a variety of different ways. It's not a popular opinion that I would say to say like a board or a committee, but I would love some volatility. I think there are a number of managers in the portfolio where you've had a doldrums 15 years where money was basically free, fundraising was super easy. I'm a little curious if those marks are legitimate. And then we've also seen volatility on the public market side. You know, 2022, fixed income and public equity down in the same year. Anybody with a private book looks like a genius, but really you're just volatility laundering. Is that what Cliff says? Flip side of that is 23 and 24, where you have really concentrated markets. AI is a little bubblicious. We started to see a little bit of the potential fall that can happen if it turns out that the thesis of AI is that you have to spend $180 billion on chips every 18 months. If that's not correct, maybe some of that starts to rotate. That could potentially cause additional volatility on the public market side. And then fun things might happen in several categories of the portfolio, particularly the hedge fund component of the portfolio. You've got some stability that's baked in in a couple of our niche year strategies and then it'd just be great to have more of an opportunity set available to us.
- [58:13]
Shannon, I want to make sure I get a chance to ask you a couple fun closing questions. What's your favorite hobby or activity outside of work and family?
- [58:21]
Eating. I'm very food motivated, Ted. I love to try new things. I love to eat. New York is great. Love coming here. It's very hard to go wrong. Have a network of people that feed me new restaurants that I can then try out when I'm here. I love to cook the food. I love to eat the food. And then I get a lot of exercise so that I can continue eating all the food.
- [58:45]
What was your first paid job?
- [58:48]
Mowing lawns. I learned that it is hard for a person who's 5 foot 2 to get a early 1990s all metal lawnmower in and out of a suburban. Thus my interest in physics. Right. I learned a lot about leverage.
- [59:09]
What's your biggest pet peeve?
- [59:11]
So many. What to choose? My latest pet peeve is the inbound emails that are now calendar appointments of managers attempting to have me trying to click through really fast and then inadvertently responding yes to a meeting that I absolutely did not agree to.
- [59:33]
That's a good one. How's your life turned out differently from how you expected it to?
- [59:39]
No one who knew me when I was younger would have ever expected me to have four kids. But I do and I love them all.
- [59:50]
Why is that?
- [59:53]
I think I was voted most likely to wear a suit in a senior class survey and I just was not at that age focused on family building just wasn't part of my worldview of what was to come for myself.
- [60:08]
What's a mystery that you wonder about.
- [60:11]
So having grown up with only sisters, I have three boys and one girl. I find teenage boys endlessly fascinating. It's just wild to watch their brains work. It would never occur to me, Ted, that if I were surfing behind a Jet Ski when I come off the rope to ask someone from the shore to peg me with a full NFL sized football to see if I could catch it. But that is in fact a real thing that has happened in my many adventures with teenage boys. It's like watching a live fire science experiment go on over a three year period in your own home. Anyway, very fascinating to me having never had any experience with it.
- [61:02]
All right, Shannon, last one.
- [61:03]
Ted Seides
If the next five years are a.
- [61:05]
Shannon O'Leary
Chapter in your life, what's that chapter going to be about?
- [61:08]
This five year period of time is kid launch on all cylinders. So I have two kids in college right now. I have another one who is a junior in high school. And so it'll be fascinating to support them and encourage them and watch them lean into figuring out how to be adults in the real world.
- [61:33]
And how about professionally?
- [61:35]
This is going to be a fascinating time. At the foundation, our CEO just announced his retirement, so we'll be doing that CEO search. At the same time we have the grant redesign process combined with this more local investment capital program that we're working on. And I think the combination of this work leading into that new strategic plan with a new CEO could be really powerful for the community and the state.
- [62:03]
Well Shannon, thanks so much for sharing your incredible insights about people.
- [62:08]
Thanks for having me, Ted.
- [62:10]
Ted Seides
Thanks for listening to the show. To learn more, hop on our website@capitalallocators.com where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content including podcast, transcripts, my investment portfolio, and a lot more. Have a good one and see you next time.