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Educational Alpha
S2: Conversation with Jennifer Choi, CEO, Institutional Limited Partners Association
00:40:18
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- [00:05]
Bill Kelly
Welcome to Educational Alpha. I'm Bill Kelly, CEO of CHI association and your host. Bringing you on the ground conversations with business leaders, educators and industry colleagues from around the globe. Educational Alpha is sponsored by iCapital, the financial technology company with a mission to power the world's alternative investment marketplace. Part innovator, part educator and part navigator of the alternatives industry, iCapital offers intuitive, scalable digital solutions that have transformed how private market and hedge fund investments are bought and sold. With iCapital, financial advisors, wealth managers and asset managers around the world now have access to everything they need to deliver the return and diversification potential of alternatives to high net worth investors. To learn more, visit icapital.com in this.
- [01:03]
Jennifer Choi
Episode, host Bill Kelly welcomes Jennifer Choi, CEO of ILPA Institutional Limited Partners association, to discuss the dynamic landscape of private equity, its governance and the evolving role of limited partners. Jennifer shares insights from her extensive career, starting with consulting and private equity emerging markets, to leading ilpa. This conversation provides a deep dive into the mechanisms driving change in private equity and the critical role LPs play in ensuring accountability and governance. Listen in.
- [01:42]
Bill Kelly
Jen Choi welcome to Educational Alpha.
- [01:44]
Jennifer Choi
Thanks Bill. Great to be with you.
- [01:46]
Bill Kelly
I'm really looking forward to this conversation where Kindred spirits in so many ways and I want to talk about your background in a moment, but maybe to slightly preempt that, two interesting observations I took note of just as I quickly scan your LinkedIn profile. One is that OPA started on or about the exact same date as Kaya in 2002. So we share a common history in terms of duration. I think that's there's something to be said for that. But then I think your time at OPA in various roles, most notably and most importantly now as a CEO kind of runs parallel to mine. I'm stepping down as you know the end of this year and it'll be 11 years and I started early 2014 and it looks like you came on the scene just a few months behind me, but your expiration date extends far beyond mine and I think the industry and ILPA are all the better for that. So maybe with that maybe clumsy introduction of some of your background, maybe I'll turn it over to you and talk a little bit about your history because you've been in the association space but curriculum has been in your DNA, so some of your background would be a great place to start.
- [02:47]
Jennifer Choi
Sure. And just big picture, I've been in and around the industry more broadly since around 2002. Started off as a consultant working for the GPS and doing A lot of work on pre loi, kind of rapid fire due diligence. When the deal market was really hot, really frothy, everything was going to auction. So was doing a lot of the research and the advisory work leading up to maybe submitting a bid or sense checking a bid that was going in. And that was my first exposure to the industry. I never planned to be in private equity when I was 8 years old. I didn't sit around drawing pictures of myself being the CEO of an association, much less a private equity association. It's been a happy accident and a journey, probably a little bit like yourself and some of your listeners. I know when I talked to my members at OPA and we asked them, how did you become an lp? Most of them had never even heard of private equity when they were in school and certainly had not heard about LP as a career. So after I left consulting, I ended up in a startup association focused on private equity in emerging markets. This was back in around 2006, which was a really interesting time because emerging markets were heating up. Everything was about the brics. For those of us who have more gray hair, we will remember brics. And then for a while it was bricsa, Brazil, Russia, India, China and South Africa. And there was growing interest in the maturation of private capital in those markets. A lot of it was development capital coupled with domestic capital, but trying to catalyze international private investors into these growing economies. And that association had both LPs and GPs in it. And so I got to know a lot of the LPs, the endowments, the pensions, the development finance institutions quite well as part of that world. And I also got to know ILPA. ILPA kind of landed on my radar in 2007. Ish. 2006, 2007. So it was relatively young. They had their first full time executive director who I became good friends with. And just a collaborative partnership evolved over the years. I got to know many of ILPA's board members in that span of time. And there came a point after lots of years of getting to know one another, that those board members began saying to me, hey Jen, what's it going to take for you to come and work for the LPs? And so we eventually found our way to a role that made a lot of sense because ILPA around 10 years ago was making a pivot. Historically, since its founding, ILPA was really focused on education and speaking to the members, not necessarily for the members, not engaging a lot with policymakers or trying to tell the GPS what to do. Or trying to engage with GPS in an ongoing dialogue. And around 10 years ago, there was a conscious decision made that we need to be more open, we need to be more inclusive, engaging. And that includes with policymakers, that includes with regulators like the sec. So I was part of that evolution and over the last 10 years have had a really exciting front row seat to some amazing changes in the industry.
- [05:54]
Bill Kelly
And we're going to cover a lot of those in the coming 20, 25 minutes. But before we leave, the founding principles. So all associations, caia, ilpa, mpa, they're born out of necessity. And I may or may not have this right. ILPA is now very much of a global organization. And you just have to look at where you've opened offices recently. But was it born out of Canada and it was maybe the Maple 8 or the Canadian LP saying, hey, we need to kind of unionize around common practices?
- [06:21]
Jennifer Choi
No, that was an interesting and happy accident. So it was a coalition initially of primarily US public and private pensions, with some Canadian pensions involved. This goes back before 2002. So in the 90s there was a group that would come together in airport lounges or in the hallways at agms. They would kind of host these small dinners. This is how all associations start, right? You have a few really engaged, passionate people who keep wanting to spend time together, comparing notes about how to make the industry work better. And over time it institutionalizes and it professionalizes. So we were actually incorporated in California because the chair at the time, Rick Hayes, was the head of private equity at CalPERS. But our first staff came out of OMERS in Ontario because they happened to have somebody on their team who was transitioning to more of a halftime for more work life balance was transitioning, had a little bit of capacity. And so for a period of time was our interim executive director until we hired our first full time executive director, I think around 2006 or so. So even though I think we might have been perceived as a Canadian organization, that was just a happy accident. A team grew up around that executive director in the early years, but we were never a Canadian organization.
- [07:44]
Bill Kelly
Wow, interesting. Okay, so I've already learned something. And then maybe just as you look at those humble beginnings and fast forward to today, maybe just a thumbnail on your size and reach in terms of number of members, where they're geographically located and is it just only lp' Are there GPS and service providers? What's the makeup look like?
- [08:04]
Jennifer Choi
We're just LPs. That's been a really critical part of the charter all along. We always reference the line for LPs by LPs, it's really explicit in the mission. But today, about 620 institutions in around 50 countries, the bulk of which are North American. But we've seen a lot of growth over the last 10 years from Europe and the Middle east and Asia and also in Latin America. So definitely have a footprint in global markets around, around the world. And the institutional mix has also evolved quite a bit. Where we had started off 20 plus years ago as predominantly pensions, now we have a lot of endowments, foundations, insurance companies, family offices, sovereign funds. So the full breadth, the full spectrum, doesn't make my job or my colleagues jobs any easier. Trying to navigate a pretty heterogeneous spectrum of views on a lot of issues.
- [08:56]
Bill Kelly
And it used to be maybe pre Covid the sign of being in a market was to establish a bricks and mortar beachhead, an office less necessary today. But you did recently open an office in London, I believe.
- [09:08]
Jennifer Choi
We did. We actually had boots on the ground, the proverbial boots on the ground. Starting in 2023, we had a couple of folks from our Toronto office seconded to our UK entity and we just secured a permanent head of Europe. Art Van Dyke just started with us October 1st. He was with us this week in Montreal for our board meeting and meetings with members. But we're really excited to have him on the team. And you're right, the model's changed. We can operate from anywhere. You and I were just talking about how our office is somewhere 37,000ft in the sky on a lot of days. However, I will tell you, members value nothing more than having the opportunity to sit across the table from us or from their colleagues and to really talk about what are you seeing in the market, what's hard, what's exciting, what are your ideas about how we can make things work better for everybody. I know that Kaya does a lot of this work getting out into the field and bringing members together and also just sitting down with them. And that was a big reason why we felt it was important to make the investment in the bricks and mortar presence, as you put it.
- [10:14]
Bill Kelly
And I think if you can find a way of deputizing your members, it's a better value proposition for everybody. Because I suspect, just like Kaya, in terms of actual headcount of people that can go out there and talk the talk, walk the walk, it's probably pretty slim in opa. It certainly is inside of Kaya. So the extension has got to be not only established in the office, but establishing a coherent structure of LPs in these precincts around the world. Critically important.
- [10:41]
Jennifer Choi
That's right. We've grown a lot over the last year. So we're about 37 people today spread across Toronto, D.C. now London. And then like a lot of organizations, we have a few people who operate from cities outside of those three headquarter offices. But it's about getting the members activated and making sure that we understand how they are approaching different issues, but also that they have an opportunity to really get aligned with some of those core messages that we're trying to promulgate and amplify out in the marketplace.
- [11:13]
Bill Kelly
That's great. So I think we're done with the preliminaries and a great job in leading an organization I just have so much respect for. So I saw again courtesy of LinkedIn and social media is such a wonderful tool that I did not have and vast majority of my career. And it's very helpful for this platform too, because it allows me to say, well, what's Jen been up to? The short answer is a lot, but it seemed like if I read right, your 2024 conference is barely in the rearview mirror. And maybe without quoting anybody, what are some of the challenges and opportunities on the minds of your member base?
- [11:48]
Jennifer Choi
Well, in the conference bill that you're referencing is our legal conference, which is something we started doing about six years ago here in dc. It's one of four big events that we hold around the world, and it's the only event that's just for the legal professionals that sit inside of the LP organization. So think the general counsel for a pension fund. Okay, Right. Or the legal person who reviews all the fund documents inside of a foundation. Those are the types of folks that we bring together. So a lot of the conversation is around what's changing in the fund terms. What is market? Often we have to listen to how the market is defined for us by council maybe negotiating on the other side. But what's really changing, and I would call it out that we're seeing more transparency, more embrace of providing investors, providing LPs with things like the ILPA reporting template on fees and expenses. So that's a lot less of a battle than it might have been eight years ago. When it comes to some other things, we're not seeing wholesale improvements to the extent that I would say let's cry victory, we're really getting to stronger alignment overall in the industry. I will tell you that the LPs, the council who were in the room are still very focused on things like fiduciary duty and key person. And the backdrop for a lot of these conversations is the fact that at this particular point in the cycle, we've got a lot of contracts that were negotiated during boom times where fundraising was meteoric. Right. Successor funds were growing by leaps and bounds. Funds were getting closed inside a very short period of time, shortest period of time perhaps in history, in our collective memory. And so there were probably some things agreed to that you wouldn't have agreed to if you had the luxury of more time to be more deliberate. And we're going to see how that plays out in a much more challenging market, not just from a fundraising perspective, but from a deal making perspective. And the exits may not come as freely, as quickly, as easily as they did in the past. And what is that going to mean for GPs and how they manage their business? And how does the contract factor in as far as the governance challenges, the conflicts? LPs have a fiduciary duty and so they want to know that the contracts support them in executing on that. So I think we're in for some really interesting times.
- [14:06]
Bill Kelly
Yeah, I'm going to come back to nav based lending as an example because opa's been very vocal on that. But before I lead the legal counsel inside of these LPs, not an unimportant role. And when you think about trying to affect change, I assume they're probably a key point of contact. And we did sign on to your amicus brief for the private fund advisor role. And it's interesting if you look at the comment letters and the one that you folks wrote was excellent. It seemed like every One of the LPs wrote a comment letter and they were generally in support of, and I think they wanted to carve out for maybe side letters and they're very clear about what worked and what didn't work. But I would say invariably every one of them pointed to the OPA letter. So I would assume that they represent, given the pace of change and innovation, that having that representation amongst the LP membership is a pretty important one.
- [14:57]
Jennifer Choi
It greases the wheels, let's say, in getting to better alignment of positioning across, like I said earlier, a large and diverse membership. Because the legal folks inside of an LP organization are connected into lots of different conversations. And so when it comes to something like submitting comment letters to the sec, they're a critical constituency and they can be a critical ally early on. I don't want your listeners to think we only engage with the legal folks, but we have found them to be really Thoughtful, really enthusiastic about operating as a community of practice and helpful in how we support all of the other individual professionals that sit within our member institutions.
- [15:42]
Bill Kelly
And I've seen how you folks role in the primary contact is the cio, full stop. And that's the ones who are calling the shots ultimately. But I think the fact that you're finding ways of engaging across that value chain is critically important. Important. So I just want to stay not so much with the private fund advisory rule, but maybe tied to that democratization. And if you think about Fund X +1, pick your GP and fill in the blank. Fund X +1 is going to have more and more retail assets in it. And I've used the example of kkr. I think it was kkr, Hamilton Lane, it doesn't matter. Both firms I have a lot of respect for, but their most recent fund offering was just like so many. The fund was registered in the Cayman Islands and it had a feeder fund on the blockchain where the minimum to get into the feeder fund in the blockchain was $20,000 to get into the Cayman base fund, 5 million. So institution into the Cayman fund, especially if it's tax exempt qualified investor in for 20,000. The reference NAV is the same for both. So I think to say that it's Abu Dhabi Investment Authority in Yale and they're smart investors and we can call it a day there. That may have been true in fund X minus 1, but as we look forward, the fact that we have more and more diverse investors and individual investors coming in with the right education net, I think it's a good thing. We'll see. But to not think we need more regulation, more transparency, maybe the highest definition of fiduciary duty, more transparency and fees and list goes on and on. And that's what interests me so much about what you're trying to accomplish because the industry's changing and we have to adapt and evolve along with it.
- [17:26]
Jennifer Choi
That's exactly right, Bill. And we know without naming any particular platforms, we know there are a lot of GPs who've been very successful at building out the platforms to pursue and absorb capital coming in from these channels. We know that there are more avenues for 40 ACT funds, for example, to play in this space than there were when I got started. When you got started. But the regulation of private funds hasn't necessarily anticipated any of this. I mean the private fund advisors was the most meaningful step that the SEC has taken since Dodd Frank went into effect in 2012. And we saw what happened with the Fifth Circuit's decision to ultimately vacate that rule. So I think right now we're in a place, and maybe we'll dig into this a little bit more, but we're in a place where I think institutional LPs, the kind of folks that ILPA represents, see this coming. They see this wall of capital that wants access, they see the GPS calibrating to figure out how to access and the idea that these two different pools of capital and to your point, all sophistication, right, There's a spectrum, but there's probably a step change between these two cohorts in very generic terms. And right now the industry is doing everything on a mostly voluntary basis when it comes to disclosures, when it comes to how fiduciary duty is codified in the contract where we're operating to the lowest common denominator allowed under Delaware law and some of these things. And so are we really ready to be successful in opening the floodgates to this capital? And if there's a misstep, if we move too fast and we haven't thought about some of these things, it stands to have really long reaching ramifications for the industry. It's never good to be on the front page. Never good. And we have to get out ahead of these things.
- [19:20]
Bill Kelly
No, we do. And particularly I think it's a double edged sword in some degree because innovation and capital formation is happening in the private markets and there's plenty of data to prove that thesis. So then how do you and I, managing our own 401k plan, get access to that? And therein lies the rub. And it's going to require more sensible regulation, more sensible legislation, and greater cooperation between the investors and the institutions. And it's going to be ILPA representing the individuals. And I don't know how, if at all, your model evolves when you've got an RIA consortium are the asset owners now? And that's probably going to really come into full speed post your tenure, because I think that's going to happen slowly than all at once. But we do have to recognize the landscape is changing and it's in some cases changing very, very dramatically. And the gps, they're very, very smart, they ply their trade very, very well and they recognize more than anybody that if you look at the AUM pie globally, the individual now is slightly dominant to the institution and that trend is not changing and we've got to adapt to that.
- [20:27]
Jennifer Choi
But I think this is where organizations like CAIA and ILPA play a really critical role. And that is we have education that is suited to the most sophisticated, Most experienced institutional LPs, some of the biggest sovereigns, the savviest endowments, the largest and most successful public pensions. We've built those resources. Within all of that, there are kernels that we need to figure out. How do we get those into the hands of some of these $20,000 investors that are coming in today? Does that go through the rra? Does that go through aggregators? How are those ultimate investors accessing information about what they should be looking for? And it's challenging, right? Because if you've got education in hand, you need to be able to do something with it. But if you're a $20,000 investor, well, are you picking managers? No. You're probably just getting access through a platform. Are you negotiating an lpa? No. You're more focused on the terms that you're getting from whatever product you're buying. So it's education, but we have to think about it differently. It's education to what end?
- [21:35]
Bill Kelly
Yeah, and I think the value chain between asset owner and GP in the institutional space is still very tight. And sometimes it was direct, there was no intermediary, sometimes a pension consultant. And now, as you so rightfully point out, you've got the individual investor and the gp and there's so many movements and plots, the platforms, wirehouses, RIAs. The RIA has to go someplace else to get the product. And so it makes your and mine and maybe soon John Bowman's role all the more difficult. Because where do we insert ourselves? We don't have the budget to do it all. And that's why I think we need to have some of these organizations collectively come to us or accept our phone call. And many of them do and figure out how can we make this better? Because I think the time to figure out is now, as this democratization is warming up. If this beast continues to grow four or five heads, and then we're trying to retroactively professionalize and retroactively trying to bring education in. I don't know. I think the ship has sailed to some degree.
- [22:35]
Jennifer Choi
I think you're absolutely right.
- [22:37]
Bill Kelly
So it's up to you. And I'm going to deputize Bowman Jen, to keep on keeping on. So I want to move toward an example of NAV based lending. And you had a couple of, I think, best practices around this and it was interesting. And this is what I love about this podcast. It's a lot of discovery. And I found a new association out of London called the Loan Market Association. And Scott McMunn is the executive director. Didn't know anything about them, but one of our members made the introduction and I learned so much from him. And he described the area of NAV based lending and subscription lines as the fund financing market. And it was a very interesting conversation. I'll make this quick and I would love to get your perspective on it. And if you look at the secondary market coming out of the gfc, that might have been a fund financing market as well because LP was looking to get liquidity outside the confines of the normal drawdown fund. But it was a place where you went where the bid ask spreads were wide and it was more of a distressed sale. But then coming out of the gfc, the secondary market has become a pretty active place to meet liquidity needs. And then along comes NAV based lending and there was some maybe that be super critical on it. It's engineering returns through financial mechanics as opposed to creating returns economically. But where is it ever written that a portfolio company should be in a portfolio 7 to 10 years and at the end of 10 years we're done when maybe the company still has more value to be created. And I think as we got to fix this shut window in the M and A space, we've had so much transaction value come in. And funny thing about LPs they have pensioners that want to get paid and you need to raise cash and the DPIs have been negative. So all that being said, I think some of this LP was maybe born very quickly out of necessity and it caused some angst between LP and gp. But I wonder if these types of funding mechanisms, once they reach their cruising altitude, are they here to stay because it's creating liquidity in maybe an evergreen structure if we move from the 10 year drawdown. So there's a lot there. You've thought about this a lot. And maybe you could just start out with your views on best practices around NAV based lending and maybe your views about where NAV based lending is five years from now when we fix the plumbing in the private equity space.
- [24:58]
Jennifer Choi
Yeah, it's a great question. Is this going to become a mainstream feature or is this one of those products that sort of had its time and when you start to see rates move as they are now, is something else going to come into play to displace NAV lending? I don't know. The fund finance market. We've over the years collaborated with the Fund Finance association, which represents a lot of the lenders and sponsors that are operating that space and that collaboration Started to run subscription lines of credit several years ago when we were really trying to get smart around what are these tools and are they being used responsibly? And what kind of best practices can we establish here with NAV financing? It's kind of come up in the last few years as a tool primarily for offensive use cases, portfolio support. Right. You're at the tail of the investment period, but you have a need for some follow on capital to finance an acquisition, for example. And maybe it was a more attractive rate than what you're able to get when interest rates are pretty high from the more conventional sources of financing. Where I think the amber light on the hypothetical ILPA dashboard started to flash was when a couple of things were happening. One, we were hearing that LPs didn't know these facilities were in place even though they were secured by the assets in the fund, one or more assets in the fund, and maybe assets across multiple funds, which really the amber light maybe starts to turn a little bit more red at that point. And so they weren't aware that these were in place. It wasn't sort of being proactively discussed with the lpac. It wasn't being disclosed. And then a couple of years ago we started to hear about the increasing utilization of these facilities to provide distributions in the absence of dpi, sometimes tied with a fundraise. So the compulsion to demonstrate results because you're going back out to those same LPs and you want to raise the next fund and you want them to re up, and you need to show track record to your current LPs to your prospective LPs, but you also need to give cash back. And I think those are really the two things that sparked for us the need to wrap our arms around what's going on, what's the state of the market, what are the best practices here? And to give you the too long didn't read version, where we landed was the contracts. The LPAs say nothing about this. There's a borrowing section on every single one of these agreements. But NAV facilities weren't a phenomenon when the contracts were being negotiated. So they say nothing about it, neither for nor against nor any kind of guardrails around. What do the LPs need to know? How do they need to be consulted? So we wanted to start there. And where we landed was if the document is silent, start with your LPAC gps, take it to your lpac, tell them why you want to do this, why is this the best option versus other sources of financing that you might pursue and get them comfortable with it, let them ask questions, get them to approve the use of these facilities and be more transparent about the fact that you're using them and why. I think LPs understand that you're going to have offensive use cases and this might in fact be the best avenue. Just be open about it. Let's not try to hide the ball here. So on nav facilities, I think it very well could become a feature in the market. In part, this kind of ties to your comment around the fun life seven to 10 years. Who says the clock stops at 10 years? Well, continuation vehicles have absolutely become a mainstream feature of this market, 100%. The fact that you've got GPS now raising funds specifically designed to invest into CVS, into single asset CVs of other GPs, and you have LPs now looking at this as an interesting alternative to traditional co invest that they might want to be able to if they want to go more deeply into the middle market. All signs point to the fact that there's something there with the continuation vehicles. So I think we're very interested to see how that market develops. We're hopeful that some of the best practices we've put out around continuation vehicles, that those remain top of mind and that the GPs and the LPs both are utilizing those.
- [29:06]
Bill Kelly
And I'm curious in terms of the course of your travels and your client base and absent any specific attribution, but I've always felt, Jen, that, well, it might be a difficult time if you're all in. In whatever your allocation is in the private markets and you're worried about cash flow and negative DPIs going back several years and maybe going forward negative a couple of years. But if you were never in the private markets or underinvested in the private markets, I'm thinking this could be a wonderful time to come in. Because as many different entry points, liquidity never goes away. It gets repriced and in times of stress it gets priced down. And there is an opportunity potentially to be more of a price maker than taker. If you're coming in, do you see a consensus about any of your LPs that have been underweight at the private markets? And looking at this segment of the market, while it's stressful for somebody that's maybe fully invested, is there another side of that coin that would you view not so much this vintage year? Because I don't know if that still means the same thing, but there's a lot of merchandise on sale at this vintage year and your views on access points in 2024.
- [30:12]
Jennifer Choi
It's a great observation, Bill, that there are more ways to come into this market than there were a decade ago or two decades ago. Absolutely. And on a lot of the secondary transactions we're hearing at least about pricing that's very close to par. So these are not distressed sales. So if you're coming in as a buyer, that's not to say you're going to get a massive discount relative to the value that the seller attaches to it. But the fact is that you've got more high quality assets that you can now tap into through the secondaries market, which is much larger, more robust, mature, sophisticated, accessible than it was over the last couple of decades. So that is certainly attractive. And the fact that there's just such a broad spectrum, broad variety of products in different ways to play the private markets. So I don't know about the pricing piece, Phil. I'm not sure this is the cheapest time to come in, but there's certainly lots of different ways you can do it.
- [31:14]
Bill Kelly
Yeah, no, I agree. And I think it was Bain, I think, put out a report where there's $3 trillion of value locked in this portfolio across 26,000 companies. And I can say with conviction they're not all going to clear the market at the current nav. Some may do better, some worse. But if somebody came in and said, hey, I have a way of fixing your plumbing problem and I've got a lot of liquidity but I'm willing to pay X, then there's a bit of a trade that goes on, but we'll see. It's an interesting point in time and I absolutely believe private equity is here to stay. Bit of a growing pain, but I talked to a bunch of students in County Cork just last week and one of the points I made to them is that if you look at the fundraising for the three years leading up to and including 2022, I believe total fundraising globally was $3 trillion. That's the equivalent of the market cap of one public company, Apple. So there's still a lot to do, I think. We just grew so quickly and then the window got shut and we'll figure this out, but it's still a very, very good place. So maybe a bit of a free ranging question to close out the conversation, Jen, and maybe you can help me perhaps, because I'm teaching a boot camp on Monday on artificial intelligence to a bunch of data scientists and I do this every year and a safe spot for me is to talk about the ethics of AI But I have to refresh my deck a little bit. But if I look at where we are with artificial intelligence and gen AI, a lot of people are talking about it, I still think it's nascent, but it's really the GP with the higher margin, higher operating leverage, a bigger revenue base that they can probably get ahead of the game and they can invest in some of these algo based tools and large language models and maybe what was once an investment process driven by a smart Kaya, it's now an investment process driven by a smart robot. And you can't explain why it does what it does because the algorithm doesn't lend itself to explanation. So what are you seeing of most your member base, the LPs, how are they thinking about generative AI? Is it something that's on the mind but sort of too new? Are they concerned about, are they embracing it? And then maybe lastly if you want to tie it in this quarterly reporting standardization initiative, I guess to me to simplify it, that's operational alpha. Fuel can have greater efficiencies in reporting standards, especially with some of these service providers. That's operational alpha too. And I think there part of that solution might be automating some of these manual processes. So I guess if I sum this up, any insights on generative AI and where we are on the LP side of the street?
- [33:49]
Jennifer Choi
On the LP side of the street, as you'd imagine, we're still relatively early on the curve. We always ask this question when we have a group of members together. We asked it just last week at this legal conference and how many organizations in the room are prohibited from even using the tools that already exist. The Copilot for example, with an office or the Acrobat utility. And a good proportion of the majority are still they're not using it as part of the day to day. Their institutions haven't greenlit even piloting these projects, no pun intended. And part of the challenge is of course really trying. You have to establish the data privacy and the governance rules and get really comfortable with. You're not accessing necessarily the LLM yourself. You're buying a tool, you're buying a consultant, you're buying something that sits on top of the LLM that does whatever it is you need it to do. And so you need to know what it has access to. And this notion of zero retention really sticks out for me as something that LPs are going to get hung on. Is my data being used to make the LLM smarter? Because we don't want that. We Want to make sure our data is really tightly ring fenced. So I think we're still in the discovery phase for a lot of LPs. Meanwhile, they're going to AGMs, helped by their GPS and seeing these phenomenal demonstrations of what AI can do. Maybe some terrifying demonstrations of what AI can do. So we've got a lot more work to do there on qrsi. This is the Quarterly Reporting Standards Initiative. This is work that started with the pfar, the Private Fund Advisors Rule that would have required a lot on fee and expense reporting and performance reporting that GBS and LPs were not doing. So when the rule was live, we set in motion an effort to bring the communities together. There's been a really intensive and extraordinary amount of collaborative effort invested in getting this right. The comment period as you mentioned, is ending today. We've had some really terrific feedback over the last nine months coming in on all of this, but the automation piece is critical. One of the things that we've been doing is bringing the fund administrators in early and they've been testing to make sure that the templates as they're being refined and developed will work in practice with the data that they've got. And where they don't have that data today, how are they going to get that data into the system? And I'll tell you just a little flashback. I am very optimistic that this is right effort, right time, right tools, relative to something I was involved in several years ago called the Alt Exchange. Alt Exchange was an effort to standardize the syntax of the data. So in your capital call distribution, notice every line item. Can we agree? How many digits can we agree if it's a negative or positive value, how many decimal points? How does it relate to the other line items in the report? Just agreeing on the syntax so you could build the to end pipe the real plumbing to automate this. And we couldn't get there. And part of the reason we couldn't get there was at the end of the day, you still had human beings on either side who were going to have to input the data into something or process the data coming back. The tools just didn't exist. This was about 10 years ago. So I'm excited, I'm hopeful that the combination of thoughtful people working together, LPs, GPS software providers, fund admins with the benefit of tools that we have today means we'll get to a better place.
- [37:15]
Bill Kelly
Yeah, and I sense like me, you're a massive optimist and you have to be in this space, not hopelessly so. But I think this is a great industry. It's been a pleasure to have been part of it for as long as I have been. And you may be less so in terms of years, but the innovation and change is a good thing. And if you think about alpha, it's founded in pockets of great inefficiency and massive change. So I think we're going to get through this and find out that there were some opportunities and we come out the other side. If we can utilize a lot of these tools that are nascent today, we're going to be better for it. So, last point for me, and then we can sign off. I don't know if I took it out of context, but I just quickly looked. I'm sorry, Jen. I just quickly looked at your website. I'm looking at notes down here. I picked up Michelle, I apologize, but I look at your website and I saw the word priority, so I said, all right, let me see what it opens up to around priorities. And I wrote this down and there were just three of them. Improving governance and transparency, standardizing fee and expense reporting, and strengthening fiduciary obligations. What's so complicated about that?
- [38:18]
Jennifer Choi
What's complicated about it? It shouldn't be, but it is. Here's what's complicated about it. It's that this industry operates on the basis of partnerships. So all partners have to agree on the definition of those things, have to agree on the definition of governance and transparency, have to agree on the definition of fiduciary obligations, have to agree on those foundational elements. In principle, I think we're probably on the same page.
- [38:44]
Bill Kelly
And I take your point that if I look these words up in a Webster dictionary like fiduciary, it might have one or two words, but in reality, there's a lot of gray space between what one might view as a fiduciary duty and the other. And both of them could be right, legally and regulatorily. But is that the right answer for both parties together? And maybe that's why you and I have our day jobs.
- [39:06]
Jennifer Choi
That's exactly right.
- [39:08]
Bill Kelly
All right. Well, Jen, I have so much respect and admiration for you. Your organization, your ability and interest to collaborate with us makes us better. I run into you and some of your team everywhere I go around the world, and it's always a refreshing warm face and handshake to see your folks there. So thanks for all of that and we do appreciate it. And I wish you well into 2025. And Bey and Ilp is in very good hands with Jen Choi at the.
- [39:33]
Jennifer Choi
Top thank you, Bill. And congratulations on the amazing legacy that you've built in your time at Kaya and this transition coming up and how beautifully you and John have managed. Transitions are never easy, so kudos to you for managing it so well and so smoothly.
- [39:49]
Bill Kelly
Well, you know a thing or two about transitions yourself, so coming from you, I'm going to take that as a massive compliment. Jen, thank you.
- [39:55]
Jennifer Choi
Thank you, Bill.
- [39:58]
Bill Kelly
Thank you for listening to Educational Alpha. I'm your host, Bill Kelly. Learn more about the Kaya association and subscribe to the show@caia.org that's C A I A dot org. See you next time.