A (3:08)

Well, we're going to find out very good proving ground for what TIFF is doing today.

B (3:13)

Anne thanks Bill. I am a managing director at TIFF focused on working with our clients to come up with solutions that align their investment portfolios to their institutional and mission driven needs. Before coming to tiff, I have always worked in financial services, in professional services across the alternatives landscape, at other outsource investments office as well as some of the investment banks like Morgan Stanley and Credit Suisse. Even doing manager due diligence earlier in my career.

A (3:48)

We're going to certainly come back to the importance of due diligence, probably more important now than it ever has been. And I think that's been part of both of your backgrounds. Certainly I think a big part of what TIFF is. Cain, with your background now in record maybe a little bit of the origins of TIFF and maybe to lead where I'm looking to go with this. It's interesting what little I know about TIFF and thinking about democratization for the average investor. Maybe we need a TIFF 2.0 for the wealth space but we can get to that in a moment. So I think TIF is about 30ish years old. So maybe some of the origins, where it grew up and what your expectations and plans are as you look forward today.

C (4:27)

TIFF has an amazing origin story. TIFF was founded in the early 90s. People in the nonprofit space came together and basically had the observation that smaller endowments and foundations and TIFF by the way is a digression stands for the Investment Fund for Foundation. So it's an acronym. That's how we come up with tiff. The insight was that smaller endowments and foundations don't get the same level of returns as the large places, the much ballyhooed Ivy Leagues and the Gates foundation, the Ford foundation, these large organizations that could we create almost an industry utility of some of the world's and in our minds best investors sitting in one spot and delivering those same types of returns to smaller endowments and foundations. When TIP was founded as founded by some of the heavyweights in the industry, the David Salems, the Larry Landry's, the David Swensons, the Jack Myers, the Alice Handys, all of these people came together in the 90s and said let's create TIFF. TIFF was very early into alternatives. It was really innovative around hedge funds, private equity. And that's basically what we've been doing for the last 34 years, is delivering institutional type returns with a heavy dose of active management, a heavy dose of endowment management, a heavy dose of alternatives to, to predominantly endowments and foundations. Over the years, at different junctures, people that have an endowment and a pension plan, our foundation happened to be high net worth. We've taken on some smattering of clients away from the core of endowments and foundations, but that has continued to be the majority of our client base. You'd ask the second question, which what is our vision going forward? TIF was founded, as I said, solely to deliver investment returns. And if you look back and because of compliance regulations, I won't go through our returns, but people have told us they're top decile, maybe even top whatever a 5 percentile would be. And so we have an opportunity, I think, to continue to deliver those type of investment returns to the endowment and foundation and base, but also to be able to customize for some of the larger clients because of that origin story. It really was focused initially on the smallest endowments and foundations. And what we found in the last decade or so is that larger organizations, 200, 300, 400, 500 million also need the same level of exposure, the same types of returns and allocations that the smaller organizations need. But they demand and merit and want a level of customization that is different than, call it a 20 or 30 or $40 million school or foundation. So we've been able to sate that. That's plan one. Plan two is we do have, and we'll probably get into this later in the call, what we perceive to be privileged access to really hard to access general partners, and particularly in the private equity and hedge fund, and even in the long only space. And we have found that some people want to use us as parts providers for that access. And I'll just do a quick digression here. We think one of the reasons we get such good access, besides our origin story, besides the team, which I can get into, one of the structural advantages is having that endowment and foundation base. If you're a general partner and you have people throwing money at you frequently, you feel you get some psychic satisfaction in saying I want to get to choose my LPs. And somewhere very near the top of your LP list is someone that has the type of client base that we have. So there are other structural advantages we have, but we Think that origin story and the fact that we have worked predominantly with endowments and foundations for 30, 35 years actually has this virtuous pinwheel effect with giving us great access and therefore great investment results. So let me stop there. There's more to what we do and more to our plans, but I think that's enough to begin.

A (8:36)

It is absolutely. And I'm going to park my observation on democratization for a moment because I want to take it in somewhat order and I think Ann, you have some views on that as well. But Kain maybe just segueing to the macro because you've got to navigate a lot and the more things change, the more they stay the same. This time is different. It usually is not. But we just signed the big beautiful bill a week or so ago and this will probably air in September, but we're sitting here in mid July. Tariffs are an issue geopolitical hotspots around the world. Fed independence is under constant threat and what that means vis a vis rates and inflation. So you've got to factor this all into your calculus as an investor. And sometimes it is noise in the short term and doesn't really impact things longer term. But how do you take all of this in and how does it affect your investment thesis?

C (9:28)

This being the macro backdrop, we countenance macro a lot. I would say our starting premise is though, and I think this is a mistake a lot of investors make, you don't actually have to have a view on everything and a position on everything. So we generally like to be fully risked. We think that there's clear resilience to the equity risk premium in our mind, clear resilience to alternative returns. And so we generally start with our strategic asset allocation. We end up customizing that for most of our clients that may have a different risk posture or different ability to take on equity risk, et cetera, illiquidity risk. But once we have that starting point, we don't feel like we have to do anything. And our bias is to only do something when we see a fat pitch. So if you think about March and April this year, we were really close to a fat pitch. Actually, we would tell clients that we were more biased to go long than short. That neutral point. Our view was that some of the difficult things for the market to digest, like tariffs and some of the volatility were being front loaded and some of the positive elements and tariffs would be a long discussion what's positive and what's negative. Probably predominantly negative, but some decent things. But the unambiguously Positive things like deregulation and some of the likely tax breaks that would come through would be more back end loaded. So we were pretty close to going overweight. We did some modest things like rebalance early, but we didn't do a significant overweight because we didn't think we were quite at a fat pitch. But we were really, really close. I can put some numbers around that if that's interesting. So some of the views we have today that I think are interesting versus the market. There's a lot of discussion about should you now be ex US and is the US exceptionalism or outperformance gone for forever? We're probably more balanced on that view. We have looked at some opportunities outside the U.S. but we've continued to think some of the natural and structural advantages to the US are going to persist. So on the margin we've made a little bit of changes, but we haven't done like some have done and said I have to be overweight Europe to a significant degree, I have to be overweight other parts of the world. Some of the things we're debating today are around the US Dollar. At least one of us, and here I will say me believe the US dollar is going to depreciate for various reasons, not least of which by almost any measure it's been overvalued by a long period of time. People that invest in currencies know they tend to go in cycles. Some of the things we've done as a country think on the margin have made the US dollar slightly less attractive. And that's all markets are on the margin. So when you see bitcoin and gold and other precious metals going up, you know that there's some bid away from the dollar towards other things that might hold their value. But I think at least as importantly is if you cycle through what Trump wants to achieve and this administration wants to achieve around making a manufacturing renaissance and changing our trade dynamics, having a weaker dollar would be highly beneficial to those types of things. So for lots of reasons there's not unanimous views around the dollar in our organization. But I guess I would say that and it may be the strongest view just to hit one that we clearly having a portfolio is short rates. So versus our benchmark, we are short overall fixed income, we are short duration. It's a view we've held for a long time. We think there's real asymmetry towards it just to pick the 10 years, the 10 year more likely to go to 6% than call it 2.5% from here and we think it's more likely 6% for various reasons, not least of where some of the deflationary impulses that persisted in our country for 10 to 12 years call from 09 to 2021 have dissipated. We also are worried that Congress has not shown a great proclivity to reduce its profligacy. And we are very disappointed that Doge and some of the other initiatives weren't more successful. Put aside all politics. Just what is the one biggest risk to the us? Continual outperformance. Exceptionalism is this debt bomb of whatever it is today 35 trillion plus another 50 trillion that are off balance sheet. And so when and how are we going to address that? And so as investors, multi asset class investors that have the ability to move assets around, we have just stayed short duration, not on every given day, but just long term. And so that's a position we have today. There's a lot of other macro views so we counted in our portfolio. But I want to zoom back up just for a second. The way we think about investing for our clients is the majority of the money is picking the right strategic asset allocation for their objectives. Then the second thing is producing alpha for them by getting them into what we perceive to be exceptional managers. And then the third thing is on the margin if there's a fat pitch tactically moving the portfolio. So everything I've been talking about is in that third column and it's not actually a huge part of our risk budget, but it does inform and contextualize everything we do on any given day.

A (14:37)

Maybe one follow up and we'll get Ann in here. Maybe it's an observation, maybe it's a question. This big beautiful Bill, I absolutely agree with your sentiment. It's very much tied to the dollar, the debt and deficits. There seems to be no ceiling to this. And I look at that long end of the curve and we can talk about independence of the Fed all we want and we can set the short term rate at zero if we want to. But the outside buyer is going to determine what the risk premium is of investing in the US dollar and funding this deficit. And I think the longer end of that curve has no chance of going anywhere but up. I agree with your investment thesis there and I just don't know what the rating agencies are eventually going to do over time and raising the debt ceiling and constantly kicking this can down the road. And Doge could have been a very good solution. But I agree with you, it's failed to deliver.

C (15:27)

It's a really hard issue as people have said the world only ends once. So betting chronically for the world to end is a money losing strategy. So when is the 10 year going to have its UK as people like to call it euphemistically Liz Truss moment? I don't know. None of us know. The one thing that argues against it happening in the next week, month, year is where is the money going to go. Everyone talks about the US being the cleanest dirty shirt and in some ways that's true. And so you just hope that there is maturity in Washington and a view to address it earlier because it will eventually be painful. But when that is, people have been saying it for a decade as we went from 60% to 80% to 100% to 110% of GDP that we're going to have a moment where the bond vigilantes run wild. It's hard to figure out when that moment is.

A (16:16)

And maybe just staying on this big beautiful bill for just another minute or two. A couple of things in there and it was over a thousand pages long got left on the cutting room floor and one early which was this revenge tax which could have impacted 60 to 70 trillion dollars of foreign investment coming into the U.S. so I'm glad that got shot before the final bill hit the Senate. But there was also this endowment tax that impacts I think some of your clients, not all of them because it seems like the larger ones got nicked with this. So I think it was better than forecasted. But if I understand it right, and I think you wrote a thought piece on this, I think it might be an 8% tax to the larger endowments and they've got to pay that regardless of what inflation is. So that is a big hit to their business line when the corporation is taking out 5 to 6% net of inflation every single year too. I guess it was a win relative to where it was. But what is the current viewpoint and maybe I misstated exactly what the final analysis was in the bill for this endowment tax.

B (17:17)

You're right in that the final version included an introduction of a tiered endowment tax. The current tax is a flat 1.4% on private endowments, over 500,000 AUM per full time student. That has now increased to including a 4% tier and an 8% tier and you're entirely in one tier. You're not paying a little bit like you and I may pay our income tax. The final version is certainly worse than where it is today in that you were formerly in a 1.4% and now you're 6x and an 8% better than the House version, which the Highest tier was 21%, which was put at that rate because it's about the corporate tax rate. It kind of depends on where your reference point is better than the initial proposal, but worse than where we stand today. I think it's important to understand and appreciate the size and impact of what that tax is because it is larger than it is before and it is of course meaningful from a budgetary perspective for any school that's impacted. Those are now dollars that will not be going into the budget, that will be going to the federal government. But from a investment perspective, an 8%. And again, this is on net investment income. The impact is, per some analysis that tipped it internally, is about 30 to 50 basis points in an 8% tier. Now that's not atrocious. It's meaningful, but it's not something where we think you'll see a wholesale change in investment approach to try to offset that. We think it's more a tweaking of a strategy to either ensure that your target return is a little bit higher so that your after tax return is where you were before, or to minimize the tax. Now you can't get rid of taxes. Just like people always say, the certainty in life is death and taxes. That's going to be the same, at least for the tax part. For endowments where they can minimize the tax, they can try to defer taxes, there will likely always be some. You'll probably see some strategies around that, whether it's taking a page from taxable investors and doing tax loss harvesting. Perhaps we'll see routine secondary sales now become more common because there's a value to taking a loss. Or perhaps you'll see endowments who have the liquidity move into more tax friendly asset classes like private equity, which we're likely to talk about here, and perhaps away from tax unfriendly strategies like high turnover hedge funds. I think those are some of the things you'll see as endowments look to offset some of that tax. But again, the magnitude from an investment perspective, 30 to 50 basis points, tweaking of the strategy, not a wholesale change of approach.

A (20:12)

Maybe this is a good segue because all things being equal or on the margin or however you want to categorize it, I think all investors, particularly given this endowment tax, they're going to have to be more liquid as opposed to less liquid for various reasons. We've seen a lot of merchandise going on sale at some of the larger endowments and this follows a trend you can't pay taxes with DPI distributions of paid in capital, so you need to have greater liquidity. There might have been an article that TIFF was quoted in or wrote that was in P and I and it's on P and I Daily. I'm a subscriber to P and I, but not the Daily, so I couldn't read the full article, but I think it was titled the Latest in Private Markets. But I could see two very interesting and competing headlines when I went there, and these there's no magic to it. One was Calpers Joins Growing Wave of Pension Funds Offloading PE Stakes Volume Hits Record. The very next headline and maybe one after that. So right almost next door was retail investors projected to account for at least one half of private market flows by 2020. They're on the receiving end of this largess. And then we just saw this week that Trump is likely to sign an executive order directing the SEC and the DOL to provide guidance to allow D.C. plans to commit to this space. And I saw a quote there that some of the big PE shops, or at least this article, described it as a pot of gold for the PE industry. That pot of gold belongs to the investor. I hope it's a pot of gold for them as well. So a lot there. You don't have to comment specifically any of those headlines, but maybe it's a good opening bid for what you're seeing and what TIFF is seeing around democratization.

B (21:53)

Going back to your broader comment around what issues are institutional investors facing today? I think what you see with CalPERS is actually what you mentioned is perhaps a data point for broader headwinds that face the nonprofit space at large. There are more challenges and more headwinds. These investors are hyper focused on ensuring that their investment portfolios deliver for them so that they can deliver on whatever their end mission is. As you noted, they're facing all sorts of different issues. Whether it's broad economic issues like continued inflation like we just saw the print come out was worse than the month before. A lot of federal policy changes that are impacting the space. Federal aid, federal services getting cut, changes in tax incentivizations, and even more specific industry issues. Higher ed facing drop in enrollment. These institutional investors are facing issues at the highest level. They're looking to their investment portfolios to ensure that those portfolios can deliver for them. And liquidity is one of the biggest issues right now. When you think about all of the issues that I just noted, our clients are really focused on ensuring they have the right amount of liquidity. Given that the underlying assumptions of their rules of engagement, I'll call them, are shifting, they need to make sure that they have an alignment of what's available in that pool of capital for potential emergency needs. Or some of them are even scenario planning of. Okay, well what if some of these bad potential outcomes come? We go into recession, we have lower future withdrawals, how do we shore up shortfalls? One thing that has happened that I think everyone listening to this podcast will be aware of is that private equity allocations for certain investors has gotten overallocated. There are institutions that have gone to the markets to rebalance their portfolios to increase liquidity to one, get back to where they need to be in terms of their asset allocation, but also improve their liquidity profile. Because they're facing so many challenges, they don't want to be caught on their back foot in serving what their institution needs. Because all these pools of capital are for another purpose. They're not just to make more money for the pursuit of more money. They're all intended for an end goal, whether it's a pension or an educational budget or more charitable giving approach.

A (24:29)

So your client base covers a spectrum from probably the small to the very large, very sophisticated, maybe a smaller investment office. So less sophistication in some cases too. But all things being equal, and Kane mentioned this as well, part of your offering is access, and that's critically important. You could have a very small and sophisticated CIO office, but unless you have that access, it's very difficult to find those right managers, especially when performance dispersion is so very wide. But if I think about all of what you just said about these big endowments, foundations trying to balance against calls in their capital, charitable giving, they're moving more liquid. If you have a foundation for the very first time that's coming to you, trying to get into the private markets, this could be an opportune time to come in because there are a lot of interesting entry points. Maybe a manager you know very well has kind of been closed. Maybe they're opening back up again. So there's two sides to every coin. And is this not only for tiff? You could speak about that model if you want, but generally could this be a very good time for a small foundation or one that's not been in alts to be coming in for the very first time?

B (25:38)

I would say yes. When you think about what is underlying the endowment model and really a lot of investing, it's going where other people are not and finding value in that approach Right now I think the industry is split on whether the future of private equity is positive or negative. TIFF is strongly in the camp that there's a lot of value there and there is a return premium to be had within the industry. In particular for our clients where traditional 60, 40 isn't going to cut it. They are looking for delivering on their target return. And how do you do that when you probably don't have more risk that you can take? And maybe you have some liquidity capacity, which is where private equity comes in, but maybe it's just around improving your overall alpha potential, which back to the access point is really important to ensure that you have the right managers that you can deliver on the overall alpha composition of your portfolio. Private equity is interesting right now in particular because people are running away from it. The institutional capital is probably just a time when you should say, hmm, maybe that is actually an interesting space to be in. Are there fundamentals there that are still holding strong despite some of the past two to three years that we've seen in the overall market, in particular the exit market, which has really been kind.

C (27:04)

Of a desert for our client base. We tend to have a significant chunk of the portfolio committed to private equity. And we do believe there are governance and market dynamics that make private equity well accessed superior to the public markets. And I actually put it into three pieces. Just overall we think of private equity and kind of the alignment of interest, the ability to get non public information within the law, the ability to add value to portfolio companies, the ability to get term debt, the ability to not always be 100% invested, are structural advantages to private equity. That's point one. Point two is we think there are particular sectors within private equity that are more interesting and more attractive and the ability to add value and outsize returns there. And then the third is the point that Ann has been touching on, which is the manager access. Everyone has seen the same charts where public market managers tend to be within 100 basis points of the benchmark and private equity managers tend to be within a thousand plus or minus from the benchmark. So clearly if you're able to access the top first or even second quartile managers, you're going to get outperformance. I put it in those three buckets. We can talk about access because it's really a critical, critical point. But just on your question about retail, I put it into two buckets. One is these interval funds and things that are trying to introduce liquidity to what is by its nature an illiquid asset class. You buy a company and you have to wait seven years till you've improved the operations to sell it. And sometimes there's sparse exits like we've gone through for the last two years. And there are other times where it's better to sell companies and access the public markets or sell it on to strategics. And then you get a lot of liquidity. So it's not by its nature a daily liquid asset class. So some of these vehicles are trying to make it a daily liquid asset class. And so what you end up getting, I think there's been a huge movement to this. These tender offer interval funds. Evergreen, you're really trying to square peg in a round hole or vice versa. And so you end up getting diluted private equity. You have to change something about the core characteristics to make it fit in that structure of having some level of liquidity. The 401k market, actually, depending upon how you use it, actually makes sense to me. If you got a 2060 target date fund for it to have some private equity in there where it's committing to the private equity and you got a whole bunch of people coming in and out of that 2060 target date fund, it's not going to have to get liquidity till 2060 for some of these people. And even if you have a different shareholder base during that period, that actually can make sense, you're really trying to use the asset class as it was intended very long term, kind of like an endowment or a foundation or a pension plan or a sovereign wealth fund. It's when you try to say, hey, I want to have private equity, but I wanted to have it weekly liquid. It's not really private equity. So I do think the manager access point is one of the most important points. If you're going to try to do private equity well, or hedge funds well, but private equity. For this conversation, manager access is one of the keys.

A (30:13)

We could take this in a lot of different directions and run out the clock of my record long podcast came. But I think it's worthwhile staying on this for a moment because I agree with most of what you said, particularly manager selection being so critically important. On the one hand, if I have my self directed IRA or let's for argument's sake say Trump signs an executive order and now I can choose a whole host of interval funds for my 401k, the likelihood I'm going to get a differentiated return is very, very low versus I think what you just said. I think the very best entry point for privates is in a Target Date Fund, you've got professional management, you've got a portfolio manager with a pool that might be billions of dollars of assets. They get access to, hopefully these top quartile, top decile managers and you're holding it for the long term. And I haven't seen this recently, but Morningstar, I think they do it every year. They do a gap analysis between what the average fund has done in the long term space. So equities, debt. I think they do one for alternatives, they also do one for Target Date funds. And invariably the investor is day trading their way to at least 100 basis point or more shortfall versus what the fund itself delivered. One of these I saw recently from Morningstar is the Target Date Fund didn't do as well as the individual because they're clipping the coupon every two weeks, putting money in dollar cost averaging. And that is the way smart investors think. And I think if there's anything that in the more retail mindset is on cruise control, it is the Target Date Fund. But I think the challenge for the investor is that if I've got a house and I've got taxable investments and I've got my 401 plan, and in my 401k plan I have, say, a 20% allocation to a Target Date Fund, if you add up my net exposure to the alternatives, it might be a very, very low number. So you can comment on any of that. But I want to come back to the observation I was making before, which is, I think it was the Ford foundation created the common fund, the MacArthur foundation created TIF. Do we need somebody to create, I don't know what the acronym would be, but a TIF for the individual investors, where I could go to them and say, okay, I've got this small corpus of money. I'm the equivalent of a small foundation, similar to what we see in the Australian super fund model. Could you be the aggregator along with all of the other small investors and do that manager access for me as well? Hard to scale it, but I think we need something like that ultimately because you need that professional management. The due diligence, the manager selection and education is a critical component of it as well.

C (32:56)

I'll try to address that in two pieces. One is first on the manager access. In some ways, manager access and private equity is easy in the sense that you can tell who the winners are. And so I'll give you some stats to amplify that point. And this is from a research paper done by University of Chicago in late 2022 and people can find it online. But the persistence of buyout managers, per this paper, for Q1, first quartile from fund one to fund two or fund A to fund B, it's 35%. And so if you were in the first quartile in fund A, the likelihood that you're going to be first quartile in Fund B is 35%. That's astonishing persistence. Actually it doesn't seem like it. But if you do that with lots of public market manage like 25.0001, it's a coin toss. With VC it's even better, it's 45%. And the likelihood that you would drop from first quartile to fourth quartile is only 12%. So just think about that astonishing persistence so you can identify, I think who the really good managers are. Sometimes you can't get access. You need an angle. The way we do it is we have a few angles. We tout our client base which a lot of GPs like we have this board which I know you know about, similar to our origin story. We've been able to maintain a board of these all star CIOs in the industry that help us think through investing and help us get manager access. We've also been doing it for a long time. We use the analogy we have beachfront property you can't build in front of us. These managers haven't taken a new LP in 20 years. Those are our structural advantages or ways we think about it. Other people may have other ways that they get into and maybe it's their friend or their sister in law or whoever. You have to have some ability to have access and to get in on your second point on retail needing an industry utility. It's about our business. But we have worked with a lot of RIAs that say, look, I know I'm not going to be able to get access to the same types of managers on the alternative side. And the conversation is usually broader than just private equity. How can I use you as a parts provider? And I actually love that model because what a lot of those RIAs and family offices, they're extraordinarily good at things that Tiff doesn't do today, which is wealth planning, tax planning, estate planning, all sorts of adjacent services that mass affluent and high net worth and ultra high net worth want. And they're really, really good at that. And they know that the missing piece for them is to get access to things that are going to be drivers of the overall portfolio, at least for a portion of it. And who can they find to do that? That that's their area of expertise. So we have done some of this where I'd say we're the intel inside for some of these RIs. In short, I think that industry capability, or utility, so to speak, exists today and not only with tiff, but obviously with some of our competitors as well.

A (35:53)

The sustainability of performance and those stats are astonishing and I think a good reminder about the persistency of performance. And it doesn't exist in the public markets. And this is maybe one of the reasons why Jack Bogle created Vanguard 50, 70 years ago. Whatever the timeline was, some could argue that was a windfall for the average investor because they could get exposure to the beta very inexpensively. And this may be sort of fantasyland Cane, but if I think about trying to do right by the retail investor and the wealth investor, and some of this is probably not quite your target market, but if we could build a thesis that private equity on average has a 300 basis point return over time better than public equity, and I'm making that number up, we could discuss what the number is. But is there a way of creating beta access to private equity? And I've had a couple of guests on this program and a few folks I've met in the course of my travels, not for want of trying. There are some replication indices out there where you can replicate it. But I think the flaw is that if you're creating access, even if it's a public market proxy, if you're allowing day trading on a regular basis, the likelihood you're going to end up with anything better than The S&P 500 is probably low in the first place. So maybe to get it back to the original thesis, could you ever see a sustainable replication for private equity beta to at least allow the investor to have exposure to it somewhat cheaply?

C (37:21)

I think the short answer is no, because I think it's a fundamentally flawed premise. I think the beta of private equity is the same as the public markets. I just think the beta is the same. And so you're saying, can I get better beta than the public markets? No, I want to have all the alpha, but not suffer the downside of locking my capital up and really trying to get access to the best managers and doing significant diligence and think about what all that that entails and having an angle to find diligence and then convince a manager to let me be an lp. No, that alpha is hard to do. And so when you say, can you get private market beta? Yeah, it's called the public markets. And you should do that in the public markets and be daily liquid. There's a huge role for people like Vanguard and huge role for 401ks and people doing that. But if you want Alpha, you actually have to get Alpha. So whenever I hear people say, oh, private equity is just small cap levered or I never should have done private equity, I should have just done S and P, I always look at that and say, yeah, that's great, you're weather reporting. Now that you've been able to look back and tell me that The S&P's had its best run ever, that's what you would have done. Tell me what you're going to do for the next 10 years. Tell me what's the new S and P? Because it's easy to kind of look back and say I should have just done X, X changes. And so far, if you look at it, I'll give you another stat. P has had a terrible last two years, 25 shaping up to be another terrible year versus the public markets. Public markets have zoomed ahead 20%, 25% this year on pace for 12, 15%. Private markets haven't marked. There haven't been a lot of exits, they've been flat to down. So you look at any the last couple years and you say private markets lost its mojo and it's a terrible place to be. If you zoom out and say over any 10 year period, starting in the beginning of this millennium and you roll back 10 years, any of those 10 year periods, every one of those 10 years, private equities outperformed by three or four or 500 basis points. I'm not arrogant enough to say it has to always be that way. But I'm also not short term to say it will never be the way it's been for the last 20 years. So when you ask about saying, oh, can I just get private equity returns in the public markets, I think no.

A (39:41)

I agree with you and I think something you said, a simple observation, but an important one is that equity risk premia doesn't know if it's public or private equity risk premia is equity risk premia. And you mentioned something structurally about the private markets early, which I think hammers that point home. Unless I'm the Norway Sovereign wealth fund, if I've got exposure to the public equities, I own a stock, I don't own a company. My ability to influence outcomes and get board seats and get involved in strategic plans and allow those companies to take risks about what they're going to say or not say on a quarterly basis, very, very difficult to do. But you can have a much more of a strategic input in the private markets. And I think that is a big, big part of the secret sauce.

B (40:27)

Bill, one comment I would just make on private equity. A lot of people comment that private equity has the illiquidity premium. I actually like to think of it as more of an activism premium in that when you're in the public markets, you're trading thinking a lot about intrinsic value, stock price. In private equity, the real value is that you have control and that you can change things actively with inside of the company. And the illiquidity premium is something you should get because it's illiquid. But I like to think of it as an active slash control premium.

A (40:59)

And I think that that control premium dictates when that underlying portfolio of companies has reached its maximum value. And I think there's an expectation that if it was a 10 year fund that every portfolio company is going to reach its fruition inside of those 10 years. And when you have liquidity freezes like Cain alluded to, all bets are off. But it doesn't mean to say those portfolio companies are forever damaged. The liquidity window might be very, very different. And these stats bear themselves out not over one year, like 20, 22, over the long term.

C (41:32)

I love that you said that, Ann. I have heard so many people in the 25 years I've been doing this saying the illiquidity premium and I literally think almost every person has gotten it wrong. That's why investors demand excess return. They need to get compensated for locking their money up. That's what people call the illiquidity premium. That's completely wrong. The question is why does private equity deliver that excess return? Not why do the limited partners demand it. That's so obvious in simple because they're locking their money up. But why has private equity been able to deliver it? And one of the reasons is, and I think appropriately says is it's that control, that value add ability, that's what delivers. There's other reasons people don't want to be in the public markets. They don't want to pay the cost of audit. They don't want to have the short termism of quarterly reporting. They can invest for the long term. You have industry expertise, there's lots of other reasons. But that's why private equity delivers it. Everyone knows why investors demand it.

A (42:32)

You talked about the various wrappers we're seeing and I think that's some of the flaws in these wrappers when not only is the underlying illiquid, it demands a longer term commitment of your capital put aside if there's an illiquidity premium or not. But to take those types of investments and allow it to leak out through quarterly withdrawals, it's a suboptimal wrapper. I don't know if we're going to come up with a better one, but I just don't think it's perfect.

B (42:56)

And Bill, one other thing I like to remind people when they think of interval funds, evergreen funds, is that they are liquid until they're not. And you're seeing this with a number of funds in particular in the real estate market right now. I think there was actually another one announced this week that wants to change to a closed end fund because the underlying assets are liquid and you promise the investors that they're liquid. But there's a mismatch in liquidity and it's all works fine when there's enough inflows and not too many outflows. But when everyone wants to leave, all of a sudden the fund becomes illiquid and all of a sudden you're trapped. So for those new high net worth or retail investors coming in, hopefully they appreciate that there's a bigger dynamic here at play than your regular 40 act daily traded fund.

A (43:47)

And I look at where private equity is and it's still a young industry and the first GPS active in the space are probably just 40 years ago and it sounds like a long time, but it was probably in the 2000s where things really started to accelerate. So I still think that we have a lot of Runway in front of us. But I look at the secondary market as an example and that was probably a distressed place to a large degree coming into and coming out of the gfc, much less so today. But if the secondary space is 1 or 2% of the entire private capital pool, it still needs to grow. I think we need to have a larger, more active secondary market. I think that's a natural maturation part of where private capital, including private equity is going. So I think it's going to be interesting to see how that goes because I think we've seen that investors, even the most sophisticated ones, need greater liquidity and sometimes it's not to pay a benefit. It might be because they want to get into the next vintage fund as well and they're not getting the DPI to do that. It's going to be interesting to see how the secondary market develops as well. I've kept both of you a reasonably long time. I do want to finish though, and Anne, maybe stay with you on hedge funds because I think in this news cycle we've had a tendency to talk about hedge funds less, but when you have rates high and maybe trending higher or high relative to where they were and then volatility sleepy and not so sleepy at times, maybe some of your views on hedge funds. I don't know if this is part of tiff's model, but I know it's an area you've spent some time in and I think this could be an interesting space for investors if they're thinking about diversification.

B (45:25)

I think the question that you most frequently get is do hedge funds still make sense? And I think since the advent of hedge funds there's been waves of interest retreat, certain subsectors doing well and then not doing well and so on. And I think many investors have been disappointed by hedge fund performance in particular, even now with rates being much higher. TIFF has been successful in investing in hedge funds. I think it's because we invest in a very specific way that is not the same as other investors in this space. I would actually argue broadly that hedge funds is actually a catch all bucket for a very wide range of strategies. I'd actually argue that it's one of the most complicated asset classes because it isn't just one style of investing with a couple of flavors. It's actually many, many distinct sub strategies that are dissimilar to each other. And many of them are actually very technically complicated. Bill, you and I both know, having both taken the Kaya that learning the calculation for theta and what exactly that means when all of the derivative type metrics, it's heady stuff. I think when we look at the market of what is it that has brought disappointment to hedge fund investors? It's really because investors are approaching the asset class in the wrong way and have incorrect performance expectations. What we typically see is that investors are usually on one end of the spectrum in terms of hedge fund investing. They're either incredibly basically zero beta, so too defensive, or the other end of the spectrum where they're trying to match or exceed broad equity markets. Or given the complexity of hedge funds, they're actually only invested narrowly within their comfort zone of spaces that they know and understand. They're really approaching the space in what we view as the wrong way. They're too concentrated in one fund, they're too concentrated in one style, they're too concentrated in one risk category, they have too much leverage and they just probably don't appreciate the nuances of each strategy and how to kind of put them together. And I think for tiff, what we're trying to do is really thread the needle on the balance between having it be a diversifier to equity. So we're not trying to match equity performance, but be a diversifier but also provide good risk adjusted return. So high Sharpe type return strategies. And that is really hard to do because it requires you to get a lot of things right. It requires you to get manager selection right. And as we were just mentioning, there's so many strategies you have to get portfolio construction right. So maintaining the appropriate beta, which as we all know with hedge fund moves around with leverage and different trades and then also most importantly is risk management. Are you actually maintaining an uncorrelated portfolio? Are the cross correlations between your managers the same? It's challenging to nail each leg of that stool. For tiff, we luckily feel as though we've been successful doing that, but it's very hard to do to both get returns and be defensive at the same time.

A (48:54)

And again, maybe coming out of the GFC as an example, I think there's a lot of disappointment with hedge funds. And how can you be disappointed with something that exists in name but you're wrapping so many different strategies underneath it? The concept simply does not make sense. And it's interesting that I think we're repeating that same mistake when we're banging the drum for access to private equity. Not only is the performance dispersion very wide and managed selection matters a lot, but are we talking about the buyout space, Are we talking about growth, Are we talking about vc? Is it sector specific? It is lower middle market. So I think as many different managers there are that many different strategies. And that's probably driving the dispersion to some degree, but I think it gets back to some of the observations you made. And you can pick hedge funds, you can pick private equity, private debt, real estate. Due diligence is so, so critically important.

B (49:49)

Yes. And I think that is the case in private markets, as we were just talking about. It's also the case in hedge funds in particular for going back to hedge funds, because we're just speaking about them. Being able to do appropriate due diligence on managers is critical and it's challenging within this space because there are so many subsectors. That means you actually are doing many different styles, you're looking at different metrics. You really have to understand and have a base, deep understanding of what they're actually doing on the other side. And what's just the story versus what's real in terms of their investment approach? Due diligence is key. Tiff having been an investor in this space for so long, we're fortunate that we are known in the space and we are a nice size in terms of our aum where we can be in a lot of those niche managers. And we're also lucky because we have our advisory board who they also know a lot of different managers and are also able to help us in terms of getting that access of you can get access to the best managers and then ensure through your due diligence that you're picking the right ones to go into your portfolio.

A (51:00)

Has great observations and maybe a good place to leave it. So a final observation from me. It's great to see what TIF has done and I've known the common fund model for many years. They were a client way back when and Mark Anson was on our board and as I alluded to in the conversations with both of you, if I had another act and I think I'm too old to have another one in my career but I think we need tifi, the investment fund for you, for the individual. If you can find a foundation that's willing to fund that and they're looking for an executive director and age is not an issue, you can have them ring me. But I appreciate you taking the time today. I think our listeners will take a lot away from this and look forward to seeing you soon in the real world.

C (51:45)

Thank you, Bill. Thank you for including us.

B (51:47)

Thanks, Bill.

A (51:48)

All right, all the best. Thank you for listening to Educational Alpha. I'm your host, Bill Kelly. Learn more about the Chi association and subscribe to the show and at kaya.org that's C-A I a.org see you next time.