Podcast Summary: How I Invest with David Weisburd

Episode: E179: How UCLA's Endowment Wins in Private Equity w/Deputy CIO Michael Marvelli
Release Date: June 25, 2025

Introduction

In Episode 179 of How I Invest with David Weisburd, host David Weisburd interviews Michael Marvelli, the Deputy CIO at the UCLA Investment Company. They delve deep into UCLA’s successful private equity strategy, particularly focusing on the lower middle market. This episode offers valuable insights into asset allocation, manager selection, and the unique approach UCLA takes to optimize returns in private equity.

Michael Marvelli's Journey at UCLA

Michael begins by sharing his long tenure at UCLA, spanning over 22 years. He highlights the impressive growth of the endowment from a $400–$500 million pool of capital to a tenfold increase during his time.

[00:05] Michael: “When I joined, we were a $400 to $500 million pool of capital. We've grown about 10x over the course of my time here.”

He explains his current role, which encompasses private markets, asset allocation, and the development of the annual spending policy.

Formation and Evolution of the Independent Management Company

David prompts Michael to discuss the establishment of UCLA’s independent management company in 2011, sparked by the aftermath of the Great Financial Crisis.

[01:02] Michael: “In the wake of the great financial crisis, we had sort of resurrected AUM just above a billion dollars... that's when we decided to set up a proper management company in 2011.”

Over 14 years, the team expanded from three to 15 professionals, allowing for a more nuanced approach to asset class strategy.

[01:54] Michael: “There were three of us at launch and now there are 15 professionals. So you can do quite a bit more with that level of resource.”

Understanding Portfolio Construction: Asset Allocation and Manager Selection

Michael breaks down portfolio construction into three layers: portfolio construction, asset class strategy, and manager selection.

[03:15] Michael: “Asset allocation absolutely drives the returns, particularly in endowment land... followed by manager selection.”

He emphasizes the critical role of asset class strategy, arguing that without targeting specific segments within an asset class, even the best manager selection can lead to suboptimal returns.

[04:11] Michael: “Unless you're focused on the right segments within the asset class, you can be the best manager selector in the world and your performance might be good, but it's going to be suboptimal.”

Focus on the Lower Middle Market in Private Equity

A significant portion of the discussion centers on UCLA’s focus on the lower middle market (LMM) in private equity. Michael acknowledges the lack of consensus on defining LMM but provides a practical explanation based on EBITDA levels and strategic value.

[07:40] Michael: “There is no consensus... but what it really matters is the strategic value.”

He illustrates how LMM investments can lead to substantial returns through multiple arbitrage, using a detailed example of purchasing companies at lower valuations and selling them at higher multiples.

[12:00] Michael: “We've been able to increase the multiple from entry to exit by seven and a half turns.”

Drivers of Returns in the Lower Middle Market

Michael elaborates on the "value bridge" drivers: cash flow, accretion, debt repayment, and multiple arbitrage. He argues that multiple arbitrage offers more significant opportunities in the lower middle market compared to the upper market.

[13:14] Michael: “...the third component is pure valuation multiple arb. For us... we've been able to generate a return that is two turns higher than the market.”

Challenges and Strategic Paradox

Despite UCLA’s success, Michael discusses why more endowments are not venturing into the LMM. Factors include the need for specialized teams, governance structures, and the ability to manage smaller fund sizes effectively.

[16:56] Michael: “...if you're managing billions, investing smaller fund sizes becomes challenging.”

He describes a paradox where large endowments might struggle to invest meaningfully in the LMM without diluting their focus.

Selecting the Ideal General Partner (GP)

The conversation shifts to identifying the ideal GP in private equity. Michael emphasizes the importance of operational value add over mere financial metrics, advocating for GPs with hands-on operational expertise.

[35:07] Michael: “We were very focused on operational value add... growth of cash flow and margin.”

He argues that GPs who can professionally manage and grow portfolio companies are crucial for achieving higher returns through multiple arbitrage.

Portfolio Construction Without Upper Middle Market Exposure

UCLA strategically avoids investing in the middle and upper middle market, focusing solely on the lower middle market to capitalize on specific return drivers without overextending their resources.

[29:59] Michael: “Private equity is probably the best beta out of any asset class... three to six commitments per year.”

Investment Period and Deployment Strategies

Michael discusses the typical deployment period in the LMM, noting a shift towards shorter investment periods compared to traditional private equity.

[32:54] Michael: “It's probably gravitated to closer to three years... evaluating fundamental performance.”

Value Creation from the GP Side

The discussion highlights how GPs in the LMM focus on operational improvements and strategic growth to enhance company value, rather than relying solely on financial engineering.

[35:07] Michael: “Growth of cash flow and margin... professionalizing the company.”

Building Relationships with Founders

Michael underscores the importance of building trust and rapport with founders, many of whom are family operators with deep emotional ties to their businesses.

[50:36] Michael: “The founder had so much pride... they have to trust the people involved.”

Advice for Young Professionals

In his closing remarks, Michael advises young professionals to engage in independent thinking, understand the fundamental drivers of returns, and develop a strategic approach through continuous learning and modeling.

[55:07] Michael: “Build a model from scratch. Play with these variables and understand their relative importance.”

Conclusion

David concludes the episode by praising the depth of insights shared by Michael, positioning the conversation as a masterclass in navigating the lower middle market in private equity.

[64:19] David: “Michael, this has been an absolute masterclass in the lower middle market.”

Key Takeaways:

• Strategic Focus: UCLA’s success in private equity stems from a focused strategy on the lower middle market, leveraging multiple arbitrage and operational improvements.

• Asset Allocation Importance: Proper asset class strategy is paramount, often more so than manager selection alone.

• Specialized Teams: Effective investment in niche markets like the LMM requires specialized, dedicated teams and robust governance frameworks.

• Building Trust: Establishing strong relationships with company founders is crucial for successful investments and value creation.

• Advice for Aspiring Investors: Young professionals should focus on understanding fundamental investment drivers, develop strategic models, and cultivate specialized expertise.

Notable Quotes:

• Michael Marvelli at [00:05]: “When I joined, we were a $400 to $500 million pool of capital. We've grown about 10x over the course of my time here.”

• Michael Marvelli at [04:11]: “Unless you're focused on the right segments within the asset class, you can be the best manager selector in the world and your performance might be good, but it's going to be suboptimal.”

• Michael Marvelli at [12:00]: “We've been able to increase the multiple from entry to exit by seven and a half turns.”

• Michael Marvelli at [50:36]: “The founder had so much pride... they have to trust the people involved.”

• David Weisburd at [64:19]: “Michael, this has been an absolute masterclass in the lower middle market.”

This episode offers a comprehensive look into UCLA’s private equity strategy, providing listeners with actionable insights and a deep understanding of the dynamics within the lower middle market. Whether you're an institutional investor, a private equity professional, or someone aspiring to enter the field, Michael Marvelli’s experiences and strategies present valuable lessons in achieving exceptional investment performance.