Speaker 1We all may own asset classes such as public equity, private equity, venture capital, credit, fixed income. You don't have the same objectives necessarily at the portfolio level or even within those sub-asset classes. I don't like to start with asset allocation or manager selection. Where I like to start is what's the nature of the capital base that I'm working on behalf of? The nature of the capital base should inform your investment philosophy. The investment philosophy can then inform a strategy. I think a lot about the process is the how of taking that philosophy, that strategy and turning it into an institutional portfolio that's unique to that exact institution. You can't adopt that same strategy without understanding what's informing it and what is unique for that institution. We have one asset class as equity. We think a lot about how do we earn an equity premium? How do we compound capital to preserve intergenerational purchasing power? And different between public or private equity. It's not how do I fill a bucket? It's how do I fill a bucket of equity? How do I fill an allocation? It's where is the most attractive risk-adjusted return.
Speaker 2I'm Ted Seides, and this is Capital Allocators. Every now and then, I get to hand off the microphone to a guest host. We've had CIOs lead podcast interviews with managers and friends interview me. Each time an informed host brings their own perspective in an interview. Today's guest is Zach McGuire, Senior Managing Director
Speaker 3of Investments at Children's Healthcare of Atlanta. Zach's career spans Citigroup, Emory University, the University of Georgia Foundation, and the Maine Public Employees Retirement System before joining Children's three and a half years ago. His responsibilities extend well beyond investing into teams, businesses, and companies. go. His responsibilities extend well beyond investing into team leadership, overseeing the investment process, and strategic initiatives across the broader healthcare system. Our conversation covers how an institution's capital base shapes its investment strategy, show us thematic approach to portfolio construction, empowering a team of generalists, and leveraging investment relationships to support the broader institution. Zach brings humility, curiosity, and conviction to his work, grounded in a belief that resonates deeply with us at Capital Allocators. One of the best ways to compound capital is to compound relationships. Before we get to the interview, AI voice cloning has gotten scary good. Apparently, mine has too. I've been doing more interviews on the podcast lately, and you're about to hear the next one. The funny part is, I've now had multiple people tell me that they had no idea it was me behind the mic. They thought they were listening to Ted the whole time. Recently, someone told me how much they liked Ted's company. I'm not sure if that's true, but I'm not sure if that's true. with Nick Sisco from Trinity Wall Street. I interviewed Nick. I didn't have the heart to correct them. While AI keeps improving, apparently my Ted voice is right there with it. So tell your colleagues about the latest episode. No need to tell them who's hosting. Let them decide if it's me, Ted, or AI. Thanks so much for spreading the word.
Speaker 2Capital Allocators is brought to you by AlphaSense. Every allocator sits at their desk for hours preparing the work around investment decisions. Getting up to speed on a new theme, prepping for the next investment committee meeting, and tracking what changes across an entire portfolio. AlphaSense just launched something built to help. It's called Super Analyst, an always-on agent that works like a power user on your behalf. It draws on over 500 million premium sources, including broker research, expert transcripts, company filings, and earnings calls, and keeps working long after you've gone home for the day. It's Super Analyst at a theme, company, or market, and it learns the coverage universe so you can easily turn new insights into the briefs, models, and memos you'd otherwise build by hand. It was designed to work like an extension of your team, so it remembers your projects, follows your templates and processes, and links every output to its source so you can see where each conclusion came from. The best way to judge its quality is to give it a whirl. Pick the research task on your desk before your next call. If you have any questions or questions, feel free to reach out to me at and hand it to Super Analyst. Start a free trial at alpha-sense.com slash capital and see what it has ready for you. Capital Allocators is also brought to you by Ridgeline, the investment management platform built for firms who are rethinking how work gets done. You're at your desk looking at a line graph of your firm's growth. The line is moving sideways, linear growth, and you know exactly why. You're constrained by your operational bandwidth that's been the same for so long it just feels like the cost of doing business. Ridgeline is built to change that line's trajectory to be the inflection point that takes your growth from incremental to accelerated with the team you already have in place. Ridgeline is the only AI native investment management platform that brings together the front, middle, and back office with one set of data and powerful AI agents that automate away operational drudgery. So your talent can shift from managing old technology to materializing new ideas. Ridgeline helps asset and wealth managers understand and improve their firm's growth trajectory. To see how your firm compares to 16,000 of your peers, visit ridgeline.ai slash trajectory. If you file form ADV, your firm is already there. Then talk to Ridgeline about how you can do more with the team you already have. Capital Allocators is also brought to you by Juniper Square, the operations partner trusted by the leading private market GPs. One theme that keeps coming up on the show is GPs that build the strongest and most durable relationships with LPs are the ones that have both strong returns and strong operations. AI raises the stakes on operations, and having Juniper Square as your operations partner helps ensure your data is organized, accurate, and accessible so you can unlock operational alpha. That's why thousands of GPs trust Juniper Square. Learn more at junipersquare.com slash capital allocators. Please enjoy this
Speaker 3conversation with Zach McGuire.
Speaker 1Zach, thanks so much for doing this. I think it's such a pleasure to be with you today. I've admired what you and Ted have done at Capital Allocators for a long time. It's a real privilege to be here.
Speaker 3I want to start with one of our most popular questions from our summits. How did your upbringing inform who you are and where you are today?
Speaker 1I grew up in central Maine. I was in a family that most of my family members were either in the military or worked some type of blue-collar job. My grandfather was career Air Force. My dad was an electrician, also served in the Air Force. He always had an entrepreneurial itch, strong work ethic. I think he got tired of wiring houses in cold Maine winters, and so he developed an interest in business. Ended up going into sales and business development role in life. Safety and alarm industry. I realized that I didn't want to wire houses. I had a real bug for finance from talking to my grandfather. Went to college at the University of Maine. Wasn't exactly sure what I wanted to do. There was a professor at the University of Maine. His name is Dr. Robert Strong. Dr. Strong taught finance and investing classes there. He was also the leader of the Student Investment Fund. It's called SPIFI. When I was there, it was a little bit over a million dollars. It's over five million dollars today. One of the larger student investments funds in the United States. That experience of Dr. Strong's classes, learning about investing plus involvement with that club, was transformative to my life. I firmly wanted to work in finance and investing after that experience. Didn't know exactly how that would take shape, but I brought a strong work ethic, a desire to, as a first-generation college student, do something that I thought would be meaningful and contribute to a mission, something larger than myself. I had been in Maine for almost my entire life. I worked for two years for Citigroup. Right out of college, had a great experience there. Ended up moving to Atlanta. I had the itch to maybe see something outside of Maine, experience something new. That was 2007 when I first moved to Atlanta. That upbringing shaped some of my core values. Work ethic, mission orientation, intellectual curiosity to try new things, which my parents didn't actually have the opportunity to do.
Speaker 3When you were working at Citi, that was in Maine? It was in Maine.
Speaker 1They had one small office in Maine. It was more working on back and middle office. I had three different roles over the two years that I was there. I was ambitious. As an opportunity came up, I would raise my hand. I want to do that. I want to try that. I started out in their funding group, moved over to corporate actions, derivatives pricing, transaction processing. And then the last role that I had there, I was working on a special project for an asset manager based on the West Coast. I was maybe 24 at the time. They raised, who wants to live in Southern California for six weeks? Raised my hand. Great experience. Jumped at that. It gave me a fundamental understanding what securities were. How do you think about derivatives pricing? There's some performance reporting and analytics. And that gave me the wedge to be hired. That plus a strong work ethic and intellectual curiosity to be offered the position at Emory.
Speaker 3What was your first foray into the institutional investment world? How did you transition from Citi into that world?
Speaker 1I had two different job offers. When I moved to Atlanta, one ended up being with Emory's investment office. Didn't really know what that meant in terms of a career. I knew that I liked the people. I liked the idea of working for an institution where I could learn a lot. lot, be exposed to all different asset classes, be able to work collaboratively with some of the senior leaders on the team. First-generation college student, I worked through a lot of college. I liked the idea of helping support scholarships. I think about what my undergraduate experience could have been if I had more scholarships. That seemed like a great potential career path or a next step to learn about the world of institutional investing. I'm forever grateful to Mary Cahill, who was the CIO at Emory University at that point in time, for giving me an opportunity to transform my life in terms of 20 years later, it's become my life's work in terms of investing on behalf of institutional pools of capital. I would have not guessed that as a 24-year old interviewing for that job.
Speaker 3Looking back, what surprised you about joining an endowment investment office? The
Speaker 1world of manager selection, manager due diligence was entirely new to me. The level of rigor and thoughtfulness that goes into the manager selection and due diligence process. Importantly, what struck me the most is understanding the nature of the capital base that you're working for, the liquidity requirements, the duration of the capital base, the governance structure, how you think about the needs of the institution and how that informs the investment strategy that you're able to perceive. It was eye-opening to see how all those pieces fit together. Learned that over time, things like a private equity fund or hedge fund, those are wrappers. Legal structures for different investment strategies are only going to be different assets that can be pursued. Understanding how all those pieces fit together to make an institutional portfolio was a tremendous learning. At Emory, we had a public market team, private market team, and I sat in our performance analytics and risk role initially. I worked across the entire portfolio. It gave me a strong understanding of how the entire portfolio fit together and what the different drivers of return and what the different asset classes and the roles and managers played in the portfolio. That was a unique seat. Early on, I was like, oh, I'm going to make this great. Early on in my career, to have that lesson, I was less focused initially on manager selection, but how do you think about the ingredients that go into making an institutional
Speaker 3portfolio? What was your path from Emory to the seat you're now in at Shoa?
Speaker 1Emory, I had a fantastic experience. I worked there for almost 10 years. I had a couple of different roles. When I left, I was on the private markets investment team working with Amuthi Mathai, who's my current CIO at Children's Healthcare of Atlanta. I was just locked down this, have a strong 10-year relationship now with Amuthi, and that's been incredible, both personal and professional relationship for me. At the time, I enjoyed what we were doing. My former Emory colleague, Jason Bull, had been hired as the first chief investment officer at the University of Georgia Foundation. I thought about my career and what would be the next incremental learnings for me. I love private markets investing and still do within our portfolio. That's where I spend probably the majority of my time underwriting managers, getting some more generalist, broader investment exposure, also getting opportunities to do a lot of other things. I've been doing a lot of other things, but I've been working with a CIO directly and working with the investment committee would be an important next step in my career. I joined Jason. I had spent a few years at University of Georgia, helped him build an institutional quality investment office there, learned about generalist investing, had my first foray into presenting to an investment committee and learning how to do that, and for bad sometimes, but it's a fantastic experience to help shape my journey as an investor. I like being a generalist rather than an investor. I like being a generalist. I like I have a narrow sandbox. I want to find the best opportunity within that sandbox. You can think about investing across all asset classes across the world, make both absolute and relative return decisions on what goes into a portfolio.
Speaker 3Before you leave Georgia, we have to ask if you could give advice to someone that is presenting to their investment committee for the first time, what would it be?
Speaker 1The first time you'll be incredibly nervous. You're going to find a way to get over that. More importantly, the principles of humility, transparency, and accountability. You have a short window to build trust. It takes a long time to build. It's easy to lose. It's okay not to know every single thing. Prepare. Don't be overly rehearsed. What are the key things that I want them to hear? If I had to draft, what is the bullet points in a short executive summary they want them to walk away with? What is it I want them to feel? Those are the key things. Do so in a way that's punctuated with humility, transparency, and accountability. If I had to draft, what is the bullet points in a short executive summary they want them to hear? Do so in a way that's punctuated with humility, transparency, and accountability for both what's working and what's not working. Love it. Continue along your path from Georgia
Speaker 3to where you are, Joe.
Speaker 1One thing that I needed to develop was leadership of people and then contributing in a meaningful way to helping shape governance and strategy. I was recruited to be the deputy chief investment officer at the Maine Public Employees Retirement System. I'd known Jim Bennett, the CIO there, through connections from Maine. I thought very highly of Jim. I ended up interviewing for that role. I was the chief investment officer for the I thought it was a great opportunity to step into a formal leadership role in a way that would be directly leading people, supporting Jim in governance, helping manage stakeholders. Things that I was doing at the periphery, but not as a primary part of my job. I value the experience that I had there. Learn the art of stakeholder management, the complexities that go with that, and rewarding feeling of helping lead a team. There's high highs and low lows in terms of bringing your best self to work. Every day, give people opportunity, help challenge them, make them better, try to impart wisdom where you can, give them room to run, get the best out of each team member. That looks different for each team member. So adapting your leadership style to where that person is. So it's the first opportunity that I had to apply those things in a role, benefit from that experience, much better leader and person at Children's Day, given that experience.
Speaker 3What was the impetus for the transition from Maine to Georgia?
Speaker 1I'd always admired children's and what they meant for the community, for the state of Georgia. What better mission is there than to work on behalf of kids? I was hired as a CIO there. I had stayed in touch. I remember him and I had a number of conversations he was joining about his vision. The call came that he was ready to begin building his team. I was doing my time at Maine, but it was a pretty easy decision in terms of somebody who had been an incredible mentor, incredible investor, incredible leader that I admired. Located in a city I already had lived in and was familiar with. It was an incredible opportunity. Been there three and a half years now, loving every minute of it.
Speaker 3I want to ask you about the various institution types that you've sat at throughout your career. What is it that an endowment analyst or associate doesn't understand about how a pension or a healthcare system invests that's different from how they invest?
Speaker 1For many of us, it's a jump straight into asset allocation or what manager is in the portfolio. The experience of having worked at a pension, hospital system, and endowment. That's such an important thing. I don't like to start with asset allocation or So you have to understand each institution's liabilities, level of dependence on the portfolio, the time horizon, the governance structure, being able to understand the abilities of the institution's willingness to take risks. And those are not the same thing. Having a deep understanding of the capital base is the key to effectively managing an institutional pool of capital. The investment philosophy can then inform a strategy, the five W's, the who, what, when, where, why, how do we spend our time, who do we spend it with, what is your real objective. Selecting a manager is generally similar across strategies, access, due diligence process, certainly very widely by institution. Each institution needs to find what their competitive advantage is, lean into that. The starting point is at that capital base. What is the institution trying to accomplish? What is their mission? How does this pool of capital support it?
Speaker 3Looking back at the three institutions that you talked about prior, how did the nature of those capital bases, so Maine, Georgia, and Emory, inform what the ultimate portfolio looked like and how you made investment decisions?
Speaker 1At Georgia, we had a small team. Jason Bull, the CIO, clearly identified. We're a small team of few investment professionals. Where can we spend the most time to generate the most alpha for the portfolio? We had a reasonable amount of passive investments within the portfolio. We spent most of our time on hedge funds, private equity, and venture capital. The dispersion of returns there is greatest, access is hardest. If we can spend our time to make the biggest impact on the portfolio, it's in those wide dispersion, high alpha asset classes. Maine Purse, it was about having scale. Innovative and over 50% of the portfolio is an alternative. It would look similar from an asset allocation standpoint to an endowment foundation style portfolio. The underlying strategies and implementation of that may be different. You have things like infrastructure, real estate, some resources, also private equity, venture capital, less venture capital than you may have at an endowment or foundation, healthy allocation to private credit. If you can invest in private credit, then you can also have significant co-investments. That goes a long way in helping meets your discount rate. While the asset allocation on paper may look similar, The ability to scale, the ability to use different flavors of those asset classes look different. And then how about Emory? Endowment style portfolio at that time, early to investing in venture capital, great drivers of return there, active global portfolio. There we had more of a traditional strategic asset allocation, clear asset class buckets, focus on manager selection within those. That's different than our approach at Children's. There was about how do we find the best managers globally to partner with across asset classes at Emory.
Speaker 3It's a great segue into Choa, starting with the nature of the capital base. How does that nature of the capital base inform how the team is set up and how you make investment decisions?
Speaker 1To Mutu's credit, he really spent his first year developing trust, understanding what the nature of the capital base is. From there, we can implement our overall investment philosophy. Children's has a rich 111-year history. We have a dual mandate to both provide protection and performance. About 30% of the assets are in defensive or fixed income-like assets, relatively liquid, low beta. The strategies that have low correlation to equity markets, low correlation to credit generally, except for the credit book. Diversifying strategies that can earn attractive returns in a liquid format. The other side of the coin is the equity market. The other 70% of assets, the goal there is performance. That's public and private equity. We think about equity is equity. Where is the pockets of inefficiency? Where are the pockets of innovation? How do we have the most attractive risk-adjusted return for each segment of the market? The capital markets are across the globe. We have thematic allocations to certain areas. Some of those we express through public investments. Some express through private investments. Some we think we can express through both. Oftentimes, that's based on the level of inefficiency in a market or perhaps the level of innovation. Finding compelling bottom-up opportunities to partner with what we think are exceptional managers.
Speaker 3How has that approach. informed how the team is set up?
Speaker 1We're a generalist team. As we've grown and the portfolio has gotten larger, we've moved towards a generalist team with majors and minor structures. So we have some members of the team with lots of experience in either hedge funds, public equities, private markets, just myself. We try to capture the best of that thinking, that expertise, and those networks and relationships. Well, having the entire team, everyone from CIO to myself down to our interns that we have with us, help rigorously debate how investment decisions are going to be implemented. What role in the portfolio may be? The approach is one of dynamic asset allocation rather than strategic asset allocation. The approach is emphasized by top-down diversification. We pair that with bottom-up concentration within our portfolio construction. Spend a lot of time focused on manager selection in both what we think, hope, are innovative and inefficient markets. It's a pretty flexible investment mandate predicated on a collaborative team, having great access to managers, which in many ways, is enabled by our mission and then our proactive approach that our team pursues.
Speaker 3Within this flexible mandate, this generalist structure, majors and minors, dynamic asset allocation, how does the decision actually get made? What does that look like from beginning to end?
Speaker 1A significant amount of time is spent on proactive sourcing. The entire team has responsibility for sourcing, developing relationships with managers. That's in your major, that's in your minor, that's across our thematic allocations. The entire team is dedicated to doing market mapping, spending a lot of time on market mapping, spending time in market, developing relationships with managers. We run a proactive and robust pipeline within private markets. We know 12 to 18 months out, where a lot of the capital has a high probability of going, because we've been proactively building relationships with managers or spending time with our existing managers for a long time. We have a rigorous due diligence process. I spend a lot of my time thinking about our process, making sure that we have robust debate across the team, making sure that questions are answered to everyone's satisfaction. And sometimes they can't be. We're okay with if there's not a unanimous decision. Sometimes I think if everything was unanimous, we wouldn't actually be making hard enough decisions. So we're okay if there's diverging viewpoints. We just want to solicit those, have people heard, and make sure that we understand where people's concerns, considerations, risk may be. So that gives us a lens into what can go right, also what can go wrong. We value having that diversity in thought and perspective. I have an iterative process where we'll do a short memo, qualitative, quantitative analysis. Walk the team through multiple iterations, hopefully, where we can. We have an internal investment committee. Everyone votes. That's a member of the team. Mutu has final discretion on the sizing of positions up to certain parameters. Mutu, myself, and Don will start a head of operations, see how everybody votes. We encourage people to write real considerations as we take those seriously and use them oftentimes as monitoring points. Because once we make an investment, monitoring becomes the next phase of the life cycle. I think a lot about process. What is the role of any manager in the portfolio? Ted had a great article about the investment office playbook. Mutu and myself have embraced that. We've used that same framework as we talk to our investment committee, our leadership team, and even our internal team about where we are on our journey as an institution at Children's. As we move from the deployment phase to the optimization phase, there's a reality of within Marketable's portfolio, that transition happened a couple years ago. We're one in, one out there. Something not only needs to be a great manager on a standalone basis, but also needs to bring something different or be additive. To the portfolio in a unique way that our current manager can't fulfill. Joined three and a half years ago. Private investment portfolio was still relatively nascent at that point in time. In terms of our overall investment strategy that we intended to pursue. We're right on the cusp of transitioning from deployment to optimization. Gone from adding a handful of new managers a year to zero to two managers and in a given year. That's a new muscle to develop. We also want the team to be proactively sourcing and to be developing relationships, both with existing partners and new potential partners.
Speaker 3I'd love to get into your role specifically as senior managing director on the investment team. Especially with this data point of the investment office life cycle of moving from deployment to optimization phase. What is your allocation of responsibilities and how you spend your time given where the office and the portfolio is in that life cycle?
Speaker 1It's certainly evolved over the last three and a half years. It's been 30 to 40 years. It's been 30 to 40% of my time working collaboratively with Muthu on leadership of the team, governance. We're closely integrated in the system, which may be one of the biggest differences that I've noticed between being at a university endowment and the hospital system. We inherently are part of the system and we're there to serve the mission and contribute in any way that we can. We spend a lot of time with our CFO thinking about where the overall organization's priorities and the system's priorities and how we can be supportive of those. The idea of developing new skill sets is something that I hadn't done previously. And I love that part of my work. We're about 17 people today. One of the things that we're most proud of is the team that we have. We have great difference of perspectives. We had some folks join us with direct investment experience, which has been incredibly additive to those of us who had more of a traditional allocator background. Now that we've all solidified around the strategy, that framework helps. We're able to inform how we spend our time and who we spend it with. I think a lot about how do I provide advice and guidance and perspective, but more importantly, how do I empower other members of the team to go and execute against that framework? It's looking different three and a half years in than it did the first six months. I have been doing this for a while. I have a lot of strong relationships. This portfolio should begin to reflect managers that you've sourced, that you've developed strong relationships with, empowering people to do that, go find managers, underwrite them. I'm willing to take risks, but we want to encourage members of our team to put ideas forward, even if they're unconventional. We just want a portfolio where the best idea wins. The one thing I spend a significant amount of time thinking about is making sure we run that rigorous investment process so people are empowered, but we fully, exhaustively examine all aspects of an
Speaker 3investment to the best of our ability. Back to that pie chart of time allocation. If 30% to 40% is spent on team, how much is spent on process, and then what else is in that pie chart?
Speaker 120% on process, the remainder of time spent investing. I describe my role as probably the most fortunate position where I get to do governance and help lead, but I also get to actually do some of the day-to-day investing. Investing activity is interesting in that it has a couple of different flavors. We're all generalists, we're across the portfolio, we're evaluating a hedge fund, sometimes I'll help contribute to that effort. John Dolph on our team, he's got 25 years of experience with hedge funds, that's the type of person you want to empower to go build a great hedge fund portfolio. It can be a sounding board, debate ideas, but it's not the day-to-day underwriting and managers. My background is more in private markets, venture capital, real assets. When I do spend time underwriting managers, it's within that segment of the portfolio. Other than that, we've built a world-class venture capital portfolio, saw that as a huge opportunity to be able to go out, evangelize children's mission, develop new relationships, build a great venture capital portfolio. My colleague, Sam Gay, in particular, works with me closely. on that, Sam saying, so I can't take credit for it, but he says whenever there was a doubt about, can we get access to a manager? Just get on the plane and go. We use that mindset. We try to learn from our best managers. That's what they would say. If you want to get in front of the best founder, get on the plane, go take the meeting. We're pretty active there. Happy with how that segment of the portfolio is taking shape.
Speaker 3There's so much to dive into across this spectrum of how you spend your time that truthfully is pretty unique. No two people have the same allocation of responsibilities and how they decide to spend their time. Yours is wide reaching, involved in so many different facets of the investment office that it's exciting and interesting to dive into a couple of these. I want to start with team. You mentioned that empowering the team looks different than what it was when you first started. I'm curious what an example of that is now. How are you empowering your team to be successful?
Speaker 1We think of relationships across the portfolio as having stacked layers of analysis, execution, and judgment. Analysis, doing the quantitative work, qualitative work on a manager, execution of going out proactively sourcing, leading the underwriting, and then judgment as a senior person on the team, bring perspective of relationships, network. As the team has matured, transferring a lot of that judgment layer to them as well. You've done a fantastic job developing a relationship with this hard to access manager. I'm here to support you, provide perspective. If we need to get on the planet, let's go do that. You should lead this. You should lead this effort. It's your idea. You should spearhead the underwriting. I trust your judgment. I trust the level of thoughtfulness and rigor of your work. That is different as folks have been here for three years versus six months. How do you widen the aperture? How do you empower them so that they help shape the portfolio? How do I make sure that the ideas that do go in align with that overall investment philosophy? Let's talk about that. What is the fit of this? What is the role in portfolio? I understand it's a great manager on a bottoms-up basis. What does it truly bring to the portfolio? We should discuss that in depth. Sometimes a private sounding board, and then sometimes a public sounding board. That's probably the biggest evolution over the last few years. My colleague, James Zujoin, who worked in leveraged finance in New York, worked at an independent sponsor in Atlanta. He brings us a level of direct investments experience and skill in underwriting of private equity transactions that has been incredibly complimentary. It's helped us widen the aperture and how we think about investing within private equity. Examples of that would be, we want to stay in the pockets of inefficiency within markets. That's getting harder and harder. One is more capital comes into private markets. And then as we've grown as a portfolio, how do we think about becoming a full lifecycle investor? Maybe we can partner with somebody on a few transactions to independent sponsor. We're willing to develop strong relationship conviction and help anchor their fund. Eventually, and we have one instance of this, maybe we could think about being, supportive, collaborative capital. If they have a generational succession issue, one partner needs to buy out the next. We need to provide growth capital. How do you think about being a full lifecycle investor? How do you think about being a first call for co-investments? How do you think about being a first call for if a manager has a unique secondary opportunity within one of their funds? How do we position ourselves to be that preferred partner? We spend a lot of time with the team on those aspects as well.
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Speaker 3Investing involves risk, including the loss of capital. And now, back to the show. How do you balance empowering the team and giving them more responsibility in this judgment layer that you described versus someone making wrong decisions or making poor investments? No one bats a thousand? There's no exact investment.
Speaker 1It's only team investments. Once we make a decision, it's all of ours. We all contribute to that decision. We all have responsibility for it. The things that we can control are the process, the rigor by which we pursue the due diligence process, how we size a position. We can't necessarily control the outcome of that. Some things go wrong. Some of those are foreseeable. We can often look back and say, hey, we identified that risk and unfortunately it came to fruition. That was a calculated risk we were willing to take. Sometimes things are unforeseeable. You can't underwrite every single risk. We want to encourage our team to be willing to take risks. If we have a consensus portfolio that looks like our benchmark, we can't produce alpha. We need to be willing to take risks, risks that's outside of our benchmark. The risk of partnering with a newer firm, but maybe they have a better alignment given where they are in their life cycle. They're focused on generating investment returns so they can generate wealth rather than preserving the wealth that they have. Every decision is a team decision. The team is responsible for success. We own the failures. It's a core principle. You have to do the work. You have to have accountability around doing the
Speaker 3work. You sound a little bit like an NFL coach on Sunday afternoon after a loss where it's on them and when the team wins, it's all on the team, which I appreciate. It's the way it should be. You have an investment that you've made that was brought forward and sourced by a younger member of the team that you're giving more responsibility in this judgment layer. That investment over time goes wrong for some reason that was unforeseen, not something that you accounted for in the due diligence. That junior person inevitably feels responsibility because they sourced it. They brought it to the team. Of course, it's a team decision. What is your conversation with that junior team member who feels that sense of responsibility and ownership to an investor that didn't go the right way? It's so important to do
Speaker 1both a premortem. How do we think about what could go wrong? And then what materialized like a postmortem? What did go wrong? Was there something in our process that we missed? Was there an area of refinement within the process? Did we just miss on underwriting? Was there something foreseeable or unforeseeable that happened? How do we learn from it? We size all positions in an appropriate way. We start with what's our core target position and then depending on level of conviction across the team, depending on Muthu's conviction, my conviction of the opportunity, we'll size it accordingly and then the risk that we see. Our job is to take risk, get more investment decisions right than wrong. We certainly don't expect to have a 100% hitting rate. We are okay with that as long as it wasn't a breakdown in process. And if there was something, we need to learn from it. Every opportunity is a learning opportunity. We also learn more about things that went right. How do we spend more time leaning into that? Capitalizing on relationships where we seem to have developed an edge. How do we do more of that? Every investment is a learning opportunity. I was on a panel a couple of weeks ago. One of the questions to me was, have you been doing this 20 years? What are your reflections on mistakes that you've made? There's two kinds of mistakes. There's the foreseeable mistakes and the unforeseeable ones. My initial thought was I thought about maybe a software investment that I made a few years ago that was pre-ChatGPT and that may not turn out to be a great fund. The dynamic has changed. Was that a mistake? I'm not sure as much because we're in a rigorous process. Did you throw your diligence on the manager? I didn't know in 2021 when it was made about ChatGPT. Could I have known? Should I have known? So I don't chalk that up as a mistake I have personally gotten things wrong and made a bad investment. It often comes timed around some elements around people. Did I understand what their motivation was? Did I understand what their economic alignment was? Why are they doing it? Is they doing it for love of the sport of investing or they're economically aligned with us? Are they treating their people right? They have the ability to attract and retain and empower exceptional talent. Oftentimes it's been people or the team dynamics and alignment around those
Speaker 3things that have led
Speaker 1to mistakes.
Speaker 3It's a good segue into the investing components of your job. I want to call back a couple of things that you've already mentioned. One in particular is the pockets of alpha are harder to come by. I'm curious where you have found those pockets of alpha and how you've exploited them.
Speaker 1If I had to characterize our overall investment strategy, it would be to buy quality and public equity, build quality and private equity, and back innovation and venture capital. On top of that, we have thematic allocations that may be expressed through public or private markets or just one. For example, technology is a thematic allocation expressed both in public and private markets. India, mostly public markets, a limited amount of venture capital. China, public investments, biotechnology, mostly public, but have some exposure to tech bio as the convergence of life sciences and AI is happening. Inefficient, innovative markets, there's upper limits to those thematic allocations, but the mandate is not to fill them. Having exposure there is highly dependent upon compelling bottom-up opportunities to partner with what we believe are exceptional managers in either inefficient or alpha-rich markets. Within buyout, we're focused on the lower middle market. We still believe that there's inefficiencies that can be had there. They're being squeezed out. We're having to think hard. Buyout as an asset class is possibly going through what hedge funds 15 years ago, we had so much capital come into the space, a lot of the alpha squeeze out. How do we stay small? How do we stay nimble? How do we think about partnering with managers who are so capable of generating exceptional returns. We're finding those opportunities, but it's gotten harder. We think a lot about participating in innovation. Are we in the right ecosystems? Are we in the right ability to partner with managers who will be in a handful of companies that are going to be transformative and create so much value within venture capital at the forefront of innovation? Themes don't stay static. We re-underwrite the themes annually. We generally contemplate new potential themes. Spent some time in Brazil early this year, just exploring Latin America. It hasn't risen to being a theme, but thinking about is there pockets of inefficiency there? There's certainly less capital, but that doesn't necessarily mean it's a place to invest. We're exploring it. Some of the teams spending time in Africa. We're thinking deeply about commodities, energy, power, and super cycle. We have limited exposure today, but we're working hard to develop a top-down view and understand the manager landscape. It's dynamic. It changes over time. One good example of the process is within biotech. Biotech performed very well. It crashed out. We re-underwrote the theme. Mike and Ben on our team led the work there and developed conviction in our managers, conviction in the long-term opportunity set. I was looking back at our last investment training materials. The level of compounding within that portfolio is by far the best-performing public equity segment. We stuck through, added capital when it was down, because we had conviction in the theme. That was based on believing that we had the right partners.
Speaker 3What are the quantitative and qualitative characteristics that determine one of these themes? Are they investable?
Speaker 1A couple of core elements. One, having a top-down view that it's a healthy market. There's reasonable enough rule of law, reasonable depth of capital markets that you can invest. There's little binary political risk. Having conviction that there's enough manager talent and we've found an exceptional manager to express that theme through. Believing there's a strong pocket of innovation or an efficiency within that market. I love this example. Back in 2023, the team spent some time, thinking about corporate activism in Japan. A few of us went there, led by my colleague, John Dolphin, explored the manager landscape there. We ended up looking at both public and private equity managers in Japan. Decided that an aggressive corporate activist manager was the best way to express the corporate governance reforms happening in Japan. We partnered with a manager there. They've compounded tremendously. Their third largest position in our public equity portfolio today. Tremendously. They've been able to get us alpha from the market. I would describe earning buyout-like returns are better, given the unique idiosyncrasies around corporate governance in Japan. It's grown larger than some of our themes, but it was discovered by the team's intellectual curiosity. Also enabled by finding a fantastic partner by spending time on the ground. -
Speaker 3I want to double click on another component of the portfolio that you've mentioned has evolved a lot, and that's the venture book. For an asset class that is so capacity constrained and does have a lot of value, but does have such a wide dispersion of returns. How have you made a world class venture book as you've described? - We have a tremendous mission.
Speaker 1We focus on proactive sourcing, telling managers about our mission, all the good work that we are doing here at Children's, tell a story or two, help them share the power of the mission. Being proactive, spending time on the ground. Last year, I went to California nine times. - Just get on the plane. - If there's any possibility, get on the plane. Taking that attitude, seeking to develop meaningful relationships, being prepared, asking real questions, probing questions, challenging thinking, being a good partner. When we can get into a manager, we had the benefit of being able to have some strong relationships. That's been helpful. We've been willing to think about, what are the ecosystems within venture capital that we strongly want to be a part of? Finding a node within that ecosystem, leaning in there. All of a sudden, over time, we're getting referrals from some of our best partners. Hey, we know this person at this firm or this company who's starting. At this point, it's transitioned to, we are being proactive sourcing, but a lot of that proactive sourcing is coming through referrals from our existing network. Our list of managers that we aspire to invest with is much smaller today than it was three years ago. We have a great core portfolio built. Who within your network, Mr. Venture Capital Manager, do you think is a fantastic investor who is ready to do their own thing? We'd love to talk to them. We have fantastic partners who we're incredibly grateful for. Team executing into our mission has enabled that. Now we have to give ourselves a willingness to do some opportunities. They may be risky, maybe a new first-time fund, maybe a new manager. We're happy to invest in first-time funds. We don't want to invest in first-time investors, per se. We're willing to be an early partner, allowing ourselves the freedom to do some of those opportunities which may have the opportunity
Speaker 3to be a return with an asymmetric return profile. Back to the pockets of alpha, one of the things you mentioned is this transition into being a full life cycle investor. What's an example of that? -
Speaker 1The best example of this would be, there's a manager in portfolio. Me too and I have known the manager for maybe two, likely 15 years, maybe 10 years. Invested them at a few different institutions, supporting their funds. They were going through a succession issue with one of their founders getting ready for retirement. All good, celebration, but this manager needed some capital, help with some succession planning, also help with growth for the business. Looking for supportive, collaborative capital. I had talked to many GPCs. GPC stakes firms had offers from there. We talked with them. We can help be a solutions provider here. We know you incredibly well. Obviously transitioning from an LP with a passive relationship in your funds to ownership of the management company is gonna require a different level of transparency and trust than what we have been privy to to date. We spent six months with that manager going through what their aspirations for the business were, why this succession was important to them, what they intended to use the growth capital for, how they intended to use it to grow their business, attract and retain talent, provide further incentives for their team. We partnered with another healthcare system with us leading the transaction. Between the two of us to buy 10% in this management company of this manager. We're participating in both as an LP and then a GP. Those opportunities will be fairly limited, but only enabled by a proprietary opportunity, building trust over many time periods of being a great LP, being a thoughtful partner, many LPs from my perspective. One of the things we need to focus on is how do we be an exceptional partner to some of our managers? Hopefully that builds trust with them and they also return the favor by being exceptional partners to us and that can develop into some of these more interesting proprietary opportunities. Like I say to our team all the time, one of the best ways to compound children's capital is to compound our relationships with our best and highest conviction partners and that can take different forms. Sometimes it's a proprietary investment opportunity, sometimes it's being a first call for a co-investment. There's been a few instances, we had one manager where the manager had a secondary sale, helped walk us through the underwriting. We ended up buying a high quality asset at a significant discount, highly accretive day one, and the manager helped us understand the prospects for the companies that were in that fund. How do we lean into some of those relationships that we think could earn great returns? -
Speaker 3When these types of proprietary opportunities arise, Zach, are you the one that is spearheading these initiatives or does this fall into the purview of the team of generalists who are responsible for their own proactive sourcing? -
Speaker 1A little of both. In addition to doing venture buyouts, I do some of the special situations investing. This does not cleanly fit into a fund. It doesn't cleanly fit into a co-investment. We think there's good output to be earned. We think there's a great partner, but it doesn't fit in the clean due diligence style or box. It's just something new. Certainly led the effort on the GP stakes first time that we did that with collaboration across the team. We've noticed there's an interesting dynamic where there's almost two venture markets that have evolved. There's the insider round. There's the primary round that's invested. We've been working closely on an idiosyncratic relationship where they're not necessarily a manager, but it's a trusted advisor to certain companies. They're being offered equity in exchange for some of the work that they're doing with some of these companies. Referral from our network built a strong relationship. We are helping be innovative and help provide them some equity. They're being rewarded as an investment to be able to take down these proprietary opportunities, often at the insider round price. Certainly leading that effort. It's not a fund. It's not a co-investment. We're doing this all alongside a partner. It's not a direct investment. It doesn't fit the clean parameters of what you think about. Hey, I invest in a venture capital fund or a hedge fund or a real estate fund. These are all team decisions that we make. And then over time, as you get more comfortable, we'll bring more members of the team and to help them with some of that work so they can gain exposure across the manager.
Speaker 3You have two buckets. You've got your 70% equity. You don't really care where that equity comes from. You've got your 30% of your cash alternatives. When you're reporting to the board and stakeholders, what does that look like? Because it doesn't sound entirely clean like a traditional asset allocation structure does. -
Speaker 1The most important thing is we think about the key things we manage our overall level of market risk. So what's the overall portfolio's beta. So that's a simple measurement of how much risk we're taking the portfolio, how much liquidity, we have within the portfolio. We have ample liquidity, median and each children's might have. We're purely managing unpauled, but committed capital. We think about what are the number of managers in the portfolio? What is the level of concentration amongst those managers? Talk down, thinking about those three things. And then we'll report equity-like. We do report some sub-components. Those components are not meant to be filled. So we have public equity, private equity. We'll have fixed income-like, and that'll be hedge funds, credit, fixed income and cash. break all that out, the committee has full transparency and so every line item, every manager, but we focus on how are we managing those key things, top-down risk management, bottom-up concentration of the portfolio, what have the results been, and ensuring that we have ample liquidity to meet any needs that our CFO, our leadership team may
Speaker 3have. I want to jump to another component of your responsibilities and how you spend your time that you alluded to, integration into the overall system at Children's. What's an example of how you specifically have been integrated into the CHOA system?
Speaker 1Ruth Butler is our CFO. She's incredible. She's been at Children's for 25 years. An incredible passion for Children's and the mission and also incredible institutional memory. We have no bigger supporter than Ruth, but also somebody who challenges us and makes us better every day. Ruth absolutely sets the culture of we're here to serve Children's mission. What are the ways that we can do that? Our primary objective in the investment office is to generate investment alpha on the portfolio, which is serve Children's mission. We also think, what are ways that we can contribute to operating alpha across the system? We serve on committees. We help evaluate ad hoc things that come up related to strategy. We've helped to buy on transactions around maybe IP that was developed at Children's funding rounds. One of the key initiatives that we thought long and hard about and Muthu and I have worked on is thinking about the idea of what we call our healthcare advisory system. We think about the idea of what we call our healthcare advisory system. We think about the idea of what we call our healthcare advisory committee. 35% of the portfolio in aggregate is invested in technology and healthcare-related investments. That provides us quite an expansive view outside our four walls. Through that portfolio, we have incredible access to investors, companies, experts, regulators, policymakers that are operating at the intersection of technology and healthcare. Two years ago, we set up the healthcare advisory committee. That's a working body within Children's aligned across administration, increasingly hoping to expand across clinical areas of the enterprise and then across research. Within that advisory committee, we think about where are opportunities to generate operating alpha through focusing on opportunities and challenge that Children's is facing in the clinical or operating side of the business. Sometimes that has taken the form of a range of partnership opportunities. It spans everything from thought partnerships, mindshare on a specific issue around how technology is transforming delivery of care. Maybe we can do a little bit more of that. I think that's a great idea. We need help thinking through some regulatory challenges as policy evolves. How do we make those resources that are made available because of the investment portfolio available to the broader team? So opening it up to Ruth, her team, and other clinical and administrative leaders across Children's to help us work through some of these issues and challenges. I was thinking about direct manager engagement, talking to managers about what they're seeing in terms of innovation and care delivery. How are they thinking about integration of AI across the healthcare enterprise and also specific companies that we should talk to? So what are companies that are working on priorities that we've identified to better serve our patients that we think can help lead to better outcomes for patients? Implementation opportunities for that technology. How do we think about maybe helping invest or incubate technology that would help solve a true priority for us? Definitely help spearhead that effort. It's been one of the most rewarding and enjoyable parts of my job in terms of developing a new skill set. The power of how the portfolio can bring resources to bear and bring expertise to bear to work on behalf of this institution is also incredibly powerful for us as investors. We can make operating expertise within the system available to some of our managers or their companies. Work closely with them. There's been instances of doing due diligence on a venture capital manager, or maybe they're doing due diligence on a portfolio company. I can put them in touch with somebody internally. Is this company working on a problem that you as a leading pediatric healthcare system value and you'd be willing to pay for? And those can lead to some incredible insights for a manager. We're happy to make those available. So if you're in a situation where you're in a situation where you're in a situation where So we learn, the manager learns, it is a powerful flywheel of opportunity.
Speaker 3That's fascinating. Clearly a valuable example of how the CHOA system can be impactful in your investment decision process. What's an example of the reverse where you've leveraged your access to experts in the investment technology community for the betterment of the CHOA system?
Speaker 1One powerful example of that is we think about this framework of One Children's and Healthcare Advisory Committee as part of that. But we also think about broadening the power of the portfolio and our access to expertise and managers across the system at Children's, but also within the broader healthcare ecosystem here in Atlanta. One of the ways we most recently did that was through a healthcare symposium titled AI and Healthcare Enterprise. That was an opportunity to bring together investors, companies, clinicians, practitioners within healthcare and technology for a one-day symposium. We were so thrilled that Dr. Noura Oyogu from Thrive Capital joined us. We had two of our technologists who are also clinicians talk about children's AI strategy. Where are the key problems that we're trying to solve? Whether it be access for patients, helping our clinicians and physicians practice at the top of their license. How do we ensure continuity of care and better outcomes for our patients? Also, Dr. Oyogu came and presented, did a fireside chat, talked about how Thrive thinks about evaluating. Companies, technologies, transformation of healthcare within AI, giving his unique seat as a doctor, an operator, and then an investor. We're aspiring to do a similar format in the spring around life sciences and research. Technology as relates to those areas of clinical work, harnessing the relationships that we have, and we are thankful for our partners being willing to help support us in these initiatives, but it's eye-opening for the entire organization to have access to that level of leadership.
Speaker 3Before we. Turn to our closing question, Zach. One of the things that you've mentioned a number of times in this conversation is how in lockstep you are with MUTU. I'm curious how you would describe your working relationship and how you operate together in lockstep across all of the different initiatives that you've outlined in your role.
Speaker 1I think a unique opportunity when you've known somebody for 10 years and you work together, there's a high level of implicit trust and that helps you get to work quickly. That's incredibly powerful. In many ways, you know clearly what his priorities are, what his vision is. I think a lot about how do I help operationalize that vision, understanding where his priorities are, thinking about what is the process, what is the strategy by which we go ahead and execute and make those a reality, whether that's the portfolio investments, whether that's the healthcare advisory committee that I discussed, spend his time thinking about his time is best spent on governance, developing strong relationships across the system and developing incredible relationships with our investment committee and members of the community. Helping, supporting him in governance, also being a bridge to the portfolio for him. What is going on? Where do I see his issues? Where do I see his potential opportunities? Trying to anticipate some of those items, make him aware, flag those items for him. What's going well? What's the pulse? What's going on with the team? What's going on with the portfolio? Be a resource to support him and help enable that vision. What's it like when you and MUTU don't agree on something? Occasionally. Depending on what it is, we'll ask the team in a team meeting. That shows it's okay if we want the entire team to have a healthy, active debate and operate with candor. It's super important that we model that and I can model that with MUTU for others to be able to feel empowered to. Depending on what it is, sometimes it's probably like, hey, we could have handled that better or that went well. Here's what we should lean into. The core thing is we are absolutely aligned on investment philosophy. Then the execution of that philosophy, there's some shades of gray. Sometimes I think, hey, we should size the position bigger. If we're always focused on the lower middle market, but maybe there's a manager being scaled as a competitive advantage, we can debate that. He's a willing and thoughtful sounding board, not dogmatic around some of those things. He's willing to hear perspective advice, and so I appreciate that push and pull. If you can come up with a credible rationale for making a decision, he's open to listening to that.
Speaker 3Do you have aspirations to be in the CIO seat at some point in your career? I love my current role.
Speaker 1It's incredible to be able to work on behalf of Children's Mission, to do work that I love with a team and a leader that I admire. I wouldn't say I explicitly have aspirations to be a CIO. I feel like many ways I get to do the best elements of the CIO role today, while also remaining afoot in investing. I still have 20 years or so left to work. That's a long time. It would have to be something special for a CIO seat because I have a special seat here at Children's. I can't quite think what that would be today.
Speaker 3What more would you want to? What would you do before assuming the potential hypothetical role of a CIO in the 20 plus years you have in your career?
Speaker 1What I admire probably the most about Muthu is his ability to paint a vision and get buy-in around that vision. I'm good at execution, rigorous analysis, being a leader, empowering, inspiring people. To be able to paint a vision that's inspiring and have people coalesce around that and share excitement around that vision. That's certainly something that I believe I can continue to learn from working with Muthu. That's a critical skill for a CIO. It could be the best investment strategy, it could maybe be the best access to managers, but if you can't clearly inspire a vision of why you're doing something, how it serves the mission, why it's good for the institution, those are all critical things to be able to do. He excels at that. I admire that and I want to keep getting better.
Speaker 3Zach, this has been so fun. I want to turn to a couple of quick rapid fire closing questions. What is your favorite hobby or activity outside of work and family?
Speaker 1It's watching my 13-year-old son, Liam, play baseball, and it's watching my 10-year-old son, Ryan, do wrestling. They both inspire me, and I find great joy in watching them do those activities. What is your biggest investment pet peeve? Overconfidence. Investing is the best approach with humility. There's an intersection of what's knowable. Oftentimes, that's backwards-looking. What you don't know, that's forward-looking, and then the intersection of two. And so we need to take a calculated risk, but also be humble in taking those risks. Being thoughtful around it, relate to that as talking about what something is rather than what could go right or what could go wrong. If we've done the work up front, we should know what something is. So we make materials available. We should all do the reading. We should put in the work. The substantive discussion is around the potential of what could go well, what could go wrong,
Speaker 3and being brutally honest about those two things. Last one. What advice would you give a young allocator that you wish you knew earlier?
Speaker 1Seek opportunities for mentorship within your organization. Find somebody who's willing to invest time in helping you understand the full aspects of what's going on at institutional portfolio level and maybe even what's going on with institutions. It's easy to believe an investment may be a compelling idea. It's much harder to understand how that fits within the overall institutional objectives, objectives of the portfolio, some of those considerations. Having somebody who can help you understand those aspects of investing is, I think, critically important. As AI increases, it makes the work of analysis much more efficient. It's so important to use technology, but have somebody help you think about what are the only things that you can do, how you can uniquely contribute. And that may not be analysis or maybe not be research. AI is an accelerator for those things. How do you develop judgment and how do you have accountability around some of those decisions and have that broader perspective? I would just encourage mentorship. Sometimes there's a reason to be patient and learn.
Speaker 3Zach, thanks so much again. This was a total blast.
Speaker 2Thanks, Hank. Thanks for listening all the way to the end. If you made it this far, how about one ask from me? Tell one friend about the show. It's the best way to keep growing this incredible community. Thanks so much. And until the next one, stay curious and keep compounding knowledge, relationships, and capital a little bit at a time.
Speaker 4All opinions expressed by Ted and podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of capital allocators or podcast guests may maintain positions and securities discussed on this podcast.
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