[REPLAY] - Ashby Monk – Asset Giant Futurist

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Professional shareholder representation, online M&A payments, digital stockholder solicitation, SRS Aquium pioneered each and continues to set the bar for game-changing innovation. So leave the days of disjointed deal management behind and define your future with SRS Aquium, the smartest way to run a deal. Learn more at SRS Aquium.com. That's s-r-s-a-c-u-i-o-m.com. I'm Ted Sidies and this is Capital allocators. I guess on today's show is Dr. Ashby Monk, the executive and research director of the Stanford University Global Project Center. Ashby is also the senior research associate at the University of Oxford, a senior advisor to the chief investment officer of the University of California and the co-founder of Longame. Ash advises sovereign wealth funds and large pension funds and is involved with a bunch of FinTech companies, all of which attempt to create innovative solutions to fixing the financial picture for individuals, pensions and countries in the years ahead. Our conversation starts with Ash's early work experience and path through academia and flows into an exploration of next generation, lower cost approaches to active management for large asset owners. We touch on investing in public equity, private equity, venture capital and hedge funds using examples from the Canadian and Australian pensions, New Zealand Superfund and University of California Endowment. Lastly, we discuss Longame and Innovative Company seeking to improve personal savings in the United States. Ash has a passion-driven creative thinker who rightfully has the ear of some of the most important pools of capital in the world. His ideas will change the way you think about allocating capital. Please enjoy my conversation with Ashby Monk. Ashby, thanks for joining me. Well, thank you for having me. It's a pleasure to be here. Why don't you take us through your background? My background is a non-traditional path to end up being whatever it is I am today. I guess the way I might start, do you want the two-minute version or the five-minute version? Let's go for the four and three quarter minute version. So it starts in the country-cilled Canada in the town of Edmonton. That's where I was born. My dad was in University at University of Alberta as was my mom. I was born Edmonton and that was 1976 in September and in 1980 my birthday. Yep. Just crossed my 41st year. Which is interesting. The difference between being in your 30s and 20s when your wife buys you sneakers in your 30s and 20s she buys you running shoes and at age 41 I received a pair of walking shoes. Literally it literally says walking on the tongue of my new shoes for my 41st birthday. So that was a bit of a nighbrow raise. No, but so 1980 my dad was working at Hewlett Packard and was invited down to Silicon Valley for a two-year tour of duty. He had sold, I believe, the first supercomputer in Canada to the University of Alberta from HP and they said young man has time to come down to the HQ and see what we're really working on and he never left. So they still live in the Bay Area 30 plus years later and so I grew up being a foreigner, a Canadian in America and then I became an American I think at age 18 and then I went off to Princeton and it was at Princeton that I often describe it that I majored in rolling and minored in economics and so after Princeton like all good economics undergrads I was presented with the two pads that are available as far as I knew consulting and banking and I chose banking and I went off to Wall Street to do two years of investment banking and then another stint as a financial services venture capitalist focusing on what we called back then internet finance. What we might call today FinTech and we were also playing around with offshore financial centers and the ability to set up reinsurance companies in places like Bermuda and understanding how you can generate higher return and not have it taxed in these offshore environments and it can kind of change the dynamics of a reinsurance company. Anyway all of that kind of came together to inspire me to understand more and in greater detail the financial services industry. I can't say that I was like inspired by what I found within the bowels of the financial services industry. I had to go about that. Well I mean just the process of first of all being an investment banker and learning what it meant to do transactions was not what I thought it meant but truly did believe that we were at the center of this important institution that was allocating capital between you know asset owners and projects. It was much more self-serving than that and then when I moved over to venture capital which was my hope that you know this would be much more aligned with long-term value creation even there because I was doing financial services venture capital. The focus was as much on fee streams and transactions and extracting rents wherever possible and so none of that kind of felt like it matched with the idealistic visions I had for the financial services industry graduating from college and then so after I don't know three and a half four years I quit and there was a couple of reasons I quit. One was 9/11 happened. My wife was in the towers she's fine but she was down there and she was one of those dust covered people that you saw on TV that was her. She had to hide in a parking garage. There was a stint on that day where I wasn't quite sure if she was alive. I don't want to oversell it but it was a big enough moment in our lives that when we kind of reunited that day we were like what are we doing? We're working a hundred hours a week we're in our early 20s you know we don't love what we're doing and so we both kind of looked at each other and we're like let's quit and let's go to Europe and so we did and so I was racing bicycles at the time. I had been a railroad in college so I understood how to suffer but cycling was a whole different level of suffering and so I went and joined an amateur team in Paris and traveled around Europe and raced. One my wife who was still my girlfriend at the time we had met at Princeton. She taught English at University De Palais Sank I think which is Assass and just kind of lived a dream there for a while and then we both got into the Sorbonne to do Masters in International Economics. We were the only two Americans in a program of 800 because he had to speak French and that was around the time that we were invading Iraq so it was quite an interesting time to be an American in a French university with no other Americans so I'm just rambling here man so you want to just jump in yeah keep going go for it all right this is almost up to four minutes though so Paris Masters International Economics I kind of got the bug for academia again then we went Oxford so my wife got in to do a doctorate an empilm and then a doctorate in economics I went to go do a doctorate in economic geography with a guy named Gordon Clark. What is economic geography? It's a multi-method approach to understanding economic activity that builds theory from the bottom up instead of the top down and rather than viewing the world through a lens of a kind of a top-down theoretical model or methodology we kind of build our understanding of the economic environment and economic systems through big data but also through interviews through case studies I mean I guess what I had kind of lost the love of was you know we we built these models and these theoretical constructs that on the surface seem much more elegant and robust than anything we would be doing if we were doing case studies the problem is the assumptions that went into those models were just as suspect as the selection bias that might be in a case study so rational actors and efficient markets I mean I think sitting here today 2017 I think we don't obviously agree that that's crazy because we are all crazy so we're not rational and and at the time like I didn't want to spend five years doing a doctorate basically embedded in that world I went from there to the Center for Retirement Research at Boston College whereas a fellow it's actually a joint fellow program between Oxford and Boston College and my project there was on national retirement systems trying to understand both the asset side of the equation how should we invest this money but also the liability side of the question which is how do we prepare people for retirement and each of these kind of stints in my life have been very formative the Boston College stint was formative in the sense that it taught me how intractable the problem is in the US in particular oh my god like we are in trouble in terms of our retirement security and with the population aging and and the medical science only getting better and so we're all going to live to 150 years old and a hundred years so we're in big trouble and it's really in some people debate with me on this was really a funding problem we got to get more money going into these programs and what I learned at Boston College is that here in the US we don't have a political will to create a mandate like we have in Australia and we don't have a political will to create a kind of crown corporation model of pension investment management like we have in Canada and so we create these various iterations of defined contribution pension plans that are the equivalent of if we took the parallel into the medical industry it would be like saying here's WebMD go diagnose yourself and here's the medicine cabinet that you can pull out of and and treat yourself and oh by the way WebMD is filled with a bunch of belonging it's not just good medical advice it's also snake oil it's also you know tons of things in there that don't make any sense that people are doing day in and day out so how is it different in Australia or Canada I mean how is it set up differently and why can't the US evolve in that direction well I think Canada is a little difference because different because they trust their government and so that that creates a different relationship between the crown corporations the people and the government the crown corporations are their arms like entities set up by the crown but they run their own budgets they have independent boards kind of the the boards can be sacked but in some cases their double arms like the board where you nominate a nominating person committee and that nominating committee picks from a set of standard boards of directors and then that those boards of directors have the right to set the resourcing for the entire organization internal and external including comp and are those the what we think of as the big pension plants oh yeah they're sorry yes the crown corpse it's it's like a legal structure that has allowed the Canadian model to exist because it's quasi private so the boards of directors of these public entities can set comp in such a way that they can recruit and retain very high quality people and the reason they do that is they've done this massive analysis of the fees and costs paid to external managers and they've decided well listen what if we did this ourselves and stomach the political damage of paying public employees seven million dollars a year I mean we're okay paying football coaches seven million dollars a year in this country that are public but we're not okay paying a chief investment officer that much that's a sacrilege and how about Australia Australia they did the this incredible mandate that all individuals have to contribute it's going towards 12% and it may even go higher than that now I think of it of their income into a super fund the super funds so already you're getting enough money into the in the door that's important beyond that they also are professionally managed and increasingly professionally managed as you're seeing consolidation among the super funds and so you get this really nice mix of the individuals are putting enough money in and the assets are being managed in a way that it has to be called professional like when you look at Australian super or first date super or C bus these are top-notch organizations that are really setting the standard I'd almost say globally for what the next generation of retirement organizations will look like like I think here in the U.S. we have a ton to learn from Australian super and how do they organize their teams and manage the money because the active passive debate is so pervasive in the U.S. and those are huge pulls of money say how how do they go about you know organizing is it's presumably is actively managed they're internally managed right yes so there there is active management like if if we take the case of Australian super and full disclosure I am a consultant Australian super but the organization manages an internal public equities team they manage an internal infrastructure team an internal real estate team I think there's fixed income securities that are now coming online they've set up an office in London there's another global office that's going somewhere that I don't think is public yet so they are building a professional team and the what you're going to is where do you choose active and where do you choose passive if you're building this internal fund and the answer to that is where do you have an edge and I think that is increasingly the question most pension funds are asking themselves is it's not like how do we get access to the best managers it's what is it that's unique about us that could facilitate privileged access either to assets or managers so if I take the example of the University of California where again full disclosure I'm a senior advisor we have this ten campuses we have five of the biggest hospitals in the world we have three national labs there's 10 billion in R&D it turns out that external managers are fascinated by this ecosystem and so we can go out to external managers and say listen we'll partner with you and we're going to add value in a way that you can't even understand today and over the last three years of watching Jagdeep Bashir and his team implement on that I can tell you that works like they're getting into managers on terms that I would describe as aligned and I never would have imagined we could actually do it I mean in theory I loved the idea but in practice and is there is there a specific example you could think of where Jagdeep and his team brought some resources to bear that probably nobody else could have I mean we're constantly tapping the energy labs for insight massive energy laboratories within the UC ecosystem to be able to assess and understand opportunities and deal flow we are tapping the medical science communities for understanding you know the future of gene editing and things like that but even beyond like those let's call that research into diligence and understanding the market we partnered with Bo Capital which is an effect the the entity that is UC Ventures and that's a guy named Vivec run a D.V.A. that's running that we partnered with them and we brought the deal flow that is privileged to the University of California to the partnership and so the idea was specifically to say listen everybody's chasing the top venture funds they're hat in hand walking Sand Hill Road like we have all these companies that are coming out of our ecosystem that are being funded by those Sand Hill investors so we could anchor a new fund and take the rights that we have to participate in those deals and endow this new venture fund with those rights and immediately put that venture fund on the map as a key player in the valley and so that was what we yeah and it was the concept broad-based or it meaning there's a lot of deal flow are you trying to be the best venture capitalist or is it hey let's just do a pseudo index of the opportunities that we have and we think that's going to work out really well because of the access so my what I wanted to do and what happened is a little different so what happened was it's a combination of what you just described that's what is happening where there's a great entrepreneur who build a company called Tibco sold it for many billions of dollars he's recruited the sky who is an early higher at Facebook and Google and he's building what looks like a very experienced entrepreneurial team to help scale businesses and then they have privileged access to all these deals in the ecosystem if I was going to do it my way I might have designed it like this where we were creating all these little seed funds on each campus those seed funds would then collect rights to deals and at the same time we would collect rights to deals out of the IP office at the University of California those are separate entities in each campus but what I would then do is assign those rights to a broader fund and when a predetermined venture fund of repute does a deal in those we would swoop in and say hi everybody with the University of California don't bother us but we're just gonna take our 10% pro-radish air in this deal so somebody else a stamp of approval Sequoia whatever is doing the deal and then literally we could create a top-design venture portfolio at next to no cost and to me that was this deliciously appealing fund structure but in weirdly the governance kind of prevented us from going down that path exactly but I think we got close so when you're working with you know it doesn't matter California Australia how do you think about fees these days and why you know you talked about alignment and everyone's talking about it but what can what can people actually do people are so sick of me talking about fees but this is my chance right to tell people why the hell I'm on the soapbox so I spent 10 years trying to figure out how do we change the behavior of the big asset owners and why did I want to do that well first and foremost I think the financial services industry is capturing too much value it's distorting incentives we have this increasingly short horizon of investment despite the fact that we have a hundred trillion dollars in long-term capital we have an asset management industry and financial services industry that's capturing about 40% of all after tax corporate profit in America it's egregious even the research shows us that we may now have a 10x fold increase in trading activity from the 1960s but our financial services industry is less efficient today than it was a hundred years ago the unit cost of intermediation is higher today than it was a hundred years ago in the era of steel automobiles railroad and then another research paper shows that as your financial services industry gets bloated your productivity and growth begin to wane because that industry becomes attacks well we're at 40% of corporate profits like it's time for us to realize that the financial services industry is almost dominating the real economy and it's meant to be the other way around the financial services industry is meant to be subservient to and so I got into this project where I was like okay we need to find a way to level the playing field and ignite a new generation of asset owners that can be better stewards of the capital but more than that hold the asset management industry accountable and achieve alignment of interests I didn't actually start with fees I started by looking at sovereign wealth funds my first book with Garden Clark was on on the rise of sovereign wealth funds and we did that project because what seemed like I didn't know where this class of investor emerged and became almost the most dominant you know at least most talked about investor class in the newspapers and if I remember the first time I put the the search terms sovereign wealth fund into Google scholar in 2007 zero might have been 2006 but literally zero papers have been written and that to be fair owed to the fact that like a lot of these entities existed but we didn't know what to call them we called them permanent funds we called them reserve funds we called them stabilization funds but then Andrew Rosenoff came along and was like these are sovereign wealth funds and then didn't really define it kind of catalyzed us to begin thinking about these but so my initial hypothesis was governments around the world are gonna start setting these up they're gonna be big and what an amazing opportunity to go in with a white sheet of paper and start building brand new investment organizations for the next millennia and so I started working in the Middle East I started working in Canada with Amco I was becoming like close buddies with the New Zealand super fund all these places that I just found incredibly motivated and doing the right thing the challenge is just as I saw sovereign wealth funds as the blank sheet of paper upon which we could sketch out the idealized institutional investment organization the for-profit financial services industry saw them as lambs for slaughter and so just as we now have the New Zealand super fund was just clock 20% return this year and I would argue is the single best investment organization on the asset owner side in the planet today there were also the Libyan investment authority there was also one mdb in Malaysia there was there was countless examples of you know almost borderline tragedy where the financial services industry clearly took advantage of these funds Ireland being swindled on foreign X fees by state street Goldman Sachs swindling Libya on a billion-dollar derivative trade I mean we go on and on right and so what if you circle back to New Zealand yeah what is the ideal model for the next millennium investment organization well so let me I'm gonna get to that let me finish on the fees yeah the whole point of the of me telling the sovereign fund story was to say why am I focusing on fees well I focused on sovereign funds for five years and realized that I was not going to get the perfect role models out of there that we needed to change the pension sphere and so then you're like all right well for not gonna get these new role models then you begin to scratch your head and say how are we going to catalyze change how are we going to get the boards of directors of these organizations to change the way they invest and yes New Zealand which we'll talk about in a second helps because they're generating such high performance with entirely new model that is not purely passive and it is not purely driven by external managers and so when I got to the fee and cost argument I realized that if you could take the fees that were being paid to external managers and present them back to the board alongside the internal budgets that were being paid to staff the inevitable question time and time again that came out of the mouths of the board members was is there another way because the fees were so high and and what was even more so high externally oh yeah extra and internally is a joke yeah internally it was a joke I mean here in in New York you had this private equity role of ninety thousand dollars a year with a requirement to live in the five boroughs to manage a seven billion private equity portfolio I mean obviously that's gonna sit vacant for three years which it did but on the flip side you know you're finding out that you're spending billions upon billions funding private equity managers and you aren't you didn't even realize it and so until you had a sense for what the true cost of producing those returns were you actually didn't have a decision to either build it internally make it or externalize it buy it you know in the in the Williamson terms make or buy and so what the Canadians did is they got transparency around the fees and they said all right well maybe we'll make these returns internally in America we're still about to have this fee moment Calpers is having it now they realize they what was it four billion dollars in private equity carry was paid to GPs alone over a five-year period that's one line item of fees and then of course they're gonna say maybe we should just give it all to Blackrock I don't know if that's true I don't have any inside information but yeah I think the fee and cost issue the reason why I go off on this constantly is because it is a way of improving the resourcing at the asset owners it's not a way of shaming or shutting down the asset management industry it's about catalyzing boards of directors and trustees and fiduciaries to think of their organization in the broader context of producing a return stream and then resourcing them appropriately so one of the tricky aspects of that if you you started in the endowment world and even if you have what's considered a big team in an end down and it's not a lot of people and yet you're trying to create global diversification across asset classes so it's hard to look at that model and say you might be able to to develop pattern recognition to find great practitioners but you're not going to be able to compete with great practitioners that are covering all these different areas around the world so how has you know what maybe we go to New Zealand how have they changed that model so they can participate and compete in in global markets well I think you'll find out that if you dig in there a lot of the value add that it's generated over time has been based on three four or five big high conviction bets for which they have spent an inordinate amount of time on and for which they are actively seeking to use their comparative advantages to get and to tilt the deck tilt the table whatever it is in their interest so they're extremely good at strategic tilting and how broad are those bets are we talking about a country bet a style bet or a security bet well so I don't know what I can speak to in the public domain but I mean you'll you'll notice like they were holding all this Portuguese debt which then they had trouble with because the Portuguese bank defaulted and then the insurance company didn't cover it so they got a short straw on that but like truth be told New Zealand did everything right and they'll probably get their two hundred million back but you'll see if you look at the structure of the deal which is which is interesting because you can now go in and look at it they were getting an exposure to kind of a unique banking asset in Portugal and how did they source that deal what you know it probably came through a set of trusted intermediaries but they owned it directly and so I think that's part of it I think part of the big bet so two hundred million dollar I'm happy it's that pool to you right well I mean when they made that investment it was probably twenty two billion so you're talking about a less than one percent yeah yeah okay but so like in my world if you can have one hundred positions you are a highly concentrated fund like at you see when we got there three years ago I think this is all public but it's we had about three hundred and forty fund relationships and now Jagdeep and the team has whittled that down to something like a hundred and twenty and it's about concentrating the bets having higher conviction and so like I would push back on you on your question about how do you get global diversification who says you need it does Norway who is basically a global index fund they own you know one percent of the global stock market do they understand all of the underlying assets they own of course not but can a pension plan do they understand it probably pretty deeply because they're just taking a different model one is about active management and adding value and investing in illiquids and the other is investing in liquids and hoping to get broad diversification and just participate in the global growth and by the way a global diversification through index funds is a fake diversification index funds and ETFs are often calculated on a cap weighted basis which is a fundamentally flawed way to calculate indices and frankly it's even worse in the emerging markets where you have single or multiple companies making up a huge portion of the index so it's not like you're getting an exposure that anybody would describe as representative of the underlying economy we're going to take a quick break in the action to tell you about private equity investing at Brookfield with one hundred plus years its owner operators and a one trillion dollar ecosystem Brookfield focuses on essential industries and business services that help shape modern life yet are often overlooked it takes independent vision to see their potential perspective to acquire with precision and expertise to build lasting value it takes industry learn more at Brookfield dot com slash it takes industry and now back to the show so a lot of what you're talking about with new zealand canada is just a different model from the traditional model in this case asset management and retirement systems we're talking earlier about your interest in just financial disruption and innovation and we talk a little bit about some of the projects you're involved with more broadly all man so few things i mean i i love to work on projects where we're bringing long-term investors around a kind of investment thesis and then designing a new investment vehicle to facilitate some unique access point i mean i have this hypothesis with the this notion that we could unlock so much capital for things that are societally beneficial if we simply change the way we intermediated between the capital and the project so if you take this example of aligned intermediary which is what i would describe as a kind of a next generation deal sourcing deal vetting platform for long-term investors the whole idea was to say actually these long-term investors they have deep pockets they're interested in positioning their portfolios for an energy paradigm in the future that will have the energy inputs into the economy being more clean everybody kind of sees the writing on the wall but they know how to get access to these assets and when they look to the traditional private equity funds or infrastructure funds to see if they're exciting products there they don't see any because the fee structures are too high for the underlying assets they won't those assets won't support a two-and-twenty structure they just aren't built for that and so when i was working with jadeep and new zeland and a few others we just came to realize that if we could design something from scratch where we could source deals on a no fee basis and almost build this as an extension of the long-term investment teams we could begin to move a lot more capital into climate solutions what we call climate infrastructure wind water solar etc and because we were going to be moving this capital which is purely commercial and seeking out the highest possible risk return we could go to the philanthropists that had four mission to catalyze the clean energy capital markets and so weirdly it was this really interesting syndicate of partners where we had these pension funds fiduciary-bound pension funds saying I want to invest in those assets I can't but I see the potential for my portfolio to generate high returns with cash flow and then we had the philanthropists who are saying God I would love to see these pension funds investing in these darn assets we've been doing all these research projects trying to figure out how to get that to happen but all these pension plans shut the door on us when we walk in and this entity was basically a way to say philanthropists stop funding research fund a platform that we can build incredible talent within and that talent will then bring deal flow to the long-term investors and so that's what we did we launched it a year ago we've got six employees at the AI and so who who does the due diligence on the deals then well right now the fiduciary obligation remains with the pension plan and so the scope of funds that we can work with they have to have some internal capability there's no problem in the US that because of the $80,000 your private equity guy they don't have that capability yes so we have one American plan and it happens to be UC Regents we have New Zealand Superfund we have Welcome Trust we have Seaboss we have Wafferut I mean we have like a bunch of in the OP trust up North but the reality is you need a little bit of an internal capability I want to talk about a couple of different kind of more traditional asset classes and the asset managers and what you think it looks like out a couple of years so you know start with hedge funds which on the one hand we've never seen more fee scrutiny and yet assets and hedge funds are all time high at North of three trillion what's that puzzle and what does it look like you know five or ten years from now yeah I mean I have I have like an interesting love hate relationship with the hedge fund space because it appalls me that we are dragging some of the best and brightest minds in society chemists physicists mathematicians away from you know what I would describe as more traditionally value adding activities and into the pursuit of basis points through a black box that is barely socially valuable if at all and so we're we are dragging all these remarkable people into this space and they're not generating value so I mean I think to the institutional investors need hedge funds maybe they need it for uncorrelated returns I don't think they want it necessarily for alpha anymore so in that sense I think there is a future for hedge funds and I'll define it in two ways for me when I think about what do I want to see hedge funds doing one uncorrelated return streams very valuable and especially if the hedge funds and the CIOs can develop working relationships whereby the hedge funds who are spending all this time understanding the sources of uncorrelated return can communicate it that back into the long-term investment community in such a way that might affect the way they are allocating their risk buckets right so that's that's very valuable and frankly challenge and probably won't happen but it's really challenge and probably won't happen but my the other dream I have is that somebody's going to build a knowledge management platform that can kind of better interact or interface between you know the knowledge of the hedge funds and the knowledge of the pension funds because oh by the way the pension funds they are at the center of so much knowledge they just aren't capturing it so that the first thing is uncorrelated returns the second thing is I have been working with countless entrepreneurs that want to build technology for investing and the traditional model if you're a technologist interested investing is go start a fund why don't you start a fund you know the economics are incredible and I am in pursuit of a business model for technologists that want to focus on investing that is not a two in twenty fund that is maybe not Bloomberg but is something there selling a signal selling a risk management product doing something that just isn't about locking it away in a black box and charging a fee stream and so I want to find a way to have the current hedge fund industry cultivate this industry of entrepreneurs that are using technology to draw new insight out of the world we live in orbital insight is a company in Silicon Valley that does satellite data of parking lots of oil wells and all those things it will be profoundly interesting to long term investors will be profoundly interesting to energy companies and governments but guess who its first clients are yeah well so all these alternative forms of data and I can probably rattle off a hundred startups doing alternative forms of data are now flowing through into the hedge fund community in new ways and I think that's exciting I think the hedge funds can play a role in building this industry of what I describe as an invest tech without being threatened by it some will be threatened by it but the really good ones won't and so I think those are two places where I'd love to see hedge funds double down working more closely with you know entrepreneurs outside of their organization the problem that I have with hedge funds is you know they just have so much darn money they can do it themselves the hedge funds initially are effectively funding the research of this data science but maybe when the signal no longer impacts the market those companies then can take the the lessons from it and either bring it to industry or bring it to broader dissemination I guess I'm hoping that we're pulling a judo move on the hedge funds in the sense that they are so good at funding research and building unique insight and identifying that insight in all these places around the world that they will in effect now I'm really putting my cards on the table back you know plant the seeds of their own demise by educating and communicating to all these technologists what it means to identify inefficiencies in the marketplace what it means to build a portfolio that is you know perfectly exposed to this idiot consincratic risk factor I mean we're already seeing it in exotic betas and things like that and then the hedge funds that survive are truly unique and that you know the one or two percent you disagree with me but I think one or two percent probably deserve to be making all the money they're making it's usually like that in any industry yeah yeah that's kind of I mean would you say that about lawyers I don't know it's not like any industry I don't know what the dispersion isn't but my guess is there probably are a few years I mean it's definitely like that not quite the same way in financial service I mean we have 10 x engineers in Silicon Valley there are worth 10 times the average engineer because that's just their creative and you treat them like artists yeah yeah how about private equity well I think private equity is only going to become more important because all of the big institutions around the world have this bogey this expected return target they're looking at and they're wondering how in the world am I going to meet that one of the answers that they get from their trusted consultancies fill your boots full of private equity and maybe hedge funds and so we are going to see this giant wall of money coming into private equity in the next five years which is going to be very difficult to manage I mean my hope is this leads to the seating of a whole bunch of new private equity funds I hope it leads to experiments like the one we're seeing with soft banks vision fund I mean say what you will about it you might think it's crazy to put 45 billion if your P.I.F. into a single fund but at least it's innovative you know P.I.F. is saying we're long term we're big and that's about it right now in terms of technology in terms of the competitive advantages and so somebody said well shoot why don't we write a 45 billion dollar check get great terms and go out and acquire stakes and all the top companies my hope is we'll see more experiments like that just by the fact that they're going to have to experiment but by the fact that we've seen so much just sheer chasing of past returns by LPs and begging for access to top GPs it's it's hard to see how this doesn't end poorly but then again there's you know I know this company up in Seattle that's doing big data and artificial intelligence for creating and assessing private equity track records and that's really exciting the idea that you can create on the fly indices that literally benchmark each company in a portfolio to show whether or not a GP actually added value there are things like that emerging which give me hope that the LPs won't completely be swallowed by the GP selling machine but you have to be thoughtful and you have to have like the gumption to be innovative to do any of this stuff if all you're relying on is a fund of funds or a traditional consultant access point to a traditional GP I don't think you're going to get the outcomes you want so what's the most interesting company you're involved with today the most interesting company is the is a company I started so I started a company with Lindsey Holden called Long Game and Long Game is about trying to help people save money who struggle to save money we started this company about a year and a half maybe two years ago and I met Lindsey she was the first hire at Formation 8 which was a venture capital fund out in Silicon Valley I'm friends with the was with the managing partners there Joe Lonsdale and Joe introduced me to Lindsey and we hit it off and and then she left F8 to go build an auction company that used this kind of behavioral trick to capture this GTLD space which is the top level domains like dot ventures and they did I don't know what the exact number is there's 500 million or a billion dollars in options on this platform that she started and she sold that and she came to me at Stanford and said listen my next big project is to try to convert the money people are wasting playing the lottery and gambling into a savings account and I was like that would be pretty cool if you could pull that off and she said well there's a way it's called a prizeling savings account and the Congress just passed something called the American Savings and Promotion Act Republican-led law signed by Obama that legalizes prizeling savings in America and I was like my goodness so not only do you have this opportunity to reward people with variable prizes for putting some money in a savings account but like if you've just overlay on it a little bit of creativity you could see how a huge amount of capital could be shifted from state lotteries and casinos and sports betting and beyond into people's personal savings accounts and having worked at Boston college and seen the tragedy that is the personal finance landscape and the defined contribution pension was this was incredibly appealing 63% of Americans don't have $500 to their name it's astounding to think that but you know you wonder where the American dream is gone well that's where it went nobody has any money to invest in themselves you need some risk capital to be able to capture the American dream and the average American debt is about $17,000 so what are we gonna do well we're not gonna mandate them to save because that's not how we operate as a country our defined contribution plans aren't working our auto enrollment and pension plans through corporate sponsors only work if you work for the kind of company that has a plan but in the era of the gig economy and you know lift an Airbnb and all these things that doesn't exist so what are we gonna do and so when Lindsay came to me and was like I want to do this prize like savings company and step one is convert lottery money into personal savings step two is gamify the process so so people don't have to be so afraid of their personal finances that they actually want to engage with their personal finances I was completely convinced and so I told Lindsay her idea was brilliant and if she wanted me to get involved I would go and leave from Stanford and start the company with her and I did and she invited me to join his co-founder so I went down to 50% time at Stanford I kept going with my PhD students and master students but I was in San Francisco with her three four days a week making copies and taking out the trash as one does an early stage start up and I did that in an incredibly intense way for over a year and today you know we have a mobile app that's on both platforms we have tens of thousands of people who are saving through the platform and how does it work what's a prized yeah savings yeah so a prized like savings account is basically the more money you save the more chances you get to win a prize and the art here isn't never ever ever touching the principle the principle is sacrosanct you know you we just don't ever play with the principle and so what we do is we partnered with Blue Ridge Bank in Virginia they pay our account holders I think it's ten basis points for their savings account which at the time was more than the national average and I think it is around that national average now and they pay us a little bit of money and when we take that money they pay us and turn it into prizes and there's a few prizes one prize is like every week we do a million dollar drawing and we ensure that prize you have a one in 240 million chance of winning which by the way is better than the state lottery but the idea is very simple that if your numbers hit your life will forever be changed through random luck and that as we learned from prospect theory and the amazing work work of Kahneman Tversky is critical for low-income people who see the lottery as literally their only path to wealth we've done all these focus groups it is it's astounding you talk to these focus groups and you say okay I want you all to picture yourselves as millionaires picture it you have the house you have the car all right got it now how did you get there without a doubt the occasional person will say something other than I won the lottery but 90% say I won the lottery nobody says I save my money and invested it wisely some people because we're in Silicon Valley or like my stock options you know and you're like oh you're not the guy we're talking to and so the idea here is you have these you put money in the count you earn coins in the long game currency those coins can be exchanged for games and we have I think six games right now one of them is a social game one is like a slot one is like a card game and one is a traditional kind of ball lottery game and they're they all offer real cash prizes that if you hit you'll change your life now I think we've had something like forty or fifty five hundred and thousand dollar winners so far nobody's hit the million we're actually rooting for somebody to hit the million as we've ensured the prize how's the company grown is it word of mouth so we were lucky in the sense that like we're taking such a unique take on financial preparedness that the big newspapers have written about us so I don't know if you're familiar with like a bunch of companies like digit or acorns or some of these other FinTech apps so they're doing a great job but their model is set it and forget it or trust us will do it for you it's not engagement so that is appealing to people who are busy and it's appealing to people who know they needed their financial optimizers they know they need to do something but they don't quite know what and this is nice every time I swipe a credit card they'll round up and they'll put some of my money into an index fund beautiful the problem is eighty percent of Americans don't even want to engage they're afraid they're stressed out I mean these are sixty three percent of Americans don't have five hundred dollars they're going to the pawn shop when they have a you know a car problem well so like how do we get these people to engage and rather than push financial literacy at them which the research now shows does not work we want to educate through doing so we make it fun we make it engaging we build these opportunities for you to change your life through luck but in the process we put you on this path to develop a rainy day fund and the rainy day fund is just step one I mean we have other products coming that will help you take control of a variety of areas of your financial life to put it that way how do you manage your time seems like you're involved deeply and broadly in so many different things so I could only do all of these things if if the core thematic it has to revolve around fixing finance for individuals for pension funds it has to be innovation and finance and the end of that innovation has to be a better deal for the companies and asset owners that rely on the industry if you look at every single thing I'm doing Stanford long game and there's a whole bunch of other companies that I started which we didn't get into and then companies I've invested in sovereign funds and pension funds that I advise in all of it it's about fixing finance for them and so the the thing that is first and foremost is like that's my passion like it's so fun to help you know I helped wafra rail pen and Alaska permanent like launch a new private equity seating platform called constellation it is my joy to spend time doing that didn't even get paid for it it's projects like that that kind of get me up in the morning I mean you know I think if we had a more holistic and long-term financial services industry would the country be as fractured and disconnected as it is today I mean you know that that's a question that flows through my brain which is like imagine the 40% of corporate profit captured by finance was 15% and that other 25% was simply invested in communities to create actual value for people would everybody feel left behind I don't know if I have the answer but I know that it's a question worth asking I want to turn to a couple of fun closing questions all right what was your favorite sports moment could be as a participant or a fan so I was at the palestra which is the University of Pennsylvania basketball stadium and at the time I was a massive Princeton basketball fan I met my wife at a Princeton basketball game that was our first date in 1998 I traveled with the team to North Carolina who at the time was the number one ranked team in the country and I sat in the North Carolina student section painted orange and at the half we were up by six so that's the level of commitment pen at the time was our chief rival and we had traveled from Princeton to Philly and there was probably about five of us and at the half we were down I think it was like 36 to 12 and then about eight minutes into the second half we were down 42 to 18 I was sick I felt physically ill to the point where I was like I might just leave and Courtney my wife was like we are not leaving be a quitter we're gonna stick this out if we need to suffer we're you know we're gonna suffer and they turned it around they went on a run like you would not believe literally ESPN when they did the highlight that night they they stopped the game at with 13 minutes to go and the second half and they were like in Princeton is down 28 you know to pen looks like pens gonna go on oh wait this just in the game is now over and then they showed the second half it was a joke right yeah but they won 53 52 Princeton at the Plesstra I mean I don't think I've ever been that happy I mean like children being born getting married like I'd love to say those were happier moments than that moment but it was just a different type of pleasure who's your favorite person outside of your family and why yeah who was my favorite person I mean I have so I'm not one of these people who can like easily just be like yeah like Steve Jobs is red you know I'm not that type of person I think in my life I have people that I respect for different things and you'll note that like I drag them into my lives and don't let go so like I have a profound respect for Lindsey Holden female CEO of a startup FinTech startup and Silicon Valley navigating that world and watching her do it with grace and boys and leading engineering team that is you know practically all male and it's incredible to watch Jag Deep Pashir I think is a profoundly unique human being in that he can do things in the context of bureaucracies and public agencies that I didn't believe possible if you want to see somebody who takes stakeholder engagement and and makes it real not just like lip service to it but actually creates a value out of engaging with stakeholders and making them feel loved and cherished and not being fake about it it's unbelievable and there's a few other people like that in my life like Gordon Clark at Oxford who dragged me into the pension fund space and served as a mentor and helped me and my wife get through two PhDs at the same time with relatively little debt I mean there are people like that for home I owe an endless debt of gratitude yeah what teaching from your parents is most stayed with you you know my parents were incredible role models in the sense that incredible loyalty honesty and integrity you know I think my dad when I was young would often talk about the higher interest and he would invoke the Steve Jobs quote all the time in our family you know you just got to put a dent in the universe you know like if you really want to have an impact in this world God and find something you're good at but make sure it's socially you know useful and so you know I think in terms of the thing I'm most grateful for it is having this broader longer term vision and mission that is about building a better society ecosystem planet whatever you know that comes from my parents in terms of parenting when my dad forced me and he forced me I did not want to go row that was like a black belt parenting move because when you're rolling you can't drink you can't smoke you can't go out late and at first I hated it and then obviously I fell in love with it and so for all those parents out there there's for struggling with unruly teens which I was I was like a skater flying off cliffs and skis and things like that I'm rolling was this incredible and all by the way like if you want to row at a high level you got to go to like an amazing school so completely reshifts your your focus what life lesson have you learned that you wish you knew a lot earlier in your life how hard I mean how hard kids are so if I if I had known I don't I don't know what I might have done differently but I have two kids they're amazing kids you know seven-year-old boy and a five-year-old girl and my wife and I both work so both of us are kind of on you know she runs like a data science team and a public company so it's not like I trump her and in many ways she trumps me and so it's this constant negotiation and challenge and I think I would have just loved to have known that this insane part of your life is coming and you should sleep in and you should go to the movies and you should probably get ready for you know do do a couple of volunteer gigs travel the world a bit more do those things because getting married doesn't change your life I didn't find I mean I started dating Courtney when I was 20 she was 18 we were Princeton we lived together for 13 years and then we had children it was like this is a totally new world this totally new everything changes once the children come and and it doesn't help that like my kids are extremely stubborn and I don't know where they get it but you know it's that's what it's something I might have liked to been told yeah all right last question you are in your waning days I guess now we're talking about 150 years old because we live a long time yeah nanobots what advice would you give yourself today oh I don't know I mean how did it go I mean I you know there's all these things that get said in those to those questions like hey nobody's ever gonna regret spending time with their family or you know nobody's gonna say I wish I worked more but I would interesting then why don't I just do like the counterfactual like I feel uniquely privileged to be sitting in a seat where for whatever reason this community of pensions and sovereign funds and endowments and foundations seems to trust the words coming out of my mouth as being in their interest and I don't want to screw that up because I don't see a lot of people out there that are unconflicted in their thinking or remarks and so I feel whether it's true or not and I could be a complete win bag but like when I do get the opportunity to meet with these people I get the sense like I can have an actual influence on them and so I think in a weird way the 150-year-old talking to the 41-year-old would say take that seriously and if you really do want to transform capital markets don't forget don't ever forget who sit at the base of capital markets and it's the asset owners and there's you know sit here we are in New York City surrounded by beautiful skyscrapers filled with hedge funds and private equity funds and every moment of every day there is a temptation to cash it in and so I you know what I'm constantly reminding myself is there's a broader project and find to go build companies find but never forget who you're serving and I am serving the asset owners great actually thanks so much really enjoyed it thank you for having me thanks for listening to the show if you like what you heard hop on our website at capitalallocators.com where you can access past shows join our mailing list and sign up for premium content have a good one and see you next time all 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 We maintain positions and securities discussed on this podcast.