The $40 Billion Outsourced Investment Office - With Arjun Raghavan, CEO of Partners Capital

Welcome to the Money Maze Podcast. I'm Simon Brewer, and Will Campion and I have created this show to explore and unravel some of the mysteries surrounding the investment business. We hope through direct and insightful interviews with masters of the real-life Money Maze, we're going to learn about different approaches to allocating capital, making investment and business decisions, and navigating the pitfalls that line the paths to prosperity. Whether you're a current or aspiring investor, entrepreneur, professional, or a student exploring career options, we hope you gain some helpful insights and enjoy the shows. You can keep up to date by visiting MoneyMazePodcast.com and please sign up to our newsletter to ensure you won't miss a release. If you enjoy the show, please subscribe and we'd love you to tell a friend or colleague about it. Thank you for listening. I'm Will Campion and co-founder of the MoneyMaze Podcast, and we're delighted to have Schroders as a sponsor and corporate partner. Schroders is a global investment and wealth manager with a purpose to provide excellent performance to clients through active investment management. By serving institutions and individuals worldwide, Schroders serves wider society, channeling capital into sustainable and durable businesses accelerates positive change in the world. Funding the future is also a privilege. Schroders use it wisely and responsibly. As we know, capital is at risk with investing. Bramont is also a sponsor of the MoneyMaze Podcast. Bramont is an award-winning British company that produces beautifully engineered chronometers designed to appeal to those who share the passion and appreciation of the innovation and mastery behind a beautiful mechanical wristwatch brought to you by the luxury British watchmaker Bramont. From zero to 40 billion in 20 years is growth we usually associate with tech startups. When it happens to a firm in the world of asset management, it's all the more remarkable. So today we're going to talk to the Chief Executive of Partners Capital, dubbed originally as the money manager to the money managers. Today, Partners Capital is an outsourced investment office acting for endowments, foundations, and sophisticated ultra-high net worth individuals around the world. So on a sunny or terminal morning in London, Arjun Raghavan, CEO of Partners Capital, welcome to the MoneyMaze Podcast. Thank you for having me, Simon. Well, it's great to have you here and it's also great to be doing this in person. We're getting back to the world that we knew, but let's go back because you grew up in India. Just tell me, reflections on a childhood in India. Look, I grew up in India in the 70s and the 80s and it was a time of protectionism in India. We didn't have access to many foreign brands and I grew up in a reasonably middle-class family in the southern part of India. Madras is what it was called when I was growing up. It's now called Chennai and the model was a simple single-factor model for someone from my background. The emphasis was on education. That was very important and the aspiration of any respectable person from my background was to go get a good education, become a doctor, or an engineer because that was the way to earn a good wage. Ironically, dealing with money matters was considered too risky. So if someone said you were in business or you're in finance, that would be frowned upon with the way I grew up. I suppose one of the things we're always interested in is what were the parental teachings that stayed with you? The top one I can think of is one of education being a primary focus. The way out of anything in life is to educate yourself and I suspect that refrain is not uncommon to a lot of Asians growing up, at least in the 70s and the 80s. The other thing was this concept of integrity and the fact that you treat everyone the same and if you don't do that, it'll come back and bite you at some point. And as we talk about that academic journey, just tell me how it went because then you've ended up here. We're going to come back to the transplant later on, but tell me about your studies. I just followed the trodden path as I mentioned and I decided that becoming a doctor wasn't quite for me, so I went down to the engineering path and I joined one of the premier institutes in India. We like to think of it as the MIT of India. It's called the Indian Institute of Technology or IIT. In the early 90s I went to Mumbai, which was then called Bombay, and I studied at the Indian Institute of Technology. And so the important difference to highlight when you go to an engineering college is that you don't actually go to the IIT to necessarily become an engineer. You go there because it's the best option you've got. It's a well-regarded institution and you get great branding coming out of it. It doesn't mean that you're passionate about engineering. It just opened up careers in lots of different ways once you went to an IIT. And so that's really the way it worked out for me because I was never going to be a great engineer, but I picked up a whole bunch of analytical skills at IIT, which obviously then helps me through my career. And in fact, a lot of people at IIT ended up in finance or management consulting, or of course there's a good proportion of them in Silicon Valley doing real tech as well, but they just branch off in a hundred different ways. And is there a light bulb moment where you think I'm going to replant myself and leave India? In fact, I went the other way, Simon. The classic thing to do once you've finished your education was to go to the US for a masters because that's the way you got yourself into the US. Most people from developing nations would like to get to the US because you've got much higher earning power and then you branch off into a hundred different careers. Now actually, I chose deliberately not to do that because I just didn't want to go down this masters and science sort of part. So I actually stayed in India and I got a job with Anderson Consulting, which is a, at that point in time, was a boutique consulting firm in India. It was one of the few consulting firms and it had less than 50 people in India at that point. And if I actually, I just looked at the stats now and now they've got 600,000 people globally of which about a third of the staff are in India. So they've got 200,000 people. But when I was there, it was 30 or 40 people. So you then decide to leave. Tell me about the motivation for that. The reason I left was I got shipped to London on a project. This was around 98, 99, 2000. Just before, there were lots of fears around the white 2K bubble. If you remember that. So there was this year 2000 and systems were going to change and the world was going to collapse around the date fields couldn't accommodate extra digits in them. And so I came over to the UK to run or join teams that ran a set of projects around transforming the infrastructure and the systems around making sure that it was actually working for a large insurer in the UK to make sure that they were ready for the big switch over in 2000. So that's really how I landed in this country. And I actually didn't leave, you know, I left for bits of time, but actually didn't leave for the next 15 years because I actually love working in London. So before we get to partners, you have a stint at a hedge fund. And that's again, a shift in focus. I'm just intrigued as to what drew you away from the path that was clearly proving quite successful. In the interim, in 2000, I was sent to INSEA to do an MBA. I thought that was a fantastic experience. And I came back to London sponsored by what then had become Accenture. I came back in a state for a few years and I got quite senior in the consulting world. But at some point, I just realized that I didn't want to be a career consultant. I wanted to branch out. I'd become fascinated by the world of finance and investing in particular. And obviously, at that point in time, it isn't quite easy to switch careers. I was around 30 years old, and I was trying to find ways to break into the investment world. And I was lucky enough to, through common friends, meet some people who were ex-Goldman who'd set up a hedge fund in London. And I just thought, actually, if I, it was quite a small hedge fund, but I thought if I dived in and learned all about capital markets there, that would be an amazing learning experience for the next few years. And I'll decide what I want to do after that. And so I plunged headlong in to the investment world by joining this hedge fund. I was immersed in capital markets for the next three years. What did you do that? It was a European long shot hedge fund. I traded European equities and options. But part of the attraction for me was to also look at the business building side of the hedge fund because it was quite a small hedge fund. And so I felt that I could bring to the table business building skills and broader management skills. And then I could have, in effect, an internship or a crash course in capital markets for the next few years. And that's really what happened for the next three years. So come 2007, partners capital either comes knocking or you seek them out. I'm quite interested again in the motivation and just to recap, your firm today has 40 billion in assets under management or advice and seven offices. So you absolutely span the world. It was much smaller then. What was the lure? When I worked in the hedge fund, I really enjoyed learning all about capital markets. But one of the things that I used to love about consulting and when I think about what I learned in my consulting days, two things come to mind. So one is just a variety of problem solving that you have. You have a very wide lens on the world. You look at different industries, you've got different types of problems to solve. And that variety always interested me. So that's sort of one aspect of consulting that I felt was actually really good. And I always thought about whether is there a way to go back to something which has more variety? And then the second aspect is I did really enjoy interacting with investors and clients and because every client situation is different and being able to bring the people's side into the equation always interested me. And so what I found, at least in my experience working at hedge fund is it was all about being deep and narrow and being a real expert in a small number of things. And that was great for learning. But I just didn't see myself as the person who was going to really enjoy a long-term career in something deep and narrow. When Partners Capital came knocking, it sounded like the perfect fit for me because it was multi asset class, multi geography have the widest possible lens on the investment world also deal with different very engaging, very interesting clients out where every situation might be a little bit different. So it was sort of this best of both worlds for me in the investment world, but at the same time having the breadth and the variety that I really enjoy. So I may be wrong, but I think having started out with a predominantly endowment based client base, you have nearly a third of your assets being made up of families today. And just tell me a little bit about how you would describe Partners Capital right now. Well, Simon, actually, it's the other way around, right? So I'm used to being contradicted. That's absolutely fine. It's when I joined Partners Capital at about four and a half billion of assets and about 15 people. But back to what he said early on, we were set up as money managers to the money managers. So when our founders set up Partners Capital, it was to offer a totally independent and conflict free investment solution to our clients. But the concept then was to try and offer clients a best in class institutional investment model, right? So this was back in 2001. And of course, David Swenson at that point had written the famous pioneering portfolio management book. And so the idea at that point was, why can't we apply these concepts of long-term institutional management to individuals who are interested in making money over the long run? And guess what? Those sorts of individuals were senior private equity partners at well regarded, well known firms and founders of these firms. And so the idea was, we'll manage your money. You've got a lot of your capital invested in your own private equity firm, but the capital that you want diversified away from it, we will manage that for you in a long-term institutional endowment style approach, which is complementary to what you already have exposure to. So those were really the origins of the firm, which is actually sort of interesting because we didn't know we were an outsourced chief investment office because we were set up well before that became a category. And it became a category, I think around 2010, 2011, when we decided that actually we were, we belong to that category. But until then, we did what we thought was the right thing to do. And the endowment foundation base has grown over time. So where are we now at 40 billion plus? We've got about 55% of our assets, more than half the assets in endowments and foundations. And at least about 40, 45% remains senior private equity partner, senior real estate partner capital plus, obviously families as well that have come along. So let's talk about the endowment model from an investment management perspective. We would generally understand that model to be term, quite risk tolerant, more flexible than the assets it can own, more flexible in the liquidity of those assets. What do you prioritize when you think about constructing portfolios? Let me start by defining what I think endowment model version 1.0 was. And I think that's evolved, by the way. So the original endowment model probably has three core principles to it. One, put in a certain level of risk, and that risk is more equity like and keep that risk constant. Don't market time your risk, don't chop and change your overall portfolio. So that's principle number one. Principle number two is multi asset class diversification. So try and diversify those risks that you have across different asset classes with a view that they've got low correlation to each other and therefore the free lunch of diversification helps portfolio returns. And then the third principle was find great asset managers to populate the asset classes because you can possibly get excess returns as a result of that. So those are the sort of the three core principles. I think they work very well in the 90s and 2000s, but I think there were issues with the endowment model that became evident as we ramped up towards the global financial crisis. So when I joined Partners Capital in 2007, the standard industry practice was to run multi asset class portfolios where we sort of had these set of asset class assumptions on risk return and cross correlations. So one thing that always used to strike me as slightly odd was you'd have hedge funds as a category as one example where you'd have hedge funds having a correlation with equities and bonds and other asset classes. And I always found that slightly odd simply because a hedge fund could be anything, particularly as you saw the growth in assets in the alternative industry by 04050607. There were a range of different hedge funds being set up. Now they weren't necessarily hedging. They had a lot of overlapping exposure with the traditional asset classes. And so this concept of uncorrelated assets, it wasn't really truly uncorrelated. And obviously when risk taking is rewarded regardless of the risk premium available, no one questions it. So you go up to the financial crisis and yes, there was lots of money in hedge funds, but no one really actually understood how they were making the money. And the reality was a lot of the hedge funds were making money. They were essentially the returns were directly correlated to the amount of traditional market exposure risk that these hedge funds were taking. So that's really what was going on. And so when the global financial crisis happened, endowment model version 1.0 was seriously questioned because you'd remember that the prestigious endowments of the world and every single multi-asset class portfolio lost a lot of capital much more than what was predicted because a lot of these risks became highly correlated and you actually found that you had factor risk sitting in every portfolio, hedge funds were full of oil exposure because I think there were predictions of oil going to $150 or $200 a barrel. So that's what was going on at that point. And so our thinking on the endowment model has evolved hugely based on lessons we took from the global financial crisis. And that's really what has sort of shaped how we think about risk and portfolio construction from that point on. One of my questions, which is timely, which is how do you balance and weigh up the risks between the probability of permanent loss of capital versus the acceptable tracking error of a portfolio versus a benchmark? For us, the permanent loss is obviously the most important thing. So there's the destination and then there's the journey. Now permanent loss is the destination. You want to make sure you get there without loss. So permanent loss of capital is the single most important concept and we have to try and prevent permanent loss of capital. So that's obvious. And that's what we focus on. We don't really focus on tracking error, particularly we're not focused obsessively about benchmarks and pure returns, etc. So we don't think about that. But we do think about risk budgeting as a concept. And risk budgeting we think is really, really, really important because you can only get to the destination if you can stay with the journey. And staying with the journey requires you to stay invested as you go through the gyrations of the market and go through valuation shifts in portfolios, etc. And that all comes down to risk appetite. So if you calibrate the risk appetite wrong, you could quite easily see a situation where if the markets are down 25, the portfolio is down 15, and that just breaches the risk tolerance of a particular client or a particular mandate, and then you get stopped out and therefore you actually can't reach your destination on time. So I think calibrating the risk appetite is crucially important. And we have a particular way of doing it. But that's really important because otherwise, you know, the destination is all well and good, but you're not going to get there because you've cutshot the journey along the way. Okay, but I want to just press you on that idea of benchmarks and I get your benchmark agnostic, although those are my words, not yours. However, I think it was the founder of all, but I once heard say without a benchmark, you're always liable to be shot by the arrow whose name is hindsight. Your clients need to judge you. So how do you think about benchmarks? Yeah, so we think about benchmarks very much as an investable benchmark that has equivalent risk to the portfolio that you have constructed. So it's not pure benchmarks, which may or may not be relevant. It's not broader indices. It's much more, for example, let's say the way we calibrate risk is against equity markets, we've got a particular way of doing it. We look at this concept of equivalent net equity beta of a portfolio. So let's say your portfolio's got a 60% equivalent net equity beta, the portfolio that we have must outperform that risk level, which you can achieve through a set of ETFs, right? So we always think about passive investments as the proxy. So investable actual investable benchmarks is the proxy. And by the way, that's just not for us, but that's the way we select managers. So when we think about managers, whether they hedge funds or private equity managers or longingly managers, we're always looking at the investable alternatives that we can buy for cheap. So the concept is if you're paying fees to somebody, you want to make sure that those fees justify by way of an outperformance versus the true opportunity cost of capital, which to us is other investable alternative. Some of the papers that you have produced, which I have to say are extremely thoughtful, you have written the market exposure determines the base speed of the portfolio and must be carefully calibrated to ensure it can deal with difficult market conditions. I just like you to expand on that. Yeah. So let me go back to my story on endowment model version 1.0 and what we changed coming out of the global financial crisis. The reality of what we saw was that when you put asset class labels on things like hedge funds or long shot managers or market neutral, et cetera, it hides true risk. True risk for us is, yes, you can measure risk with the wonder of hindsight based on statistical analysis of volatility of returns, but that to us is a consequence of taking risk. So if you really want to think about risk on a forward looking basis, you have to look at what sort of exposures a particular manager or a particular investment has. So for us, the way we think about everything is in two buckets. One is you want to think about aggregating market exposures across the portfolio. Now, those market exposures could be in equity markets, credit markets, inflation markets, interest rates, et cetera. So you have different flavors of market exposure, but those are all creating risk in the portfolio. And what we talk about as the base speed is in effect, how much risk do you want to take in the portfolio? And you want to make sure you're diversified across these different flavors of market exposure because they will help you in different market environments. So if you've got turbulence from an inflation perspective, then the inflation hedging portion of the portfolio will help you. If you've got a big growth spurt, equities will help you. So depending on what situation you're facing from a macroeconomic standpoint, that base portfolio can be constructed in such a way that it's not quite an all weather portfolio, but it's a portfolio that can weather different types of storms. That's the base, that's engine number one, as we call it. And the interesting thing about engine number one is you can construct that just with passive ETFs. 20 years ago, you probably could just buy an S&P 500 ETF, but in this day and age, you've got a lot of nuanced exposure, you can get through ETFs. And therefore, if you build a portfolio of ETFs, you can essentially do engine number one. So you don't have to pay much fees for engine number one. So that's kind of the first engine. Then the second engine is all about the alpha engine or the turbo charge that you get to the portfolio. So if you think about traditional asset classes, and you put them together and to create a base speed, given where valuations are, given where interest rates are, the chances are that you're not going to get a very high return from just the base engine. And so it's essential to try and construct a second engine for turbo charge. Now, the problem with that turbo charging engine is as expensive. And so how do you know that you're going to get the turbo charge from the second engine, as opposed to spending a lot of money on it and finding that actually it's a bad investment? That's where we spend a lot of our effort. So the portfolio construction for us is, how do you construct that second engine in such a way that you can find opportunities for true outperformance over and above those passive exposures that you could have done yourself? And that's all part of engine number one. So where are you going to get the turbo charge? And that all depends on hunting in places where there's more efficiency, hunting in asset classes, which are not fully developed. So more nascent asset classes, such as we call them alternative alternatives. But litigation financing is one that we've, you know, we've been investing in it for about five or six years. And I know that it's become more commonplace now, but it is a follow alternatives. Drug trial financing is another one. And there's a range of niche your sort of alternative alternatives that we focus on. Now, the trick in all of these is to get in before the flood of capital gets in. Because once you get the flood of capital, your price become fully priced and you haven't got the risk premium to flip from an alternative alternative. It's important to hunt in the right places, hunt in inefficient markets, hunt before it becomes mainstream, and then hunt with managers or truly exceptional and architect those exposures in such a way that you're not paying away fees to a manager for what you don't want from them, right? So given our scale now, we have a wide palette of options through which we engage with our managers, calibrating that in a way that makes the most sense from a return on fees perspective is critically important. An example there would be you use a carve out of a long book of a great hedge fund manager because our return on capital analysis suggests that the short book doesn't make much money. And therefore, why don't we partner with a great asset manager, but just for the long book? You must have known that I was going to talk about fees, which is why you've nicely preempted it because it is the great challenge in this business of going to get your offer. It costs and that payoff. But the other problem is you grow from a few billion to 40 billion and it becomes more difficult to allocate that capital. So tell me how you go about dealing with that tension of you being a big allocator and then not being in a limitless supply of offer producers, even assuming that that offer production is permanent. That's a great question, Simon. So let's talk about this concept of return on fees. So when you think about return on fees, we think of it as a ratio. We think of it as what excess returns do you get for the excess fees you're paying? Think of it versus a passive investment. So everything we do is framed against a passive alternative. You might be paying 100 basis points incremental fees to access a great investment opportunity set in, say, China or in biotech. But if you can get 300 basis points of outperformance as a result of that, then that ratio is three to one. So we look at the numerator and the denominator. And so obviously, if you want to boost that ratio, you can either boost the numerator or you can knock down the denominator. And so we look at trying to do both things. So how do you outperform as you keep scaling? That is the heart of the question here. You do that by working very actively on partnerships with managers. You allocate some capital to the large well-established managers because we call them the evergreen alpha generators. They've got a machine, they've got an edge, which sustains them and scale is their friend to some extent. And some of the large quantitative shops that we know belong in that category. Some of the large distressed players belong in that category, where scale actually helps you outperform and sustain that level of outperformance. So we certainly don't shy away from big pools of capital, but our bias is towards smaller pools of capital, where if you've got the team, you can unearth a lot of gems, as we call them, and spin-offs from well-trained shops. So you can spin-offs from the great asset managers of the world that you back early in their journey and you become a sizable part of their business and you to some extent put them into business. If you think about the stats for us, if I just think about private equity as an example, 10 years ago, actually a private equity manager we partnered on average, I'll take the median size, was $2.2 billion. That's the average size of the fund. Last year, the average private equity partner we partnered with was $800 million. So actually, as we've scaled counterintuitively, we've skewed more and more towards the smaller managers, but obviously we are more meaningful in terms of what we do with them. We do separately manage accounts in a lot of cases, simply because we're very bespoke in terms of how we're trying to build exposures. I'm sure David Swenson would have approved of that, since his very raison d'etre was working with small owner managers who weren't swamped by assets. But you are equally a large firm seeking out not just good managers, but new ideas, the alternative alternatives. Sounds a bit rumsfeld-esque actually that. But anyway, explain to me how you organise yourselves so you can have people in your offices seeking out both the manager opportunity and the investment subsets. Yeah, so we've got four categories for groupings of the investment team and I'm talking about the investment due diligence and research team, which to us is separate to the client portfolio management team, which is the team which puts together client portfolios from the great investment due diligence that pops up from our investment research team. So the broad categories are, well firstly, we've got an overarching central research team that looks at the macroeconomic environment, looks at tactical asset allocation, looks at how we should move the pools of capital around and looks at the broad investment themes. That's a central team, that's sort of the overarching team. And then we've got three broad additional categories of asset classes. We've got equities and again, because of our bias towards thinking about exposures rather than asset class labels, we put all types of equities in there, whether it's passive equities, active equities, hedge funds which are biased towards equities, they all fall into the broad equities category. And so that's an asset class team. Then we've got private markets, all of them bucketed into one team. So again, it's private equity, private debt, venture capital, all of that falls into the same group and private real estate. And then we've got absolute return on uncorrelated assets, which is the third category, which again looks for the alternative alternatives, looks at it not just for hedge funds, but also looks at it from an illiquid uncorrelated asset standpoint. And so those are the three broad categories and we've got about 20 people in each of those broad categories and about seven people and the central research category on talk. So that's kind of how we're organized. And the jobs of the asset class teams, it's just not about going and finding managers, it's about figuring out where to hunt. So it's sort of where you hunt is as important as who you find within that pool. So you have to fish in the right pool and you've got to find the right fish. So we focus on both those aspects. And so every asset class has what we call an asset class investment strategy that's refreshed every year. We put a lot of thought into where exactly we're going to fish in each asset class. And so that's kind of how we are connected. So it's top down at the macro level, it's top down at an asset class level. And it's also obviously bottom up in terms of what we're sourcing on an ongoing basis. So you talked earlier about the Endowment 1 and how it's evolved or how you've evolved. There's been quite a lot of work done on how few of the IEV League, US and University Endowments have beaten a simple 65-35 benchmark over, I think certainly in the 10-year period up to the middle of last year. You know, raises the question is that Endowment model either needing a refresh or is it past itself by date? Yeah, look Simon, that is a great question because that is the fundamental question. Then I was just looking at this data yesterday. If you look at, let's just take the US Endowment. I mean, that's the easiest one to think about. You look at the top tier Endowments, because the Yale's of the world and there's a few others in the top tier, they have outperformed my equity bond index proxy significantly by about 400 basis points or so. There's no question there that there is alpha coming through in the top tier Endowments, but they've got a big team. Usually they're very focused on finding great asset managers, partnering with them early, and their access to the best asset managers is unparalleled. So that's what is driving their outperformance. And so now that version of the Endowment model is, I think, sustainable. And I'll talk about some of the key trends that I think we should watch for in the future. But if you look at the Nakubo index, which is the index of all Endowments and Foundations in the US, it's actually underperformed. The 60-40 or the 70-30 equity bond index, whatever you pick, over the last 10 years. And the reason for that is what I described, which is post-GFC, you have to have changed your model. You have to think about it's not a matter of running a mean variance optimization, putting alternative asset classes as categories in them, and assuming that somehow magically you're going to get outperformance, because the reality is that alternative asset classes have actually become mainstream. They're not alternative anymore. If you think about capital in them in trillions, they've grown by 10 to 11x in the last 20 years. And so with the flood of capital coming in, unless you're very calibrated and very careful about how you implement alternatives in your portfolio, it's not going to necessarily lead to any outperformance. So I'd say the evidence is already there that the Endowment model hasn't quite delivered in its plain vanilla form over the last 10 years. And so the question is, we think we don't have Yale's axis. They are unique. But we think we fight very hard, get great access, and we think we get good access to the best. And more importantly, we spend a lot of time building relationships and structuring the management partnerships in such a way that it actually does add outperformance over and above passive portfolios. So that's kind of what we do. And then I think it gets tougher going forward. Well, you've preempted my next question, which is returns ahead, dealing with turbulence and excessive expectations. And that allied to a regime shift, if we've got an inflation that is here to stay or proves more obdurate than central bankers might wish, how are you pulling those strands together? Let me start by talking about the challenges of the traditional equity bond model. Yes. So you look at it today and you look backwards and you say, okay, I'm not Yale. I haven't got great access if you're an institutional investor or an individual. Therefore, I'm just going to go to the traditional model because guess what? The Endowment model hasn't, I can't get access to best. So that's not going to work for me. But then the problem with the traditional model going forward is, given where interest rates are, and given the valuation of equities, and the reality is that everything is being held up by a very low cost of capital. And so when that starts to change, you're going to see that the equity bond returns that twin engine is broken going forward. So it's very hard to make excess returns from there, which and that's a problem for pensions. It's a problem for endowments and foundations with the spending rule where they have to meet a certain return threshold. And it's a problem for possibly families as well, which are trying to use it for funding some of the next generation spending, etc. So I think it's a problem for all institutional investors. So the question then is, well, how do you architect this? And what is the formula going forward? Let me talk about a few things on the generic principle Simon, then I'll address your specific question on inflation. The generic principles are number one, do not market time, stick to the age old principle that if you need to market time your risk exposure, you have to get two calls right, you have to take risk off at the right time, and you have to put it back on on the right time. Now people look like geniuses when they do one of those two things, right? But very few people, in fact, it's almost impossible to get it right consistently. So while it's psychologically very tempting to do that and to react to the news flow, actually it's a very bad use of time. And so it's a very bad use of resources to try and second guess what's going on. So our view is stick to the knitting, put your risk that you feel comfortable with the base speed that you're comfortable with and keep it there. Now then the question is, what do you do with that risk then? How do you allocate that risk effectively across the portfolio to make sure that you're catering to the best investment opportunities, etc. And there I think you need to be very thoughtful and selective. The first principle on allocating risk, I would say, is that find the less correlated asset classes, which are going to be the next wave. And some of those alternative alternatives we talked about are part of that journey, but there could be others and institutional investors should look very actively to find those uncorrelated pools. The other concept around allocating risk is around getting ahead of mega trends. Again, to me, two mega trends, which are very clear in the market, and this is going to be a bumpy ride, but two mega trends are sustainable investing. That's a mega trend. And the flow of assets into Asia for the next decade is a mega trend. The interesting thing about mega trends is that these markets are inefficient. So they're inefficient. And if these mega trends are inefficient, you can get ahead of the flow of capital and find the best investment opportunities to play in those mega trends to outperform significantly before the flood of capital comes in and makes them efficient and shrinks risk premium. So those are very important things to focus on. And then the third aspect is what I've already talked about, which is around focus on return and fees. The concept of return on fees becomes even more important in an era where the base speed of the portfolio is lower. So you must get that turbo charge in, but you've got to do it really carefully with the right types of structures and partnerships. Well explained and thank you. An inflationary world is going to upset lots of people's expectations on returns and challenge their positioning. How are you thinking about that? Well, firstly, there's a range of views on to what extent are we going to a long-term inflationary world. It comes down to the interplay of forces between to what extent is productivity improvement going to actually take the edge off possible future inflation. Several people have predicted inflation for long periods of time. It actually hasn't happened. There's lots of forces there that people can debate. But let's just take for a moment that we accept that inflation is going to take up. So how do we protect? The short answer is you have to do more in inflation hedging assets, which tend to be certain types of real estate, inflation link bonds, and certain types of commodities. We do like gold as an inflation hedge and a deflation hedge. We're not big gold bulls by any means, but we do think hard about if we see a big inflationary environment coming, then we expect that real rates would drop and therefore gold tends to do well when real rates drop. So that would be the playbook. But again, in an inflationary world, you want to try and create inefficiency. You want to try and move assets into inefficient pockets and uncorrelated assets, which are not hugely impacted by inflation. So more of focus on direct inflation hedging assets and more of focus on uncorrelated assets. And then finally, you do want to focus the assets also on equities and private equity, but you want to bias it towards areas of the market where companies have pricing power and therefore they can pass on some of those inflation costs to the consumers. You want to focus on high franchise businesses, quality equities, and certain types of private equity where you think the pricing power does exist. And private equity is an interesting one because I think it gets affected by a nuanced set of factors when you think about inflation. But just stating that private equity, Barkley Douglas, who is a US consultant who I had a conversation with ahead of this, was talking about the diminishing returns from PE and we know because these pools of capital are vast and the potential opportunity seems to have shrunk. Perhaps it is why more firms are turning to the UK where there's this valuation discrepancy. Does it worry you? I think that is true of the aggregate private equity industry. So I think I wouldn't disagree with that broad statement. The returns from private equity have been shrinking, but if you again think about the great endowments of the world and if you actually look at what's happened, if you roll forward to 2021 returns, some of the best returns in private equity and venture capital have come from the latest vintage, the last year of return. So I think that's true in aggregate, but actually if you unpick that, and this is a hugely diverse market, if you unpick it and focus on the top tier managers, I think the returns have been significantly stronger. So there's been significant outperformance from private equity historically for the right types of managers. Now let's focus on the future because what does the future hold for private equity? Let's take a buyout model. Let's just say you construct a classic buyout model. Now there's three typical things that determine returns from a buyout model. One is the multiple arbitrage. So are you buying at a cheaper multiple and selling at a higher multiple? Second is earnings growth, and then the third is leverage, which is sort of the delta between cost of equity and cost of debt. So those are the three main factors in a buyout model. And so if inflation starts to go up, one thing you would expect is certain types of companies become cheaper because the cost of capital has gone up, and you'd argue that possibly you could get cheaper deals to buy into. So the valuation side could actually become more interesting, but that depends on the sort of company. So depending on what you're buying, it's possible that you're actually buying in at a cheaper multiple. The second factor is probably the most important factor, which is all about earnings growth. And the focus on value add with the underlying companies to actually push earnings growth becomes critically, critically important. And therefore this is sort of the post acquisition value add, operational value add becomes a crucial component of it. And you want to be partnering with managers who are very good with those capabilities, very good at buying cheap. The ideal scenario is they're good at buying cheap, the greater post acquisition value add, and they're great at also identifying the companies whose earnings are protected because of some sort of pricing power that they have. So that would be the ideal scenario that you'd look to focus on and it becomes increasingly important. Those who are just playing on multiple arbitrage or just playing on the cost of debt being cheap and just playing the leverage game. Obviously, we don't partner much with those types of firms anyway, but those sorts of firms are going to get hurt quite significantly. I want to just change tack a little bit and talk about the organization and start with talking about talent and hiring. Lots of competition for smart young people. How do you think about the people you want to recruit? And by that, I mean the skill set. There is a traditional coming as I did from a long time working at Morgan Stanley of the MBA classic path, but I got the impression reading some of the materials that you're also interested in people with industry knowledge. Tell me about how you think about it. We have come from backgrounds which are very varied. That's true of not just me, but a range of the founders and the other partners at Partners Capital. So it's almost in the ethos of the firm that the firm was set up by private equity and management consulting professionals to break the mold in the investment management industry. And so we always pride ourselves in thinking a bit differently. We don't necessarily hire from traditional backgrounds. What we're really looking for when we hire is a deep interest in investing, number one. And number two, an analytical skill set that will question conventional wisdom. And so that's kind of what we really look for and goes along with this idea that they're passionate about excellence and they want to work in a reasonably entrepreneurial environment, don't want to work in a big sort of bank. So we've always ended up drawing from a whole range of different types of backgrounds when we hire. And you've been seeing for just over a year and you've got two, you're a lot of challenges, but two which are not to be underestimated is the geographical breadth of your business and the growth of your business. Tell me a little bit about how you've been approaching those. Let's take the first one. Now, the geographic challenge is one very familiar to me because I spent eight years in Asia sitting in Singapore and Hong Kong. So I joined partner Scapulano 7 by 2013. I spent six years here. We were putting our flag in Asia and I volunteered to go and do that because I felt the entrepreneurial itch of trying to set up something new. And we've just felt that for the future of the firm, being close to the Asian investment opportunity set is going to be crucially important. And so that's why we set up shop there and that business has been set up. And but for eight years, I dialed into late night calls and had a bit of a lifestyle which my Asian colleagues will tell you is not the easiest one to cope with. But we've always had a strong principle that we operate as if we were physically in one office, although we know that we're in multiple locations. Now, that's not great from a time zone perspective because we're constantly juggling the time zones, but we have this firm ethos that we must have cross geographic teams in a lot of what we do. So in the asset classes, we have cross geographic teams, we've got teams in the US teams in Europe teams in Asia and they all work collaboratively together for us preserving that culture across the firm where the other way I think about it is I should be able to transplant anyone from any office to another office and they will fit in and work seamlessly from day one. And so that's kind of the concept of what we're trying to build. We don't try and build geographic separation. And so that's worked well for us. Now, is that going to be more challenging going forward? Possibly, but we think we hire very internationally minded people with the same set of values and same set of passions. And so I actually don't feel that that's going to be a big issue for us that in itself is not going to be a big issue. So the second question you asked is around the size and how do we deal with not just the investment side but the business side as you grow as a firm. And I think that is a tough question because there's an inherent contradiction in there because on the one hand, you can't quite operate like you were 30, 40 people because that would just create chaos and you haven't got the processes, etc. But equally, you don't want to operate in such a way where the processes are so tight. It stifles innovation and creates a bit of bureaucracy, which actually misses the whole point of being entrepreneurial, etc. So we are trying to strike that balance of making sure that you tighten the processes, you make sure the linkages are clear across the different parts of the business, but you retain that spirit of entrepreneurialism. And I know it sounds like a set of words, but we're fighting very hard with the processes in place in such a way that that spirit is sustained for the future because if we lose that spirit and innovation, I think our performance will suffer and our business will suffer. Absolutely. So some closing questions. When you're not on one of those calls that harmonizes your different time zones, what do you like to do outside of work? Outside of work, well, Simon, I'm Indian. So you know what? My first sport is right. It's got to be it's got to be cricket. We can pass over quickly on that subject. Can't be for an Englishman. So we won't talk much about cricket right now, but it's obviously a big, big passion of mine. I used to play and now I don't play very much, but I love watching. I'm also an avid but mediocre squash player. So an enthusiast more than anything else, but I've been playing for a number of years now. In particular, when I moved to Hong Kong in 2030 and then to Singapore, I just found that it was the quickest way to get some excellent exercise for 45 minutes in an hour. And I made a lot of friends along the way through those passions as well. So that's kind of what I really like doing. And obviously my kids are at a great age of 9 and 11. And so when I can, I love to spend as much time as possible watching them grow up. We've asked this of our guest before, but it's off the book that we admire a lot. If you could tell us just one thing. Well, to the extent that it helps anyone, one of the things that was instilled in me early on is around this concept of integrity and reputation. And I think if I can say one thing, I think it is to guard your reputation with passion as you go through your career. My view is you leave imprints in everything you do. Any interaction leaves an imprint. I don't talk about social media imprints, but everything you do leaves an imprint. And referencing these days, it's an interconnected world. Referencing goes a long way. Whether you're trying to do the next private equity deal or you're trying to get the next great job, that referencing matters usually. And so if you guard your reputation and behave with high integrity, I think that'll always help over the long run. Very clear. Arjun, I know you have an offsite, something that we thought belonged to the past, but now belongs to the present. And so I'm going to let you go. Thank you so much for your time, for your cogent and coherent arguments, which have been, I think, very helpful to myself, but more importantly to our listeners and all those involved in the asset allocating game. I'm going to take away two specific things. Your last comment, guard your reputation, is super important. And the other point, which is the two mega trends, sustainability and Asian capital flows. And I think sometimes the latter, with the geopolitical turbulence, is lost. And maybe if we have another recording in 12 months time, we might reflect and discuss more on that Asian opportunity set that we have to try and process against the backdrop. So with that, Arjun, thank you so much for your time today. Thank you, Simon. That's been a very enjoyable discussion. Thank you for listening to the Money Maze podcast. For more information or to subscribe, please visit the MoneyMazePodcast.com. Hope to see you next time. All content on the Money Maze podcast is for your general information and use only and is not intended to address your particular requirements. In particular, the content does not constitute any form of advice, recommendation, representation, endorsement or arrangement and is not intended to be relied upon by users in making any specific investment or other decisions. Guests and presenters may have positions in any of the investments discussed.