Investment Philosophy: Jenny Heller emphasizes the importance of maintaining a beginner's mind in investment processes, allowing for fresh perspectives and humility in decision-making.
Investment Process: Brandywine Trust Group employs a rigorous process for assessing investments, focusing on clarity of vision, durability of strategies, and avoiding tactical opportunities unless extraordinary.
Deep Dive Approach: The firm conducts deep dives into potential investment areas, such as affordable housing and crypto, using a structured process of discovery, connection, and identification to evaluate opportunities.
Investment in Crypto: Brandywine made a small investment in crypto, viewing it as a long-term opportunity akin to the internet in the 1990s, despite recognizing significant risks and uncertainties.
Team Dynamics: The importance of team communication and diverse viewpoints is highlighted, with structured frameworks and assessments used to ensure all voices are heard and biases are minimized.
Manager Selection: The firm focuses on selecting managers with unique advantages and alignment, avoiding overly complex strategies that may detract from basic underwriting principles.
Portfolio Strategy: Brandywine's portfolio is oriented towards quality businesses that can compound earnings through cycles, with a focus on durable companies that offer multiple ways to win.
Learning and Evolution: Jenny discusses the evolution of her investment approach, including lessons learned about sizing investments, managing team dynamics, and maintaining an entrepreneurial spirit within the firm.
Transcript
[Music] Hello, I'm Ted Sides and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation through conversations with the leaders in the money game. We learn how these holders of the keys to the kingdom allocate their time and their capital. You can join our mailing list and access premium content at capitalallocators.com. >> 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 forformational purposes only and should not be relied upon as a basis for investment decisions. Clients of capital allocators or podcast guests may maintain positions in securities discussed on this podcast. With eight years and over 500 podcasts under my belt, I'm often asked to recommend my favorite episode. But I can't really answer that question. I feel like I have 500 children and don't think I've disowned a single one. So when asked, I usually offer up a great recent episode to get a listener started. Finding the best episodes in a big library of content isn't easy. So we thought we'd help. Each summer going forward, we're going to share our best. Over seven weeks, we'll replay conversations curated from our favorites and yours, excluding those from the last 12 months. Our 2025 summer series focuses on CIOS. We're blessed to have an incredible library of long shelflife content, and we just couldn't pick seven. Instead, we'll share a dozen gems canvasing every type of institutional asset owner. This week's summer series is a multifamily office twofer with Stan Miranda, co-founder and chairman emeritus of Partners Capital and Jenny Heler from Brandywine. Both firms started as multif family offices that have evolved in different ways. Partners Capital has grown and scaled as a leading OCIO, while Brandywine has remained a boutique with a fixed set of family clients. Before we get to the interview, a quick announcement. We've set new dates for our capital allocators university for investor relations and business development professionals. Those dates are December 3rd and 4th in New York City. Later in the year is just a better time of year for this gathering. It's post AGM season. Travel starts to wind down. It's right before the holiday crunch time and it's a great time for capital raisers to reflect on their previous year and plan for the year ahead. December 3rd and 4th in New York City. CAU for IRBd is a closed dooror gathering for capital raisers to connect with peers, learn from allocators and other experts and really share in best practices with each other. You can learn more at capitaloc.com/university. Thanks so much for spreading the word about capital allocators university for investor relations and business development professionals. Please enjoy my conversations with Stan Miranda from 2023 and Jenny Heler from episode 7 back in 2017 and a follow-up in 2021. >> Jenny, it is great to see you. >> Great to see you, too. >> I want to talk a bit about what's evolved in your process and investing over the last couple years since you came on the show. But before we do that, I wanted to throw a question back at you that you asked me when you interviewed me on my little book tour and it was just such a great question and I thought maybe it'll add some insight into our conversation. This line you said that everyone's genius lies adjacent to their either weakness or eccentricity and I just wanted to ask you what is your genius and perhaps the adjacency. I think my genius is probably that I still approach everything with a beginner's mind. And I think that's really critical for the way that Brandy Wine is structured because everyone on my team is a generalist and we're often exploring things that are really unknown. But I think it's also really easy to get jaded when you've been an allocator for a long time. So, I think having a beginner's mind allows me to connect the dots sometimes across asset classes or in unusual ways. It allows me to keep fresh and love my work. And I think it also allows me to bring a lot of humility to what we do and sort of a restless humility where I'm humble about what I don't know, but I also am never satisfied with the status quo. The counterpoint of that is that sometimes that humility can work against me. It's taken me a while to learn where to stand firm in my beliefs. That can be challenging. Actually, it's sort of a joke on my team. We go through this process, a pretty formal process of assessing investments before we put them in the portfolio. And I listen to all of the team's views because I'm always the last person to speak. And I am always the person that changes my scores the most by the end of the session. And it's at the margin. And I always share my revised scores with the team because it's important to me that they know that they can change my mind. But I'm sure it's also always a little frustrating to them and even frustrating to me that I don't always get things right the first time. >> When you take that beginner's mind and that mindset to thinking about any new investment idea, I'm curious how you build a process around sourcing something new. Well, we have a lot of different ways that we source, but I think three things that you really need to have to source so broadly is one, you need to have a clarity of vision. So, we have gating questions around the different asset pools that we look at to just make sure that there is some focus. So for our long only portfolio for example, we have a break even analysis that we run to look at the returns of a manager and it's something we do right up front of every process to say what does a manager need to earn after fees and taxes to beat a benchmark. If a manager has high turnover, super high fees and holds a lot of cash or any combination of those three, typically they won't make it into the portfolio. Also across all asset classes we really focus on durability and that means that we have to believe the manager is durable but also that we generally need to believe that the strategy is really durable. So it kind of veers us away from tactical opportunities. They can make it into the portfolio at the margin for if something is truly extraordinary but it's very very hard for tactical opportunities to make it into our portfolio. They vary by asset class, but that kind of gives everyone on the team enough focus that they can source broadly within first principal constraints that we have. I don't know exactly if that connects to having a beginner's mind, but typically I think having a beginner's mind connects a lot to our diligence process and how we approach building research plans. I think with sourcing the goal is to be as broad as possible within these sort of first principal constraints that we have. And I think another piece of that is having a prepared mind. And to us that means that different folks on my team will have different passions they might want to explore or research areas of interest and we'll pursue a process of deep dives to allow them to explore that with the understanding that it might not lead to an investment. >> What's an example of one of those deep dives? >> One example is the affordable housing space. So, we had made an investment in securitized affordable housing bonds and they produce a really fabulous post- tax return, even a pre-tax return in the mid- teens and they have very low default risk and they're just a wonderful asset for our multistrategy portfolio. And they were such a good asset that one of my team members said, I would really love to look at this asset class more broadly. It's a very complex asset class and see if there's other ways that we could invest in it. Maybe it's not just the credits that we want to invest in. Maybe there's ways we could be partnering with developers, investing in equity, investing in tax credits. This is my team member Greg. He refers to the research process around a deep dive as discovery, connect, and identify. So the discovery part of the process is to understand an industry's history, its development, and how it works today across all stakeholders. The connect part of the process is to build relationships and connections across the space and then build a market map of the space and then the identify part of the process is to really identify the investable universe. So that comes at the end of the process and he and his colleague Steven spent months and they were doing this as a 20% project while they had 80% other work really building out the history of the industry understanding the complex regulations in the space talking to all of the stakeholders they could find in the space to build out that market map and in the end they decided that we actually were investing in it in the most efficient way possible for our portfolio. So there was a very long, very robust PowerPoint presentation that they shared with the team that didn't lead to an investment, but that's knowledge that we've now built as a group. When someone on your team brings you what's called a passion-based project, how do you balance the thought of whether that research will be compounding knowledge that you can express either directly or somewhere else across your portfolio versus something that ends up just being very specific and if it doesn't turn into an investment, it ends up being a little bit of lost time. >> There's always a risk of losing some time doing these projects, but typically we're having a discussion that unfolds over many months. So, it's not just, "Hey, Jenny, I have this great idea. I'm going to go pursue it." It's, you know, this is interesting to me and here's why. And in this case, it's well, it's a space with a lot of complexity to it. It's a space that has really interesting after tax possibilities for us. We've already found one avenue that's appealing. So, I think the interest came from a place of with a fiduciary mindset of thinking there could be an investment at the end of this. And typically, all of the deep dives we've done have had that framing around it. So I had two of my more junior team members did a deep dive into crypto which did end up leading to a small investment. Another team member did a deep dive many years ago into the quicks service restaurant space because there were some characteristics of that space that we thought were really appealing from a private equity perspective. So there has to be that initial hypothesis and then beyond that you have to limit the amount of these that you can do as a team at one time. So part of being both creative and disciplined I think is prioritizing very carefully as a team. And we have a process that at the beginning of the year where we get together for a couple of hours and everyone on the team notes the deep dives that they might be interested in pursuing not just in the next year but maybe in the next couple of years and then we'll talk as a team about which we think are the most fruitful to allow for that prioritization to occur. And it's typically folks are doing maybe one of these a year maybe two. I don't know if there's anything more topical in the deep dive area than crypto. So, why don't you take me through when you started that work, what the work was like in that deep dive and how it evolved. >> It was a 2021 project for us. I had actually developed sort of a loose interest in the space a couple of years ago. When I say lose interest, I was listening to a lot of Patrick Oshanesy's wonderful podcasts in the space and it tickled my interest that it was this completely new asset class. It seemed like it might have a really big TAM. There was just new ways of thinking about and using technology and it was attracting some really smart players. And I wouldn't say that at the time the rest of my team were true believers. I wasn't even a true believer at the time, but no one really took up the mantle and wanting to explore it deeper. The team has evolved a little bit since then in terms of interests and in some cases in terms of the folks that have joined the team. Two senior associates mentioned at the beginning of the year that they both had an interest in pursuing crypto as a passion project and I was all for it because again it still seemed like one of those areas that was really ripe with possible opportunity also with risk and I think we made it very very clear that no one on the team knew much about it and it was a completely new language. So a lot of the process initially was them gathering information, looking at primers, pulling them together, speaking with folks throughout the ecosystem in that discovery process to just help us understand as a team what the market structure looked like, what the technology looked like, what some of the risks were, why we might be interested in pursuing this. And I think again this concept of decentralized trust and using a reliance on mathematical guarantees to remove agency issues held a lot of appeal to me held some appeal to the team. Then thinking about the use cases started to interest the team more. So understanding that there's actually these real use cases that have been developing around nextgen payments around DeFi around different ways for creators to monetize their assets. Thinking about it as web 3.0 0 just this completely different technology where you don't even know where it's going to go. That interested the team a lot more than thinking about crypto as a store of value and thinking about the Bitcoin case which I think is where everyone started. As that was happening a very large well-respected manager happened to raise a fund. So that sort of fast forwarded our deep dive into an actual investment process and we pulled at that point a more senior member of the investment team who has a real interest in fintech and was a skeptic on crypto. But I thought that would be a really interesting combination because it is so deeply tied to what's going on in fintech and I thought her skepticism would be really welcomed with my two younger colleagues who were really pretty gung-ho and we ended up pursuing a small investment in the space at the end of that process understanding that there's just huge unknowable risks around regulation around the investment in tokens and their volatility around how you're owning something and what you actually own and the high correlation between assets. But we just decided that this was like the internet in the 1990s and we had to dive in at some small level to really fully understand what we didn't know and also see if there's real opportunity here. >> How do you decide to balance how much you want to learn about that space or in this example identifying a venture capitalist that you're comfortable with to take advantage of what might be a big opportunity for you? >> Well, our bias is always that we invest through managers. I was going to say that we're the dumb money. Uh, and I recognize that's maybe not a popular thing to say, but I think I actually will use that term because I think it speaks to the humility that we need to have in our seat. We are not experts in many things. I think we are really, really good at picking people to partner with and helping to uncover what they do well and whether we think they're playing an easy or a hard chess game. So, that's always the bias. And I think with crypto, it was never even a thought in our minds that it's something we would own directly. We do own certain assets directly in our portfolio, but it's always through some sort of a co-investment concept. >> When you get to the point where you are today, you've made an initial investment. You said it's small. How do you think about that space from here going forward? It's actually one of the biggest challenges in my seat is making small investments or we make them as a team and then really trying to use those investments as tools to something bigger because for us if we make let's say a $10 million or less investment in a fund that's really what I would call a ventureiz investment for us and it is an investment where you're acknowledging that there's a lot of risk that you might you know there is that risk of permanent capital loss to some degree but you're also hopefully doing that with the belief that there's enough upside potential that that investment alone could be somewhat meaningful, but really it's with the hopes that you can start to stack those investments on top of each other. And I think the reality of venture, which is where we tend to write the smallest checks by far, is you're always constrained. You're constrained by the risk or you're constrained by the manager not giving you the allocation that you want because the best managers do tend to really limit their fund sizes dramatically in that space. When we're making little investments in venture, it's not with the belief that one day we're going to be writing a $30 million check to a fund because it's just not realistic. It's a space where you have to place more bets. But there's other times where we'll make small investments, not that small, but let's say half-size investments in our hedge fund portfolio or our long only portfolio where it's really with a pathway in our minds that over the next two years, we're going to grow that to a full position. And there we have really specific what we call KDIs or key diligence indicators that we're using to create that pathway for growth. >> What are those KDIs? Given that you can imagine you're giving money to someone, you're getting to know them better and ultimately they're going to deliver performance or not. So how have you mapped out those KDIs that help you understand when you want to get to a more full-size position? Well, it looks really different depending on the opportunity, but again, from sort of a first principles basis, we're typically testing some initial assumptions. So, one assumption that we might be testing is, is the manager playing an easier chess game, which we thought they were. So, that might be, is the sector as uncompetitive relative to other sectors as we thought? Or if tons of market participants came into the space, that might be something that would destroy that hypothesis for us. Another hypothesis we might be testing would be does the manager have any unique advantages. So we might say we think they have a particularformational advantage or analytical advantage in underwriting this asset class. And there's a number of KDIs that might fall out of that in terms of the accuracy of their decision-m, not necessarily on an outcome basis, but on a process basis, because of course, you can't control what the market's going to do, but just looking at the depth of their research, and does that meet our expectations? And are they asking the questions in the way we thought they might ask them? Are they using the tools to get those questions and answers that we thought? or we might have a KDI around their sourcing advantages on the private side especially some managers that we've looked at have built particular tools around sourcing which sometimes are a little untested because we invest early on we have a manager that's built this really cool web scraping tool as part of their sourcing engine so a big KDI around reapping with them is is that has that tool provided actual utility to them from a sourcing perspective so it really can vary manager to manager but it's typically around testing their process and testing our hypotheses around their process and the strategy itself as well as of course the team. >> So over the years you've been doing these deep dives. What's the prototypical example you hold up of one of these that turned into something very meaningful for your portfolio? >> Well, I'm going to use a recent example because I think the process has been very robust. I actually don't know if it's going to be meaningful yet. I mean, I would say our QSR deep dive did lead to a meaningful investment for us. affordable housing came out of a meaningful investment, but insurance is a space that we're looking at now. And it's sort of a hybrid deep dive meets actual underwriting process, but I'm calling it a deep dive because one of my colleagues has been looking at the space since 2015. Actually, I was looking through our notes because we're doing active work on it now, and it amazed me that he had had a real interest in the space and a lot of aspects of the space, too. I mean, at one point, we looked at life settlements. Now we're focusing on the Lloyd's market, but he's really taking this on as just a side project over the years, understanding that at least with the part of the market we're focused on now, the pricing environment has been pretty horrific for a number of years. And actually, the managers he'd gotten to know in the space as part of his initial deep dive really were high integrity enough to say to him, "This isn't a good time to invest." But there were a lot of aspects of the space that still appealed to us. So what's happened in that space is we got a call from a manager saying the pricing environment has moved from sort of a soft market to a hard market frankly for good reason because there's been a lot of risks that have popped up in the space. It might be an interesting time to take a look. He's been able to use a lot of the research he did initially to dive in not necessarily at the beginning of a process but starting from a midway point but understanding that there's tremendous work to be done in understanding the asset class. So just in 2021 he and his colleague have done 22 meetings and calls across the ecosystem just to get to understand the space. They have mapped out the market dynamics of the space at a very deep level. Understanding solveny ratios and the capital base of the space, the growth of the market and what that means. Terms and pricing environment and what what that looks like. What large risks exist and what impact might that have on a portfolio? the existential risks that exist, understanding the syndicate structure, you name it. As well as now really diving deeply into firm and team and how they do their diligence, how the manager themselves do their diligence and what the returns look like on a post tax basis for us. And I think there is the potential here for this to become really a core part of our hedge fund portfolio. It's controversial internally because it's not an easy space to underwrite. But I think the work that's been done over the past five years have really allowed our colleague to educate me and the rest of the team incredibly successfully on what this space looks like. And it's really hard for us to find assets that are relatively uncorrelated and provide liquidish, not super liquid, but not 10-year lockup illiquidity that provide the post tax returns that we look for. We have a pretty high bar for our hedge fund portfolio. And if we can get comfortable with insurance, and I think we're heading there, it's one of those rare assets I think that has the potential to do that over a cycle, understanding that it's not always going to look great. You mentioned in that description how it could be a meaningful part of your hedge fund portfolio and I'm curious how you balance these deep dives with the strategic way you think about managing the whole pool of capital for your clients. >> We pull our assets into a couple of simple vehicles. So we have a a long only vehicle. We have a multi strategy vehicle which I refer to as our hedge fund portfolio but it's really just assets that are less correlated to equity markets. And then we have a private equity program. Typically at the beginning of a deep dive, we'll have a pretty good sense of where in the portfolio something might fit. In the case of insurance, we knew from the get-go that if we could make it work from a structuring perspective in our hedge fund portfolio, that's where we'd want it to live because of the characteristics of the returns and because frankly we have a really really high bar for returns in our private equity portfolio. And it's typically a lot easier to find things that find that high bar, but insurance was a little bit marginal in terms of meeting the returns of our private equity portfolio. Typically those are questions that we can answer on the front end of a deep dive. So with quicks service restaurants, the example I gave, we were really looking at that as a private equity opportunity, but understanding that the public comps would be an interesting way for us to learn about the industry. And of course with anything private we do, we're always looking at the public comps to make sure that we're getting paid an illquidity premium for being invested on the private side. Otherwise, there's no point for crypto. Actually, that's an interesting one. We initially thought okay there's ways we can invest in in a very relatively liquid format in a hedge fund format or we could take a really long duration view and look at private equity vehicles and I think relatively quickly we came to appreciate that the trading strategies were not a good fit for us and I do think by the way people can make fantastic money doing this but we didn't really want to have our main bet be on the volatility of the asset class that the high degree of trading in the strategy would be very tax inefficient for us. What was more interesting for us and more aligned with how we think, which is with a multi-generational view, was thinking about this asset class over the next 10, 20, and 30 years and thinking about where it could go and wanting to really remove from our mind the stress of the day-to-day volatility of the asset class by being in a longduration vehicle. When you're doing that deep dive and you really feel like you've got your hands on something that you know, how do you think about sizing it enough that it's not dwarfed by the other 80% of the work that that team member is doing? Sizing is something that I have had to learn a lot about over my time as a CIO because I think when I came to Brandy Wine, my instinct was to want to size everything too small. And then I think I course corrected too much and actually it was one of my, you know, talk about having a beginner's mind. It was one of my colleagues who said to me, "We're not taking enough risk in the portfolio. We really need to size things bigger." And I think I went to the other extreme for a little while and put a couple of things into the portfolio that were pretty new as full-size positions up front. And the problem with that is when that position does something you don't expect, let's say the returns are horrific for the first couple quarters, it puts huge pressure on the internal process and I also think it puts a lot of pressure on your relationship with a manager because there's just no wiggle room. You can't add to them when they're down because they were sized too big initially. I don't think that there's a perfect answer, but what we do now is to have an understanding up front of where we want a position to get should things work out. On the long only and on the hedge fund side, those positions tend to be pretty chunky. We only have about 10 active relationships in our long only portfolio and it's something we're always trying to whittle down actually. We have a few more closer to 15 in our hedge fund portfolio because it's a little harder there sometimes to get the concentration we want. But with any new relationship, we'll typically start it at a half-size position. Even if it's a manager we know pretty well or I mean meaning they've been in the market for a while with a pathway towards growing that position over a period of time, the length of that pathway can vary from one manager to another. And for emerging managers, it might be heavily dependent on seeing certain things evolve. But I've really found that that just prevents us from feeling too stupid or too smart about our timing decisions. And I think on the private side, we don't always have the same choice. Sometimes we will size things day one at a larger size because it's really important to us to secure an allocation, but it's always with a pathway towards thinking at least in terms of the next three funds with the manager and understanding what we'd like that relationship to look like in aggregate from a sizing perspective. >> That sizing mistake leads me to want to ask you about kind of where we started, which is what's evolved and what have you learned over the last couple of years in your process? My team and mistakes are teaching me things every day, but some of the big learnings, one of them has certainly been around sizing. Two has been about being wary of investing in things that are complex for very good reason, but where we find that so much of our research is spent on the complexity that we forget about the basics of manager underwriting. And I'm thinking in particular of quant for us which is a space where we invested in a manager that was sort of a tax scheme and it seemed very clever and it was a factor strategy. So we spent a lot of time looking at factor research and understanding all of the reasons why the strategy should work out and we missed some real basics on a broken culture and team dynamics and research dynamics that were very very broken at an organization that were what ended up really hurting the firm in the long term. So I think complexity can be okay. It's something I am much more wary of than when I started. I mean you could say insurance has some complexity to it. Really though with a space like that it's more our lack of knowledge than that the space itself is so remarkably complex. But if we're going to take on something complex we can't forget just about the basics of alignment team and process. I guess another big learning has been around team communication and how do we remove not only remove bias from our process but ensure that all voices are heard because we have a mixture of introverts and extroverts on our team we have a mixture of slow and fast thinkers on our team and we really have a team of heterodox thinkers so people that just approach the world very very differently so we have very diverse viewpoints typically on any investment and that can be really really challenging to manage and frankly when I started Brandy Wine it wasn't something I had to manage initially because it was me and then me plus one and then me plus two and those problems sort of develop over time. I think we've really refined how we communicate as a team. One of the things that a newer colleague recommended in the past couple years was to bring on a second after what we call the early to midpoint d you know in our diligence process which is our issue memo stage. After the issue memo is discussed as a team, someone on the team, typically another senior member of the team, will volunteer to be a second and they will sit side saddle and diligence for the rest of the process. And this is to ensure that there's more buy in on the team and that there's another check and balance beyond me to make sure that we're getting more perspectives. We also are really really believers in using a framework at the end of our process where everyone on the team grades any investment we're doing on a series of criteria that's very very specific to that investment on a scale of 1 through five not using the score three which is something we borrowed from Annie Duke I believe because we don't want everyone to just sort of sit in the middle and then the associate who's part of running the diligence will lead a discussion around our frameworks focusing on the areas of high dispersion among the team and the areas of low scores and what that's allowed is for people first of all everyone on the team is able to express their views but beyond that it moves the conversation away from I like I dislike I feel good about this to a high degree of specificity around what people actually like or dislike about an investment. It makes the decision-m process feel very data driven even if it's qualitative data and it makes us get really really specific about what we think is strong or weak about a manager. It's something we've had in place for a while, but I think it's evolved at the margin. The whole team speaks the language of these assessments now. And it's not the grade at the end of the day doesn't determine outcomes. But I think that's been a big learning. The final learning would be just understanding that you might need different team members on your team as your team evolves. So when I started Brandy Wine, I think I had a bit of a higher tolerance for arrogance might not be the wrong word, but I wanted to hire high energy folks that were jacks of all trades. I think there is a degree of arrogance that can be attached with that. I think it can be really helpful when you're building an organizational structure because those are often the folks that have super creative ideas and a willingness to run through walls. There's a real entrepreneurial quality to that. And I think as team structure forms and develops and as teams grow, then every team member you're adding has to fit into the puzzle pieces of the rest of the team. One thing that we always hire for is folks who believe in quality in everything they do. But it tends to be folks that are highly collaborative, very very humble. And the challenge I have now is to ensure that we still maintain that belief that we can run through walls and that we don't get too careful because I think sometimes once you're too formed, you can quickly veer towards bureaucracy. So we want to make sure that we can maintain that entrepreneurial spirit but do it in a way that works collaboratively. I want to dive in a little bit on that second point on the assessments. What are some of the examples if you had a checklist of your rankings from one to five excluding three that are pretty common across those different assessments of different types of managers? >> So I think the commonalities across those it always starts with investment philosophy and process and we are asking as I've said again and again is this an easy or hard chess game. We're diving into advantages that we think a manager might have. Now, those advantages might look really different from one asset class to another. So, in venture, the advantages might be around personal brand, firm brand. On the buyout side, it might be really around their ability to add value post. And on the long or hedge fund side, it might look it might be much more around their approach to a research process and how they're getting ideas into the portfolio. But there is a consistency around what are the advantages that that manager has. There's a lot of similarities around team and process. Big focus on judgment, commercial instinct, and then what is the team the manager's ability to lead and manage a team assuming that they have one. In some cases, that's less relevant. And then how well is that team structured for the strategy itself? Has that team worked together through a cycle? If not, why do we think that's okay? And finally, how is that team incentivized? There's also a lot of similarities across how we think about business structure, which really is typically again around alignment around size of opportunity set relative to size of fund and then thinking about a lot of the blocking and tackling that goes on in running a fund as well. There's a lot of similarities there. I was wondering if you could peel a layer a little bit off of the diligence process and maybe just walk me through the aspects of the process that gather the information that ultimately goes into those assessment decisions. >> The way we're structured, a director, associate team or managing director, senior associate team will find an idea that interests them. Whether that's at the result of a deep dive or simply the result of something inbound or something that they've heard through one of our other managers or a network, they'll take one or two meetings with a manager. And typically I'm meeting with my team multiple times a week. We have two weekly team meetings and then I'm meeting with every director once a week separately even while we're on Zoom now. And so we're always discussing ideas at a pretty nent stage at some level. But when it's really brought to the team and typically when I'm stepping in and when other people on the team are stepping in, it's after one or two meetings with a manager and maybe two to five reference calls. So we do reference calls really at the early end of our process because we find that that's just an incredible way to start building a mosaic. And after that is, you know, when we're writing our issue memo. So that's a maybe three or four page memo that's not only shared with the team to ask questions and and it lays out sort of what the key diligence items are, why we think something is interesting, it's also shared with our investment committee at that point and they have a 7-day period to respond with their questions and then a research plan is built assuming that at the issue memo stage there's enough of an interest from the team to move on and there typically is typically things are at least progressing for a meeting or two beyond the issue memo stage. The research plan is then shared with the team and the diligence is built around that. So it really looks different for every process. I mentioned for this insurance strategy we're looking at that we've done well over 20 meetings just in the past year and this is something we've been looking at for a while. I have to say that's probably not uncommon for us. There's been some managers where we've done 15 plus reference calls because they're so new. We're trying to get to know them and it's the best way for us to learn about them. They might not have a track record for example. So the reference calls are the best way for us to get to know them. There's other processes though where we don't have that luxury and we have to be much more selective in how many folks we can call in who we can reach out to because the manager constrains us and we're able to prosecute both processes but I think our preference is to do a lot of work on the front end to be easy investors once we're in. So when it comes to meeting the manager, it's typically meeting with everyone on the team independently. And that's usually multiple people on my team at least listening in on those calls, meeting with folks from the back office, having multiple meetings with the PM or whoever is running the fund as well until we parse through that research plan and make sure that we're answering all of our diligence questions. >> And then when you get to the decision-m stage, you mentioned these assessments, you're bringing the team together, getting everyone's opinions. How do you then ultimately make the decision? >> So the decision is ultimately between the director associate team and me and it's most of the conversations at the very final stage are happening with the MD and myself. I am not a believer in consensus decision-m so we aim to have a process that's highly collaborative where we can gather as many viewpoints as possible. The MDs hold themselves to an exceptionally high bar to really recommend that anything goes in the portfolio. So if they feel that there is a substantial question that has been asked by the team that they haven't answered, they are going to answer it to their own and my and the team's typically satisfaction before that manager gets in the portfolio or sometimes we'll acknowledge this is an unknowable that we're willing to live with and it will impact our sizing decision. Typically I find that I am pushing them sometimes to take a little bit more risk. I have a very very thoughtful and cautious team and sometimes my role has to be that this is something we do need to take a risk on but ultimately that's a decision between me and the MD. >> So I'm going to turn a little bit to the environment. Doesn't look like there are any easy ways of making a buck these days. So what are you excited about? >> I'm not super excited about all that much right now. What I'm excited about is that we have oriented our portfolio for many years towards quality and towards businesses across the portfolio that can compound their earnings through a cycle and that have a lot of ways to win and some structural advantages. And these businesses typically trade at a premium on the public side. But I do think that given there's a lot of uncertainty around inflation, it's one of the better tools that we have again thinking long term to protect against that. I also think that given there's probably equal risks, some might say towards deflation, given that we don't know what's going to happen with pandemic 3.0, 4.0, you name it, we don't know what's going to happen with China, we don't know what's going to happen with the regulatory and political environment. So to me again just orienting towards companies that are really durable and have one of my favorite managers refers to it as customer experience compounding meaning he loves investing in businesses that thrill their customers and have multiple ways to win and will compound on their own competitive advantages over time. And I love that as a framework. I think more tactically, I do think it's interesting that there are these little segments of the markets where insurance would be an example of a pricing environment that's turned really negative that ultimately might provide an interesting entry point. But the reality is my hope is if we invest in an asset class like that, it can be for the long term. So, it's hard for me to get too excited about that because there's going to be a time when we're investing into it and it's a less favorable pricing environment. What's evolved in your thinking about teams and culture with your managers? >> We talked about this a little bit during our last discussion, but I initially was very wowed by the rockstar PM and the PM who was just brilliant and it didn't really matter who they surrounded themselves with in some degree because you were just making a bet on them. I think this is more of an evolution than a revolution certainly, but the team and I have probably become ever more focused on the cultural dynamics within an organization and how people engage with each other and trying to deeply understand that and understanding upfront what dynamics might blow a firm up over time. And I think that's we haven't invested in a lot of blowups, but we certainly have seen highle departures happen from time to time. With every one of those departures, typically they're unexpected and typically it forces you to ask a question of what did I miss going into it. A recent example is there's a manager in our portfolio that was going through a very tough family circumstance and is going to choose to leave a firm because of that family circumstance. And there were red flags that were leading up to that. It's going to be fine. But it's one of these cases where we said, are there different questions we could have asked to these co-founders when this person was going through this to see how it might impact their ultimate decision-m around whether they want to be involved with this entity or not? I think there's other times where you see two really strong co-founders and it forces us to ask a lot of questions around their complimentary strengths and weaknesses, but also just their complimentary personalities. It's an intensely human business investing and the pattern recognition that comes from doing it for a long time is to be able to sort of dive underneath what you see initially. And you can learn this through references, but you can also learn it just through having multiple somewhat repetitive conversations from time to time with the manager and team to see how they're behaving towards each other to see even when they're asked a question under stress, how they're reacting, whether one partner is talking over the others or not. We actually had a lengthy team discussion recently about a fund we were looking at where one team member was incredibly dominant in the room really talking over everyone else. Actually, this happened twice recently. And in one case, we said, "We think this is so problematic that we're probably not going to move forward with the investment because it just seems like this is going to lead to team members leaving overtime." And it was clearly something that the other team members were reacting to. I think in the other scenario, it was a team that had known each other for a very, very long time. And typically the person was interjecting to pump up the rest of her team and make them look good. And you know it was something that was noted to us by other people as a problem. And and I think we said yeah this maybe it's a problem but this might just be a personality trait that the other folks who have known this person since college are really used to and really get. And it was pretty clear from the multiple conversations we had that it wasn't impeding the decision-m process nor was it impeding the feeling of morale among the team. So I guess that's sort of a nuance but maybe that's an evolution. Yeah, super interesting and subtle. Very subtle along the way. Jay, I want to take a chance to ask you a couple closing questions, which it turns out are all new since you were last on the show. So, what's your favorite hobby or activity outside of work and family? >> My favorite outdoor hobby is probably skiing. My favorite indoor hobby is reading. >> What's your most important daily habit? >> Singing and reading to my kids every night before they go to bed. >> Now, do those happen at the same time? I mean, the embarrassing thing is if there is a song within a book, I will actually make up a tune to it and sing it, which is sort of a humiliating thing to do, but my kids have gotten used to it now, so sometimes they do happen at the same time. >> What's your biggest personal pet peeve? >> People forgetting the humanity of others. I think that can show up in two ways. One, that they're just unkind to people. You're seeing that more and more in this day and age, unfortunately. Or people treating others as if they're invisible. How about on the investment side? Your biggest investment pet peeve? >> One would be misalignment, which is unavoidable, but something that drives me crazy every time I see it. And two would be when managers promise something and then 5 years later forget that they made those promises and do something else. >> Which two people have had the biggest impact on your professional life? >> One person I mentioned before and remains, Bill Peterson, my old boss, had a huge impact on my professional life. and David Patterson, who really took a huge chance on me when he hired me at Brandy Wine and has been incredibly patient with my learning over the years. Those are no-brainers. >> All right. What's the biggest mistake you've made and what did you learn from it? >> A life mistake that stands out would be almost failing out of my microeconomics class in college. >> What was the mistake? The mistake was that I had no idea how to study and I was too afraid of the teacher to ask questions. So I think one after that class I learned how to properly study and I also learned that I really had to speak up when I didn't understand something which is probably the biggest thing which has carried me through my life. >> What teaching from your parents has most stayed with you? >> Oh my goodness there are so many. The few that come to mind would be and I can't list just one because it would be unfair to them. one that family comes first. Two, they've both lived their lives incredibly fully. My dad is 96 now and and has just been a paragon of living life to the fullest. And then finally, the counterpoint of my pet peeve. They always remember the humanity of others and approach everyone with kindness. >> All right, last one. Jenny, what life lesson have you learned that you wish you knew a lot earlier in life? >> I wish I learned earlier to be more intentional with my time. >> It's a good one, Jenny. So much fun. Thanks as always. Thank you. It's been a pleasure, Ted. >> Thanks for listening to the show. To learn more, hop on our website at capitalallocators.com where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more. Have a good one, and see you next time.
CIO Greatest Hits: Multi-Family Offices – Jenny Heller (Brandywine Trust Group, 2021)
Summary
Transcript
[Music] Hello, I'm Ted Sides and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation through conversations with the leaders in the money game. We learn how these holders of the keys to the kingdom allocate their time and their capital. You can join our mailing list and access premium content at capitalallocators.com. >> 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 forformational purposes only and should not be relied upon as a basis for investment decisions. Clients of capital allocators or podcast guests may maintain positions in securities discussed on this podcast. With eight years and over 500 podcasts under my belt, I'm often asked to recommend my favorite episode. But I can't really answer that question. I feel like I have 500 children and don't think I've disowned a single one. So when asked, I usually offer up a great recent episode to get a listener started. Finding the best episodes in a big library of content isn't easy. So we thought we'd help. Each summer going forward, we're going to share our best. Over seven weeks, we'll replay conversations curated from our favorites and yours, excluding those from the last 12 months. Our 2025 summer series focuses on CIOS. We're blessed to have an incredible library of long shelflife content, and we just couldn't pick seven. Instead, we'll share a dozen gems canvasing every type of institutional asset owner. This week's summer series is a multifamily office twofer with Stan Miranda, co-founder and chairman emeritus of Partners Capital and Jenny Heler from Brandywine. Both firms started as multif family offices that have evolved in different ways. Partners Capital has grown and scaled as a leading OCIO, while Brandywine has remained a boutique with a fixed set of family clients. Before we get to the interview, a quick announcement. We've set new dates for our capital allocators university for investor relations and business development professionals. Those dates are December 3rd and 4th in New York City. Later in the year is just a better time of year for this gathering. It's post AGM season. Travel starts to wind down. It's right before the holiday crunch time and it's a great time for capital raisers to reflect on their previous year and plan for the year ahead. December 3rd and 4th in New York City. CAU for IRBd is a closed dooror gathering for capital raisers to connect with peers, learn from allocators and other experts and really share in best practices with each other. You can learn more at capitaloc.com/university. Thanks so much for spreading the word about capital allocators university for investor relations and business development professionals. Please enjoy my conversations with Stan Miranda from 2023 and Jenny Heler from episode 7 back in 2017 and a follow-up in 2021. >> Jenny, it is great to see you. >> Great to see you, too. >> I want to talk a bit about what's evolved in your process and investing over the last couple years since you came on the show. But before we do that, I wanted to throw a question back at you that you asked me when you interviewed me on my little book tour and it was just such a great question and I thought maybe it'll add some insight into our conversation. This line you said that everyone's genius lies adjacent to their either weakness or eccentricity and I just wanted to ask you what is your genius and perhaps the adjacency. I think my genius is probably that I still approach everything with a beginner's mind. And I think that's really critical for the way that Brandy Wine is structured because everyone on my team is a generalist and we're often exploring things that are really unknown. But I think it's also really easy to get jaded when you've been an allocator for a long time. So, I think having a beginner's mind allows me to connect the dots sometimes across asset classes or in unusual ways. It allows me to keep fresh and love my work. And I think it also allows me to bring a lot of humility to what we do and sort of a restless humility where I'm humble about what I don't know, but I also am never satisfied with the status quo. The counterpoint of that is that sometimes that humility can work against me. It's taken me a while to learn where to stand firm in my beliefs. That can be challenging. Actually, it's sort of a joke on my team. We go through this process, a pretty formal process of assessing investments before we put them in the portfolio. And I listen to all of the team's views because I'm always the last person to speak. And I am always the person that changes my scores the most by the end of the session. And it's at the margin. And I always share my revised scores with the team because it's important to me that they know that they can change my mind. But I'm sure it's also always a little frustrating to them and even frustrating to me that I don't always get things right the first time. >> When you take that beginner's mind and that mindset to thinking about any new investment idea, I'm curious how you build a process around sourcing something new. Well, we have a lot of different ways that we source, but I think three things that you really need to have to source so broadly is one, you need to have a clarity of vision. So, we have gating questions around the different asset pools that we look at to just make sure that there is some focus. So for our long only portfolio for example, we have a break even analysis that we run to look at the returns of a manager and it's something we do right up front of every process to say what does a manager need to earn after fees and taxes to beat a benchmark. If a manager has high turnover, super high fees and holds a lot of cash or any combination of those three, typically they won't make it into the portfolio. Also across all asset classes we really focus on durability and that means that we have to believe the manager is durable but also that we generally need to believe that the strategy is really durable. So it kind of veers us away from tactical opportunities. They can make it into the portfolio at the margin for if something is truly extraordinary but it's very very hard for tactical opportunities to make it into our portfolio. They vary by asset class, but that kind of gives everyone on the team enough focus that they can source broadly within first principal constraints that we have. I don't know exactly if that connects to having a beginner's mind, but typically I think having a beginner's mind connects a lot to our diligence process and how we approach building research plans. I think with sourcing the goal is to be as broad as possible within these sort of first principal constraints that we have. And I think another piece of that is having a prepared mind. And to us that means that different folks on my team will have different passions they might want to explore or research areas of interest and we'll pursue a process of deep dives to allow them to explore that with the understanding that it might not lead to an investment. >> What's an example of one of those deep dives? >> One example is the affordable housing space. So, we had made an investment in securitized affordable housing bonds and they produce a really fabulous post- tax return, even a pre-tax return in the mid- teens and they have very low default risk and they're just a wonderful asset for our multistrategy portfolio. And they were such a good asset that one of my team members said, I would really love to look at this asset class more broadly. It's a very complex asset class and see if there's other ways that we could invest in it. Maybe it's not just the credits that we want to invest in. Maybe there's ways we could be partnering with developers, investing in equity, investing in tax credits. This is my team member Greg. He refers to the research process around a deep dive as discovery, connect, and identify. So the discovery part of the process is to understand an industry's history, its development, and how it works today across all stakeholders. The connect part of the process is to build relationships and connections across the space and then build a market map of the space and then the identify part of the process is to really identify the investable universe. So that comes at the end of the process and he and his colleague Steven spent months and they were doing this as a 20% project while they had 80% other work really building out the history of the industry understanding the complex regulations in the space talking to all of the stakeholders they could find in the space to build out that market map and in the end they decided that we actually were investing in it in the most efficient way possible for our portfolio. So there was a very long, very robust PowerPoint presentation that they shared with the team that didn't lead to an investment, but that's knowledge that we've now built as a group. When someone on your team brings you what's called a passion-based project, how do you balance the thought of whether that research will be compounding knowledge that you can express either directly or somewhere else across your portfolio versus something that ends up just being very specific and if it doesn't turn into an investment, it ends up being a little bit of lost time. >> There's always a risk of losing some time doing these projects, but typically we're having a discussion that unfolds over many months. So, it's not just, "Hey, Jenny, I have this great idea. I'm going to go pursue it." It's, you know, this is interesting to me and here's why. And in this case, it's well, it's a space with a lot of complexity to it. It's a space that has really interesting after tax possibilities for us. We've already found one avenue that's appealing. So, I think the interest came from a place of with a fiduciary mindset of thinking there could be an investment at the end of this. And typically, all of the deep dives we've done have had that framing around it. So I had two of my more junior team members did a deep dive into crypto which did end up leading to a small investment. Another team member did a deep dive many years ago into the quicks service restaurant space because there were some characteristics of that space that we thought were really appealing from a private equity perspective. So there has to be that initial hypothesis and then beyond that you have to limit the amount of these that you can do as a team at one time. So part of being both creative and disciplined I think is prioritizing very carefully as a team. And we have a process that at the beginning of the year where we get together for a couple of hours and everyone on the team notes the deep dives that they might be interested in pursuing not just in the next year but maybe in the next couple of years and then we'll talk as a team about which we think are the most fruitful to allow for that prioritization to occur. And it's typically folks are doing maybe one of these a year maybe two. I don't know if there's anything more topical in the deep dive area than crypto. So, why don't you take me through when you started that work, what the work was like in that deep dive and how it evolved. >> It was a 2021 project for us. I had actually developed sort of a loose interest in the space a couple of years ago. When I say lose interest, I was listening to a lot of Patrick Oshanesy's wonderful podcasts in the space and it tickled my interest that it was this completely new asset class. It seemed like it might have a really big TAM. There was just new ways of thinking about and using technology and it was attracting some really smart players. And I wouldn't say that at the time the rest of my team were true believers. I wasn't even a true believer at the time, but no one really took up the mantle and wanting to explore it deeper. The team has evolved a little bit since then in terms of interests and in some cases in terms of the folks that have joined the team. Two senior associates mentioned at the beginning of the year that they both had an interest in pursuing crypto as a passion project and I was all for it because again it still seemed like one of those areas that was really ripe with possible opportunity also with risk and I think we made it very very clear that no one on the team knew much about it and it was a completely new language. So a lot of the process initially was them gathering information, looking at primers, pulling them together, speaking with folks throughout the ecosystem in that discovery process to just help us understand as a team what the market structure looked like, what the technology looked like, what some of the risks were, why we might be interested in pursuing this. And I think again this concept of decentralized trust and using a reliance on mathematical guarantees to remove agency issues held a lot of appeal to me held some appeal to the team. Then thinking about the use cases started to interest the team more. So understanding that there's actually these real use cases that have been developing around nextgen payments around DeFi around different ways for creators to monetize their assets. Thinking about it as web 3.0 0 just this completely different technology where you don't even know where it's going to go. That interested the team a lot more than thinking about crypto as a store of value and thinking about the Bitcoin case which I think is where everyone started. As that was happening a very large well-respected manager happened to raise a fund. So that sort of fast forwarded our deep dive into an actual investment process and we pulled at that point a more senior member of the investment team who has a real interest in fintech and was a skeptic on crypto. But I thought that would be a really interesting combination because it is so deeply tied to what's going on in fintech and I thought her skepticism would be really welcomed with my two younger colleagues who were really pretty gung-ho and we ended up pursuing a small investment in the space at the end of that process understanding that there's just huge unknowable risks around regulation around the investment in tokens and their volatility around how you're owning something and what you actually own and the high correlation between assets. But we just decided that this was like the internet in the 1990s and we had to dive in at some small level to really fully understand what we didn't know and also see if there's real opportunity here. >> How do you decide to balance how much you want to learn about that space or in this example identifying a venture capitalist that you're comfortable with to take advantage of what might be a big opportunity for you? >> Well, our bias is always that we invest through managers. I was going to say that we're the dumb money. Uh, and I recognize that's maybe not a popular thing to say, but I think I actually will use that term because I think it speaks to the humility that we need to have in our seat. We are not experts in many things. I think we are really, really good at picking people to partner with and helping to uncover what they do well and whether we think they're playing an easy or a hard chess game. So, that's always the bias. And I think with crypto, it was never even a thought in our minds that it's something we would own directly. We do own certain assets directly in our portfolio, but it's always through some sort of a co-investment concept. >> When you get to the point where you are today, you've made an initial investment. You said it's small. How do you think about that space from here going forward? It's actually one of the biggest challenges in my seat is making small investments or we make them as a team and then really trying to use those investments as tools to something bigger because for us if we make let's say a $10 million or less investment in a fund that's really what I would call a ventureiz investment for us and it is an investment where you're acknowledging that there's a lot of risk that you might you know there is that risk of permanent capital loss to some degree but you're also hopefully doing that with the belief that there's enough upside potential that that investment alone could be somewhat meaningful, but really it's with the hopes that you can start to stack those investments on top of each other. And I think the reality of venture, which is where we tend to write the smallest checks by far, is you're always constrained. You're constrained by the risk or you're constrained by the manager not giving you the allocation that you want because the best managers do tend to really limit their fund sizes dramatically in that space. When we're making little investments in venture, it's not with the belief that one day we're going to be writing a $30 million check to a fund because it's just not realistic. It's a space where you have to place more bets. But there's other times where we'll make small investments, not that small, but let's say half-size investments in our hedge fund portfolio or our long only portfolio where it's really with a pathway in our minds that over the next two years, we're going to grow that to a full position. And there we have really specific what we call KDIs or key diligence indicators that we're using to create that pathway for growth. >> What are those KDIs? Given that you can imagine you're giving money to someone, you're getting to know them better and ultimately they're going to deliver performance or not. So how have you mapped out those KDIs that help you understand when you want to get to a more full-size position? Well, it looks really different depending on the opportunity, but again, from sort of a first principles basis, we're typically testing some initial assumptions. So, one assumption that we might be testing is, is the manager playing an easier chess game, which we thought they were. So, that might be, is the sector as uncompetitive relative to other sectors as we thought? Or if tons of market participants came into the space, that might be something that would destroy that hypothesis for us. Another hypothesis we might be testing would be does the manager have any unique advantages. So we might say we think they have a particularformational advantage or analytical advantage in underwriting this asset class. And there's a number of KDIs that might fall out of that in terms of the accuracy of their decision-m, not necessarily on an outcome basis, but on a process basis, because of course, you can't control what the market's going to do, but just looking at the depth of their research, and does that meet our expectations? And are they asking the questions in the way we thought they might ask them? Are they using the tools to get those questions and answers that we thought? or we might have a KDI around their sourcing advantages on the private side especially some managers that we've looked at have built particular tools around sourcing which sometimes are a little untested because we invest early on we have a manager that's built this really cool web scraping tool as part of their sourcing engine so a big KDI around reapping with them is is that has that tool provided actual utility to them from a sourcing perspective so it really can vary manager to manager but it's typically around testing their process and testing our hypotheses around their process and the strategy itself as well as of course the team. >> So over the years you've been doing these deep dives. What's the prototypical example you hold up of one of these that turned into something very meaningful for your portfolio? >> Well, I'm going to use a recent example because I think the process has been very robust. I actually don't know if it's going to be meaningful yet. I mean, I would say our QSR deep dive did lead to a meaningful investment for us. affordable housing came out of a meaningful investment, but insurance is a space that we're looking at now. And it's sort of a hybrid deep dive meets actual underwriting process, but I'm calling it a deep dive because one of my colleagues has been looking at the space since 2015. Actually, I was looking through our notes because we're doing active work on it now, and it amazed me that he had had a real interest in the space and a lot of aspects of the space, too. I mean, at one point, we looked at life settlements. Now we're focusing on the Lloyd's market, but he's really taking this on as just a side project over the years, understanding that at least with the part of the market we're focused on now, the pricing environment has been pretty horrific for a number of years. And actually, the managers he'd gotten to know in the space as part of his initial deep dive really were high integrity enough to say to him, "This isn't a good time to invest." But there were a lot of aspects of the space that still appealed to us. So what's happened in that space is we got a call from a manager saying the pricing environment has moved from sort of a soft market to a hard market frankly for good reason because there's been a lot of risks that have popped up in the space. It might be an interesting time to take a look. He's been able to use a lot of the research he did initially to dive in not necessarily at the beginning of a process but starting from a midway point but understanding that there's tremendous work to be done in understanding the asset class. So just in 2021 he and his colleague have done 22 meetings and calls across the ecosystem just to get to understand the space. They have mapped out the market dynamics of the space at a very deep level. Understanding solveny ratios and the capital base of the space, the growth of the market and what that means. Terms and pricing environment and what what that looks like. What large risks exist and what impact might that have on a portfolio? the existential risks that exist, understanding the syndicate structure, you name it. As well as now really diving deeply into firm and team and how they do their diligence, how the manager themselves do their diligence and what the returns look like on a post tax basis for us. And I think there is the potential here for this to become really a core part of our hedge fund portfolio. It's controversial internally because it's not an easy space to underwrite. But I think the work that's been done over the past five years have really allowed our colleague to educate me and the rest of the team incredibly successfully on what this space looks like. And it's really hard for us to find assets that are relatively uncorrelated and provide liquidish, not super liquid, but not 10-year lockup illiquidity that provide the post tax returns that we look for. We have a pretty high bar for our hedge fund portfolio. And if we can get comfortable with insurance, and I think we're heading there, it's one of those rare assets I think that has the potential to do that over a cycle, understanding that it's not always going to look great. You mentioned in that description how it could be a meaningful part of your hedge fund portfolio and I'm curious how you balance these deep dives with the strategic way you think about managing the whole pool of capital for your clients. >> We pull our assets into a couple of simple vehicles. So we have a a long only vehicle. We have a multi strategy vehicle which I refer to as our hedge fund portfolio but it's really just assets that are less correlated to equity markets. And then we have a private equity program. Typically at the beginning of a deep dive, we'll have a pretty good sense of where in the portfolio something might fit. In the case of insurance, we knew from the get-go that if we could make it work from a structuring perspective in our hedge fund portfolio, that's where we'd want it to live because of the characteristics of the returns and because frankly we have a really really high bar for returns in our private equity portfolio. And it's typically a lot easier to find things that find that high bar, but insurance was a little bit marginal in terms of meeting the returns of our private equity portfolio. Typically those are questions that we can answer on the front end of a deep dive. So with quicks service restaurants, the example I gave, we were really looking at that as a private equity opportunity, but understanding that the public comps would be an interesting way for us to learn about the industry. And of course with anything private we do, we're always looking at the public comps to make sure that we're getting paid an illquidity premium for being invested on the private side. Otherwise, there's no point for crypto. Actually, that's an interesting one. We initially thought okay there's ways we can invest in in a very relatively liquid format in a hedge fund format or we could take a really long duration view and look at private equity vehicles and I think relatively quickly we came to appreciate that the trading strategies were not a good fit for us and I do think by the way people can make fantastic money doing this but we didn't really want to have our main bet be on the volatility of the asset class that the high degree of trading in the strategy would be very tax inefficient for us. What was more interesting for us and more aligned with how we think, which is with a multi-generational view, was thinking about this asset class over the next 10, 20, and 30 years and thinking about where it could go and wanting to really remove from our mind the stress of the day-to-day volatility of the asset class by being in a longduration vehicle. When you're doing that deep dive and you really feel like you've got your hands on something that you know, how do you think about sizing it enough that it's not dwarfed by the other 80% of the work that that team member is doing? Sizing is something that I have had to learn a lot about over my time as a CIO because I think when I came to Brandy Wine, my instinct was to want to size everything too small. And then I think I course corrected too much and actually it was one of my, you know, talk about having a beginner's mind. It was one of my colleagues who said to me, "We're not taking enough risk in the portfolio. We really need to size things bigger." And I think I went to the other extreme for a little while and put a couple of things into the portfolio that were pretty new as full-size positions up front. And the problem with that is when that position does something you don't expect, let's say the returns are horrific for the first couple quarters, it puts huge pressure on the internal process and I also think it puts a lot of pressure on your relationship with a manager because there's just no wiggle room. You can't add to them when they're down because they were sized too big initially. I don't think that there's a perfect answer, but what we do now is to have an understanding up front of where we want a position to get should things work out. On the long only and on the hedge fund side, those positions tend to be pretty chunky. We only have about 10 active relationships in our long only portfolio and it's something we're always trying to whittle down actually. We have a few more closer to 15 in our hedge fund portfolio because it's a little harder there sometimes to get the concentration we want. But with any new relationship, we'll typically start it at a half-size position. Even if it's a manager we know pretty well or I mean meaning they've been in the market for a while with a pathway towards growing that position over a period of time, the length of that pathway can vary from one manager to another. And for emerging managers, it might be heavily dependent on seeing certain things evolve. But I've really found that that just prevents us from feeling too stupid or too smart about our timing decisions. And I think on the private side, we don't always have the same choice. Sometimes we will size things day one at a larger size because it's really important to us to secure an allocation, but it's always with a pathway towards thinking at least in terms of the next three funds with the manager and understanding what we'd like that relationship to look like in aggregate from a sizing perspective. >> That sizing mistake leads me to want to ask you about kind of where we started, which is what's evolved and what have you learned over the last couple of years in your process? My team and mistakes are teaching me things every day, but some of the big learnings, one of them has certainly been around sizing. Two has been about being wary of investing in things that are complex for very good reason, but where we find that so much of our research is spent on the complexity that we forget about the basics of manager underwriting. And I'm thinking in particular of quant for us which is a space where we invested in a manager that was sort of a tax scheme and it seemed very clever and it was a factor strategy. So we spent a lot of time looking at factor research and understanding all of the reasons why the strategy should work out and we missed some real basics on a broken culture and team dynamics and research dynamics that were very very broken at an organization that were what ended up really hurting the firm in the long term. So I think complexity can be okay. It's something I am much more wary of than when I started. I mean you could say insurance has some complexity to it. Really though with a space like that it's more our lack of knowledge than that the space itself is so remarkably complex. But if we're going to take on something complex we can't forget just about the basics of alignment team and process. I guess another big learning has been around team communication and how do we remove not only remove bias from our process but ensure that all voices are heard because we have a mixture of introverts and extroverts on our team we have a mixture of slow and fast thinkers on our team and we really have a team of heterodox thinkers so people that just approach the world very very differently so we have very diverse viewpoints typically on any investment and that can be really really challenging to manage and frankly when I started Brandy Wine it wasn't something I had to manage initially because it was me and then me plus one and then me plus two and those problems sort of develop over time. I think we've really refined how we communicate as a team. One of the things that a newer colleague recommended in the past couple years was to bring on a second after what we call the early to midpoint d you know in our diligence process which is our issue memo stage. After the issue memo is discussed as a team, someone on the team, typically another senior member of the team, will volunteer to be a second and they will sit side saddle and diligence for the rest of the process. And this is to ensure that there's more buy in on the team and that there's another check and balance beyond me to make sure that we're getting more perspectives. We also are really really believers in using a framework at the end of our process where everyone on the team grades any investment we're doing on a series of criteria that's very very specific to that investment on a scale of 1 through five not using the score three which is something we borrowed from Annie Duke I believe because we don't want everyone to just sort of sit in the middle and then the associate who's part of running the diligence will lead a discussion around our frameworks focusing on the areas of high dispersion among the team and the areas of low scores and what that's allowed is for people first of all everyone on the team is able to express their views but beyond that it moves the conversation away from I like I dislike I feel good about this to a high degree of specificity around what people actually like or dislike about an investment. It makes the decision-m process feel very data driven even if it's qualitative data and it makes us get really really specific about what we think is strong or weak about a manager. It's something we've had in place for a while, but I think it's evolved at the margin. The whole team speaks the language of these assessments now. And it's not the grade at the end of the day doesn't determine outcomes. But I think that's been a big learning. The final learning would be just understanding that you might need different team members on your team as your team evolves. So when I started Brandy Wine, I think I had a bit of a higher tolerance for arrogance might not be the wrong word, but I wanted to hire high energy folks that were jacks of all trades. I think there is a degree of arrogance that can be attached with that. I think it can be really helpful when you're building an organizational structure because those are often the folks that have super creative ideas and a willingness to run through walls. There's a real entrepreneurial quality to that. And I think as team structure forms and develops and as teams grow, then every team member you're adding has to fit into the puzzle pieces of the rest of the team. One thing that we always hire for is folks who believe in quality in everything they do. But it tends to be folks that are highly collaborative, very very humble. And the challenge I have now is to ensure that we still maintain that belief that we can run through walls and that we don't get too careful because I think sometimes once you're too formed, you can quickly veer towards bureaucracy. So we want to make sure that we can maintain that entrepreneurial spirit but do it in a way that works collaboratively. I want to dive in a little bit on that second point on the assessments. What are some of the examples if you had a checklist of your rankings from one to five excluding three that are pretty common across those different assessments of different types of managers? >> So I think the commonalities across those it always starts with investment philosophy and process and we are asking as I've said again and again is this an easy or hard chess game. We're diving into advantages that we think a manager might have. Now, those advantages might look really different from one asset class to another. So, in venture, the advantages might be around personal brand, firm brand. On the buyout side, it might be really around their ability to add value post. And on the long or hedge fund side, it might look it might be much more around their approach to a research process and how they're getting ideas into the portfolio. But there is a consistency around what are the advantages that that manager has. There's a lot of similarities around team and process. Big focus on judgment, commercial instinct, and then what is the team the manager's ability to lead and manage a team assuming that they have one. In some cases, that's less relevant. And then how well is that team structured for the strategy itself? Has that team worked together through a cycle? If not, why do we think that's okay? And finally, how is that team incentivized? There's also a lot of similarities across how we think about business structure, which really is typically again around alignment around size of opportunity set relative to size of fund and then thinking about a lot of the blocking and tackling that goes on in running a fund as well. There's a lot of similarities there. I was wondering if you could peel a layer a little bit off of the diligence process and maybe just walk me through the aspects of the process that gather the information that ultimately goes into those assessment decisions. >> The way we're structured, a director, associate team or managing director, senior associate team will find an idea that interests them. Whether that's at the result of a deep dive or simply the result of something inbound or something that they've heard through one of our other managers or a network, they'll take one or two meetings with a manager. And typically I'm meeting with my team multiple times a week. We have two weekly team meetings and then I'm meeting with every director once a week separately even while we're on Zoom now. And so we're always discussing ideas at a pretty nent stage at some level. But when it's really brought to the team and typically when I'm stepping in and when other people on the team are stepping in, it's after one or two meetings with a manager and maybe two to five reference calls. So we do reference calls really at the early end of our process because we find that that's just an incredible way to start building a mosaic. And after that is, you know, when we're writing our issue memo. So that's a maybe three or four page memo that's not only shared with the team to ask questions and and it lays out sort of what the key diligence items are, why we think something is interesting, it's also shared with our investment committee at that point and they have a 7-day period to respond with their questions and then a research plan is built assuming that at the issue memo stage there's enough of an interest from the team to move on and there typically is typically things are at least progressing for a meeting or two beyond the issue memo stage. The research plan is then shared with the team and the diligence is built around that. So it really looks different for every process. I mentioned for this insurance strategy we're looking at that we've done well over 20 meetings just in the past year and this is something we've been looking at for a while. I have to say that's probably not uncommon for us. There's been some managers where we've done 15 plus reference calls because they're so new. We're trying to get to know them and it's the best way for us to learn about them. They might not have a track record for example. So the reference calls are the best way for us to get to know them. There's other processes though where we don't have that luxury and we have to be much more selective in how many folks we can call in who we can reach out to because the manager constrains us and we're able to prosecute both processes but I think our preference is to do a lot of work on the front end to be easy investors once we're in. So when it comes to meeting the manager, it's typically meeting with everyone on the team independently. And that's usually multiple people on my team at least listening in on those calls, meeting with folks from the back office, having multiple meetings with the PM or whoever is running the fund as well until we parse through that research plan and make sure that we're answering all of our diligence questions. >> And then when you get to the decision-m stage, you mentioned these assessments, you're bringing the team together, getting everyone's opinions. How do you then ultimately make the decision? >> So the decision is ultimately between the director associate team and me and it's most of the conversations at the very final stage are happening with the MD and myself. I am not a believer in consensus decision-m so we aim to have a process that's highly collaborative where we can gather as many viewpoints as possible. The MDs hold themselves to an exceptionally high bar to really recommend that anything goes in the portfolio. So if they feel that there is a substantial question that has been asked by the team that they haven't answered, they are going to answer it to their own and my and the team's typically satisfaction before that manager gets in the portfolio or sometimes we'll acknowledge this is an unknowable that we're willing to live with and it will impact our sizing decision. Typically I find that I am pushing them sometimes to take a little bit more risk. I have a very very thoughtful and cautious team and sometimes my role has to be that this is something we do need to take a risk on but ultimately that's a decision between me and the MD. >> So I'm going to turn a little bit to the environment. Doesn't look like there are any easy ways of making a buck these days. So what are you excited about? >> I'm not super excited about all that much right now. What I'm excited about is that we have oriented our portfolio for many years towards quality and towards businesses across the portfolio that can compound their earnings through a cycle and that have a lot of ways to win and some structural advantages. And these businesses typically trade at a premium on the public side. But I do think that given there's a lot of uncertainty around inflation, it's one of the better tools that we have again thinking long term to protect against that. I also think that given there's probably equal risks, some might say towards deflation, given that we don't know what's going to happen with pandemic 3.0, 4.0, you name it, we don't know what's going to happen with China, we don't know what's going to happen with the regulatory and political environment. So to me again just orienting towards companies that are really durable and have one of my favorite managers refers to it as customer experience compounding meaning he loves investing in businesses that thrill their customers and have multiple ways to win and will compound on their own competitive advantages over time. And I love that as a framework. I think more tactically, I do think it's interesting that there are these little segments of the markets where insurance would be an example of a pricing environment that's turned really negative that ultimately might provide an interesting entry point. But the reality is my hope is if we invest in an asset class like that, it can be for the long term. So, it's hard for me to get too excited about that because there's going to be a time when we're investing into it and it's a less favorable pricing environment. What's evolved in your thinking about teams and culture with your managers? >> We talked about this a little bit during our last discussion, but I initially was very wowed by the rockstar PM and the PM who was just brilliant and it didn't really matter who they surrounded themselves with in some degree because you were just making a bet on them. I think this is more of an evolution than a revolution certainly, but the team and I have probably become ever more focused on the cultural dynamics within an organization and how people engage with each other and trying to deeply understand that and understanding upfront what dynamics might blow a firm up over time. And I think that's we haven't invested in a lot of blowups, but we certainly have seen highle departures happen from time to time. With every one of those departures, typically they're unexpected and typically it forces you to ask a question of what did I miss going into it. A recent example is there's a manager in our portfolio that was going through a very tough family circumstance and is going to choose to leave a firm because of that family circumstance. And there were red flags that were leading up to that. It's going to be fine. But it's one of these cases where we said, are there different questions we could have asked to these co-founders when this person was going through this to see how it might impact their ultimate decision-m around whether they want to be involved with this entity or not? I think there's other times where you see two really strong co-founders and it forces us to ask a lot of questions around their complimentary strengths and weaknesses, but also just their complimentary personalities. It's an intensely human business investing and the pattern recognition that comes from doing it for a long time is to be able to sort of dive underneath what you see initially. And you can learn this through references, but you can also learn it just through having multiple somewhat repetitive conversations from time to time with the manager and team to see how they're behaving towards each other to see even when they're asked a question under stress, how they're reacting, whether one partner is talking over the others or not. We actually had a lengthy team discussion recently about a fund we were looking at where one team member was incredibly dominant in the room really talking over everyone else. Actually, this happened twice recently. And in one case, we said, "We think this is so problematic that we're probably not going to move forward with the investment because it just seems like this is going to lead to team members leaving overtime." And it was clearly something that the other team members were reacting to. I think in the other scenario, it was a team that had known each other for a very, very long time. And typically the person was interjecting to pump up the rest of her team and make them look good. And you know it was something that was noted to us by other people as a problem. And and I think we said yeah this maybe it's a problem but this might just be a personality trait that the other folks who have known this person since college are really used to and really get. And it was pretty clear from the multiple conversations we had that it wasn't impeding the decision-m process nor was it impeding the feeling of morale among the team. So I guess that's sort of a nuance but maybe that's an evolution. Yeah, super interesting and subtle. Very subtle along the way. Jay, I want to take a chance to ask you a couple closing questions, which it turns out are all new since you were last on the show. So, what's your favorite hobby or activity outside of work and family? >> My favorite outdoor hobby is probably skiing. My favorite indoor hobby is reading. >> What's your most important daily habit? >> Singing and reading to my kids every night before they go to bed. >> Now, do those happen at the same time? I mean, the embarrassing thing is if there is a song within a book, I will actually make up a tune to it and sing it, which is sort of a humiliating thing to do, but my kids have gotten used to it now, so sometimes they do happen at the same time. >> What's your biggest personal pet peeve? >> People forgetting the humanity of others. I think that can show up in two ways. One, that they're just unkind to people. You're seeing that more and more in this day and age, unfortunately. Or people treating others as if they're invisible. How about on the investment side? Your biggest investment pet peeve? >> One would be misalignment, which is unavoidable, but something that drives me crazy every time I see it. And two would be when managers promise something and then 5 years later forget that they made those promises and do something else. >> Which two people have had the biggest impact on your professional life? >> One person I mentioned before and remains, Bill Peterson, my old boss, had a huge impact on my professional life. and David Patterson, who really took a huge chance on me when he hired me at Brandy Wine and has been incredibly patient with my learning over the years. Those are no-brainers. >> All right. What's the biggest mistake you've made and what did you learn from it? >> A life mistake that stands out would be almost failing out of my microeconomics class in college. >> What was the mistake? The mistake was that I had no idea how to study and I was too afraid of the teacher to ask questions. So I think one after that class I learned how to properly study and I also learned that I really had to speak up when I didn't understand something which is probably the biggest thing which has carried me through my life. >> What teaching from your parents has most stayed with you? >> Oh my goodness there are so many. The few that come to mind would be and I can't list just one because it would be unfair to them. one that family comes first. Two, they've both lived their lives incredibly fully. My dad is 96 now and and has just been a paragon of living life to the fullest. And then finally, the counterpoint of my pet peeve. They always remember the humanity of others and approach everyone with kindness. >> All right, last one. Jenny, what life lesson have you learned that you wish you knew a lot earlier in life? >> I wish I learned earlier to be more intentional with my time. >> It's a good one, Jenny. So much fun. Thanks as always. Thank you. It's been a pleasure, Ted. >> Thanks for listening to the show. To learn more, hop on our website at capitalallocators.com where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more. Have a good one, and see you next time.