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Trinity Church and grounds, image circa 1900's by the Detroit Photographic Company
Most of our Chinese friends probably never heard of Trinity Church, but it is a very special place for Wall Street financiers. Located at the intersection of Wall Street and Broadway, it received its charter from UK’s King William III on May 6, 1697, almost 70 years before the American Revolution, meaning Trinity Church stood there even before Wall Street became the financial center. As it is just a few blocks away from the World Trade Center towers, it provided crucial mental support for New Yorkers after the September 11 terrorist attack.
Over the last few hundred years, the church accumulated a large collection of real estate assets in the Lower Manhattan, in areas like Hudson Square, Tribeca, West Village and Soho and the vast majority of the church’s endowment had been highly concentrated in the real estate markets of a single city. They were always concerned about this very concentrated exposure. They had the Day of Reckoning when Hurricane Sandy hit the New York City and destroyed some of the properties badly in 2012. Three years later, they put together 11 of their core commercial buildings into a vehicle and sold 49% of the stake to Norges Bank and Heinz, generating $1.7 billion cash for the portfolio. Not only the church received a large amount of cash, but also the endowment’s net asset value increased by 10 times from 2014 to 2016 as a fair market valuation was applied to the real estate assets. The problem was… it was the first time for the church to manage such a large amount of capital in its history.
Source: Trinity Wall Street’s financial reports from 2010 to 2019
In 2015, Trinity Wall Street decided to hire someone to manage this large chunk of capital. Just as the church survived many wars, recessions and even The Great Depression, they had to think strategically with a very long-time horizon and choose the person very very carefully. The church picked Meredith Jenkins, who had been co-CIO of Carnegie Corporation of New York with Kim Liew for over five years. She joined Carnegie in 1999 as its first investment associate and was an integral part of the build-out of the Corporation’s investment capability under its first CIO. During the period, Meredith spent four years in Asia as the Corporation’s special representative focusing on opportunities in China, Japan, India, Southeast Asia, and Australia. Meredith started her career at Goldman Sachs in investment banking, Stanford Bernstein in research, and Cambridge Associates in consulting before attending Harvard Business School.
After receiving a large cash proceed, Trinity’s portfolio exposure to private equity was pushed down from 7% to 1%, compared to Carnegie’s 20% allocation. It takes a lot of time to build up private equity exposure in order to diversify the portfolio over multiple vintages. As of 2019, Trinity Wall Street’s private equity exposure is still 5%. On the other hand, it was easier for Meredith to build up her hedge fund exposure. Today, the portfolio’s exposure to hedge fund is roughly 20%.
Source: Trinity Wall Street’s financial reports from 2010 to 2019
Source: Trinity Wall Street’s financial reports from 2010 to 2019
“Yeah, I think that’s fair but that’s harder to do, right? To the extent you can control it should be dialing down the size of your private equity commitments…. But, what you’re already in, you can’t really control. You can be on top of your managers, but you can’t alternate.
Alignment of Interests and Conviction
When Ted asks Meredith what investment beliefs she learned at Carnegie, Meredith says it is about understanding manager alignment. She admits she hadn’t really thought about it, but her boss, Ellen Shuman, former CIO and a protégé of David Swensen, emphasized many times that the alignment of interests between Carnegie and managers is critical. Meredith says Carnegie had many instances in the portfolio that they had to make decisions to allocate more capital during difficult market conditions, or to stick with managers as they went through some organizational challenges, the alignment of interests was at the core of their decision making process.
During the COVID-19, we had two managers who lost almost 40% of the capital due to the stock market volatility. We were thinking about deploying capital to them as we have long-term relationship with these managers (5 years with the first manager and 10+ years with the second manager). To our surprise, during our Zoom call, one manager decided to return capital due to his health reason at the bottom of the markets. As we had a high conviction in his portfolio, we received the investments in kind and kept all of them. Theses investments recovered strongly after summer and are now up almost 100% from the distribution date. We also had a call with the other manager, who did not want to use Zoom. He said “this is once in the lifetime opportunity”, similar to the market condition he experienced in 2008. We largely agreed his views, but this manager had a history of telling the same pitch over and over again even before the pandemic (as early as Dec 2019) and we felt he was trying to raise capital for himself, not for investors. So, we decided not to add capital. His portfolio was up 70-80% from the date we had the call and, clearly, our decision not to invest in the second manager’s fund in March, but we were not able to invest without strong alignment of interests between us. Meredith’s comments reminded me of these experiences this year.
Co-Investment
I found Meredith’s discussion on co-investment interesting. Who gest the best co-investment opportunity is becoming an important portfolio construction process among allocators today. She is clearly a not a big fan:
“The historical data on co-investments is, they are pro cyclical and they don’t turn out well… More co-investment trends to happen at the end of a cycle when things are really hot and more bigger dollars and it just conspires to not great returns from a dollar perspective.”
Ted then asked Meredith if it is a good time to scale down private equity allocation as he sees more and more co-investment opportunities offered by private equity. She agrees with some difficulties due to the illiquid nature of the private equity. I think her message is an important reminder as many allocators tend to chase good returns of private equity (especially venture capital) and overcommit before they realized it is too late to change their minds.
In fact, the biggest risk in co-investment is the lack of alignment of interest between the private equity manager offering the opportunity and the investors. The existence of co-investment opportunities for a buyout fund indicates the buyout manager is seeking an investment opportunity whose size is larger than the fund is designed to invest. In the venture capital space, some managers strangely do not co-invest (participate) in the co-investment opportunities as they believe the valuation is too high. Over time, investors start treating the private equity managers as a cheaper alternative of investment bankers.
Key Lessons for Asian Investors
This interview gives a unique perspective of challenges on building a multi-billion portfolio from a near scratch by the CIO who have already accumulated a number of experiences at Carnegie. Her experience should be a very important reference for many Asian institutional investor sand family offices that are going to build their own multi-manager portfolios with the long-term mindset. Many investors believe that large allocation to private equity is a critical driver for the long-term outperformance and tend to take a quick way to build a portfolio through secondary purchase of private equity portfolio (in particular, venture capital), however, this approach may plant a seed for a future problem. If you build a venture capital exposure through the secondary transaction, you are not able to build relationship with the venture capital managers in the same way you make commitments to their funds directly. The interactions with the managers may be limited and you may not be invited to the next fund even if you want to. As a consequence, you keep buying stakes of the venture capital funds again and again. This approach is not sustainable.
Hope you enjoy the investor journey of Meredith Jenkins.