06/01/2022

Sam Gallo and Endowment of the Year winner, the University System of Maryland Foundation

Each year Institutional Investor Magazine hosts a Hedge Fund Industry Awards dinner. This year’s gala was held on April 27th and celebrated superior portfolio construction and manager selection.

Among the notables, the event featured two outstanding investment heads we just happened to have recruited in the past.

Jon Glidden, director of pensions at Delta Airlines received II’s Allocator Lifetime Achievement Award and Sam Gallo, chief investment officer at the University System of Maryland Foundation accepted II’s endowment of the year honor.

Our warmest congratulations to both winners.

We managed to catch up with Mr. Gallo during a recent conference in Charleston, SC and asked him how he built an elite, award-winning investment program, what to look for in a successful CIO candidate, and what fresh challenges lay ahead.

The Endowment Elite, A conversation with Sam Gallo

Skorina: Sam, it was almost eleven years ago that I first called you about the University System of Maryland Foundation (USMF) CIO position and look where you are now.

First, you received an endowment of the year award from Institutional Investor, then you celebrated ten years as the university’s chief investment officer. Congratulations!

You don’t have the usual up-through-the-nonprofit-ranks background of a typical endowment CIO, would you take a moment to give us your highlights.

[Note: The USMF consists of twenty-plus schools with combined total assets of about $2.2bn.]

Gallo: Thank you for the kind words, Charles. Briefly. I began my career as a valuation modeler, pivoted to trader and portfolio manager, then moved to several investment and operational consulting roles, and finally on to my current position as an endowment CIO.

The last, of course, is thanks to your call so long ago.

Skorina: Your mission when you joined USMF in 2012 was to invest smartly for the future, build a team and investment strategy, and develop a commercially oriented white-glove client service model.  Ten years later you receive the Endowment of the Year award from Institutional Investor.

Let’s dive right in and ask the money question, how did you do it?

Gallo:  That’s a big one Charles and complex, but here goes.  The key to success for any nonprofit fund begins with the Board and Investment Committee.

Boards want and expect a “world-class investment program.”  But to achieve this goal, they must be willing to provide the resources and governance structure to flourish.

What boards put into it, is what boards get out of it.  It’s that simple.

Think Profit Center

Skorina:  Ok. But what does that mean?  If a foundation, endowment, or pension fund wants an elite program, what does it take to build one?

Gallo: Let’s start by talking about our golden rule, which is, all decisions are linked and have consequences, so think and plan ahead.  Be smart, be strategic. It matters.

Boards and administrations trip up when they view their investment offices as cost-centers.  We are not cost centers.  We make money for our schools.

Investment offices should be viewed as what they really are, essential profit-generating business divisions of the larger institution.

These offices should be nurtured, resourced, and report directly to the CEO, just like any other critically important revenue generating division.

Six Signposts on the Road to Riches

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A Family Office Home Companion

by charles | Comments are closed

03/10/2022

Honey, We’re Rich!

Say what, dear reader?  You have just been blessed with a humongous liquidity event?

After decades of work and a bit of luck you “suddenly” have millions, perhaps even tens or hundreds of millions of dollars in investible wealth after selling your business or going public.

You are now officially rich, and it feels great.

But wait.  What’s that?  Obscure family members you never knew existed are beseeching you for “loans”; allegedly good causes from Missoula to Mozambique are demanding donations; sketchy financial “advisors” are bombing your email and phones with “once-in-a-lifetime opportunities.”

First Things First

We’ve recruited family office investment heads and advised on selecting wealth-management firms.  But it works both ways.  We listen very carefully to our clients and learn a lot from them.

Here is some advice from clients who have been through it.

  1. The very first thing. Hire a tough, experienced lawyer who is used to dealing with wealth managers, brokers, and solicitors.  (Not just the firm who helped you with routine legal chores on the way up.)  It will be money well spent and you won’t regret it.  You will need a real pro to run interference for you against the sharks.
  2. The very next thing. Hire a reliable and reputable accountant who understands the complexities of wealth-management.  You will need financial controls and a voice of caution.  Dollars can slip away fast without an experienced check on your newly-rich exuberance.
  3. Take your time. No sudden moves.  Think about how to organize your affairs, your objectives, impact on family-members and upcoming generations.
  4. Establish a realistic spending rate. And stick to it.  One rashly-purchased yacht, jet, or hobby-ranch can punch a surprisingly big hole in your seemingly-unsinkable new fortune.

Fortune and Fate

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03/09/2022

Why build a family investment office? Because, as one chief investment officer at a large family office told me recently, “bad stuff happens.”

He mentioned that when the head of the family and business founder was thinking about hiring internal investment talent, the founder asked other family leaders he knew why they had hired a CIO.

They all said that having investment expertise inhouse and a portion of the assets in a diversified portfolio separate from the main business helped them when the unexpected struck.

In the last twenty-five years we’ve weathered a slew of financial storms including the 1997 Asian financial crisis, the 1998 Russian collapse, the 2000 Dot-com bubble, the Twin Tower attacks, and the 2007–2008 and February 2020 crashes. Remember those? And for the last two years Covid. And now there’s the appalling Russian assault on Ukraine.

And yet, in every crisis there’s opportunity. In 2020, according to the Credit Suisse 2021 Global Wealth Report, total wealth in North America rose by US 12.4 trillion. And probably more in 2021.

Looking at the ultra-high-net-worth segment, Boston Consulting Group counts 20,600 UHNW individuals in the US with personal wealth over $100 million, totaling about $5.8 trillion in investable assets.

Meanwhile, depending on the source, the number of US family investment offices grew from 3,000 to well over 5,000 during the last decade.

Personally, we have received more family office chief investment officer inquiries in the last two years than we’ve had in the ten prior.

Why?

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12/04/2021

Occasionally we publish commentary from other sources. This short piece from PitchBook on venture capital’s skyrocketing valuations is a timely follow up to our last note on investment returns 2021.

As Mary Cahill, former Emory University CIO, commented in a recent Fundfire post, “Gains on paper are not the same as money in the bank.”

Speaking of investment returns, the last two years under Covid have been strange days indeed. Half the population can’t make rent, while the other half – anyone with assets – runs the table.

One year ago, in FY2020, university endowment returns averaged 1.8 percent. This year our back-of-the-envelope calculations suggest an average in the low thirties.

It’s anybody’s guess what next year will bring, but we’ll leave you dear readers with these words of investment wisdom from a master of the craft.

“Go for a business that any idiot can run – because sooner or later any idiot probably is going to be running it.”

― Peter Lynch

Best wishes for the Holidays and a great 2022.

— Charles Skorina

VC-backed IPOs are booming, yet public performance this year is lagging

PitchBook, December 4, 2021

Has 2021’s ramp-up in IPO activity been a rush to the exits prior to a change in the market cycle?

Is it just the new normal?

Time will tell, but one thing is certain: US VC-backed IPOs have broken all kinds of records this year, unlocking more than $500 billion of liquid value.

The median company valuation at IPO is nearly 60% greater than its last private valuation. However, our VC IPO index has shown relative underperformance against the S&P 500 since the beginning of 2021.

(hit link for chart)

Long-term performance still shows above-market returns, but inflationary pressure and the increased expectations of interest rate hikes in the coming year have introduced more volatility in the market for these freshly public companies.

These swings have been especially potent in the software space, which represents nearly 50% of the total weight of the IPO index, as the lofty valuation multiples placed on those companies have received a reality check in the face of rising discount rates.

While the majority of the underperformance came earlier in the year, it remains top of mind given the signs of increased market uncertainty—which have been amplified by fresh pandemic-related concerns.

This represents a significant threat to the sustainability of the IPO volumes we’ve seen over the last couple of years, as negative price performance or just general uncertainty will discourage IPO plans for certain startups, especially if they have access to other financing and liquidity options.

We will maintain vigilant coverage of this space as we expect IPOs and their performance to be a leading indicator on the health of the VC industry, as public markets have facilitated the majority of exit value over the last two years.

For more data and analysis, click to download our free Index of Venture-Backed IPOs.

Feel free to reach out with any feedback or questions, or if you would like to discuss the research.

Best,

Cameron Stanfill, CFA, Lead Analyst, Venture Capital

(news@pitchbook.com)

PitchBook research (part of Morningstar) reports on private equity and venture capital.  We always enjoy the read.

————————————————–

CHARLES SKORINA & COMPANY

Our services: recruit CEOs & CIOs, advise on performance and pay, M&A consulting

Our clients: board members, family offices, and institutional asset managers

skorina@charlesskorina.com

www.charlesskorina.com

(520) 529-5677

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News, Interviews, Research for Institutional and Family Office Investors

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12/01/2021

The good news is that, according to the current administration, the rich will pay for everything.

The bad news is that, according to the current administration, you’re rich.

— P. J. O’Rourke

Institutional investors delivered once-in-a-lifetime investment performance for fiscal 2021, from about 25 percent at the sleepiest public pensions to 65 percent at Washington University, St Louis.

As the late standup comedian Jackie Mason used to quip, “these are returns even the mafia can’t get.”

Take the eight Ivy endowments, for example.  Their performance soared from a tepid 6.28 percent average a year ago (and ten-year 9.52 percent) to a sizzling 41.75 percent for fiscal 2021 as our chart below shows.

(please hit link for chart)

As of June 30, 2021, the S&P 500 tallied a twelve-month total return of 40.79 percent against the Barclays Agg ETF return of minus 0.3 percent.  Even a plain vanilla 70/30 portfolio rang up about 26 percent.All things equity had a run for the ages, but how long can it last?

Private-market-heavy, risk-on endowments, foundations, and pensions enjoyed their best performance ever, thanks to eye-popping venture capital and private equity returns and good old-fashion leverage.

But here’s the caveat, if history teaches us anything, it’s that nothing lasts forever, be it empires or bull markets.  Everything ends, the only question is when.

And now here’s the bad news

According to Preqin, the unrealized portion of global venture-capital portfolios skyrocketed to $1.33 trillion by March 2021, up from $803 billion in December 2019.

How are multi-asset institutional investors going to handle their asset allocations over the next few years when venture capital marks are up 80 percent, yet nothing is being realized (where’s the cash?) and investment staffs have planned for VC commitments in the 15 percent to 25 percent range.

As Sam Gallo, CIO at the University System of Maryland Foundation puts it, what do you do when an overvalued asset class takes over your book, eats up your risk budget, and threatens your ability to continue allocations across the entire portfolio?  Meanwhile, every VC manager and their cousin is raising a new fund every month and if you don’t re-up, they will never let you in again.

Here’s another pickle.  Let’s say a pension or endowment lays on a one percent bitcoin position that jumped to eight percent overnight.  Should they rebalance back to one percent so as not to reduce their allocations to other asset classes?

Or what if bitcoin drops fifty percent as it has done at least seven times in the past, cutting that new eight percent allocation down to four percent of book?

Endowments and pensions are supposed to be long term investors, so in theory they should hold on to that bitcoin position.

But keep in mind that CIOs get bonuses by minimizing tracking error relative to their benchmarks, especially on the downside.  No board likes to miss benchmarks by more than two percent a year.

What to do?

Read More »
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