Earnest Sweat 00:15
So today on swimming with allocators, we have Wendy Li. She’s a co-founder and CIO of Ivy invest, making institutional quality portfolios accessible to individual investors. She has a long career as an allocator and former MD of investments at Mother Cabrini Health Foundation, which has over 4 billion in AUM. today she’s going to share with us how institutional investors approach decision making and portfolio construction, why early stage venture remains one of the most dynamic and overlooked asset classes today, as well as why emerging managers should understand about preparing to work with institutional pieces.

Wendy Li 01:12
always like to start off on just origin stories of people, and so would love to hear about your own background and kind of, how did you make your way into this allocator world?

Wendy Li 01:44
I did not grow up in an environment in which the broader financial services industry was part of my landscape. I learned a lot about financial services and investment banking, consulting and Investment Management. When I was at Columbia, I joined a matter, and it was there where I really had an opportunity to learn about the capital markets and the different participants within the capital markets. But even in that context, at the time, institutional investors and asset allocators and endowment the foundations, that still was not really part of what I understood to be the investment world. I think when you are graduating from college and you have the big firms recruiting on campus, those are the ones that tend to dominate the conversation and dominate the mind share. I just happened to be very fortunate, as I was graduating that the Met museum was looking for its first Investment Analyst. There were a couple of I think there’s multiple moments in my career which I feel as though it’s the universe presented opportunities that were best fit for me in a way that I couldn’t have imagined. And I would say that I had envisioned as a senior going down this traditional banking or consulting career path, and then, lo and behold, had an opportunity to meet. She’s now the current CIO at the Met Museum. At the time, she was a senior investment officer when she hired me, but LoRa me was interviewing recruiting at Columbia for their first analyst role, and so I had an opportunity to learn about their endowment, and had an opportunity about the portfolio, and had an opportunity to learn about what Endowment Foundation management was. None of which really made sense to me. By the way, when I was going through this process, it was it sounded really interesting. It sounded so different from the other opportunities that I was considering. None of it really, though, truly like sunk in until I started at the endowment at the Met museum. And so that’s really, I think, in many ways, I was fortunate that I had my start in this business at a really just incredible, incredible from an investment standpoint, but also incredible from a governance standpoint

Earnest Sweat 04:27
were there any experiences from that, those early days at the Met Museum, that have shaped your perspective or approach as an allocator? Today,

Wendy Li 05:34
There are a lot of different things I think I could point to, but I’ll highlight two, one of which is a function of when I was starting at the Met Museum, Investment Office, endowments. Foundations were still a cottage industry, and it was still very common for everyone to be a generalist, because investment teams were small. These portfolios were smaller and diamond foundations were less known. And so as a function of that, I grew up as a generalist in this business. I grew up with always in the back of my mind, this perspective that when you think about the portfolio, when you think about any one investment, it has to be in the context of the overall portfolio and every other investment that is competing for capital within that portfolio. And I think that perspective has always shaped the way that I have continued to invest and the way that I’ve continued to think about managers, think about asset classes, the way that I do investment due diligence. And I think that’s something that is increasingly uncommon at many investment offices, although I am starting to see a trend back toward that there’s sort of a phase where I think a lot of investment offices have been structured to encourage folks to specialize at sort of younger and younger parts of their career path. And I do think that does a disservice to someone who’s coming up in their career and learning about this business and learning about what it is to be an investor, an institutional allocator. So that’s one, and then the second piece of it was a function of the timing and the time period in which I was at the Met museum Investment Office. I was at the museum investment office before, during and immediately after the global financial crisis. And I don’t think there’s a single person in our business who lived that, who did not have, you know, who was not meaningfully impacted by that.

Earnest Sweat 07:56
Was there one asset class that you kind of, even as a generalist, started to lean a little bit towards more of an interest to or did you have that balanced approach?

Wendy Li 08:50
I would say that broadly speaking, I really gravitated toward the private asset classes. And I think there’s a host of reasons for that, and venture obviously falls under this category, but within the private asset classes, there are opportunities to make constructive changes in those investments where, when I’m talking and I’ll back up for a second here, what I mean by that is, when you think of the various private asset classes, whether it’s Private Equity, whether it’s buyout, whether it’s growth equity, whether it’s buyout, whether it’s growth equity, whether it’s venture, you have the opportunity as both, you know, the GP investing into these companies to really shape those companies, to really both control what the for a venture company with that capital stack looks like, what the future of that business looks like, and really shape some outcomes. On the private equity side, you have full control of that company, you shape what the balance sheet looks like. You shape what the future lines of business look like. You shape what M and A for that business, if it is a business that has that many opportunities, those are the types of strategy. Logic, sort of control oriented possibilities that exist in private markets that I think allow for folks to demonstrate that they have the ability to add value in an active way.

Earnest Sweat 10:36
Could you take us to now, to today, and what made you want to create something new? what problem did you see? And what did you want to ask the same question that you all ask us all the time is, like, you know, why do we need another you know? Why do we need another investment firm?

Wendy Li 11:06
In many ways, it is. There are some parallels to the way I found myself at the beginning of my career, entering the endemic foundation world. It was not necessarily where I thought I would go, and yet it was one of those. When I saw it, it was hard to think that anything else could be a better fit. And in this, that same vein, I had spent over 17 years of my career at various endowments and foundations, truly, you know, one of the most rewarding career paths an investor could ask for, and not one that I necessarily intended to leave, but my two co-founders in our business. Our business is Ivy and vast. My now two co-founders approached me and said, I think the three of us could really tackle a problem that is both a large problem, but also potentially a really exciting business to build. And that problem ultimately, which I think we’re not alone in identifying, is that, as individual investors, our portfolios look nothing like the portfolios of these large endowment foundations that I have managed capital on behalf of for a very long time, right? And so that gap is so much wider than I think folks realize. And when you sit in a seat like those that I sat in on the Endowment Foundation side, it is so apparent, but I think it is really under-appreciated among individual investors. And that difference in how institutions invest and how individuals invest, it obviously leads to, at the most basic level, a different portfolio, different investments within that portfolio, but then it also leads to each of these different investments that institutions have access to, they have different potential outcomes that are just for an individual investor, that are not available, right? So it’s not just the investments, but what are the potential outcomes that those investments can drive in terms of returns, in terms of managing the portfolio through periods like this one, right? It is this function of being able to have a broader set of, let’s call it tools to choose from to build that portfolio.

Earnest Sweat 13:58
Can you talk a little bit more about on both those sides, what are the trends that you feel like is really a tailwind for your business?

Wendy Li 14:07
I can certainly talk about the GP side, which is enormously interesting. What’s happening here, and I think, had I still been, if I were still sitting in my seat at Mother cooperating Health Foundation, for instance, I’m not sure that I would have such an appreciation for the speed and the pace and the scale at which things are changing on the GP side and The asset manager side, in this recognition that wealth channels, whether it’s advisors, whether it’s individual investors, whether it’s through the wire houses, there is this recognition that there’s an enormous amount of capital, and GPs are increasingly looking for ways to tap into. That. And the recognition is that that capital exists, but tapping into that looks and feels very, very different from the motion of the go to market, motion of approaching institutional investors. They have to be able to solve questions like structure. They have to be able to solve questions like educating that end user. They have to be able to solve questions like, how do you bring the purchaser up to speed? So that’s the financial advisor, oftentimes. And then ultimately, how do you also bring that end customer, that end investor, client, or the financial advisor, up to speed? And so you’re seeing large asset management firms really devote resources to building their brands, to building educational content around alternatives. And we, you know, IV invest, we get to piggyback off of some of those tail winds where they’re stepping forward and providing a lot of the content, a lot of the education, getting the initial understanding about private asset classes, alternative asset classes, and we get to ride, you know, ride the tail winds of that. So on the GP side, it’s been fascinating when I tell you how many investment managers who, I think, if you talk to them five years ago, would have said, we’re, we’re an institutional you know, we, we cater to institutional investors like that’s our investor base, and I don’t think they would have paid any mind to the possibility of reaching out to retail investors or to the wealth channels. It is just a dramatic, I mean, a dramatic shift, truly dramatic shift.

Earnest Sweat 16:40
Yeah, yeah. And so your model is being this bridge to, kind of both these worlds, right? What you know, with respects to the, well, I don’t anchor What have been some of the challenges with doing that. You know, as you’ve been building this out,

Wendy Li 17:01
there’s a lot of different parts of our business that I think there’s moving pieces to all parts of our business. The conversations with the GPS in our portfolio and with GPS that I prospectively am considering Adding to the portfolio, those conversations are actually really pretty easy to have. Everybody gets where the world is going, and everybody understands the promise of what we’re building and why we’re building and the way in which we’re building. I think what oftentimes can be a little bit more challenging for us is as we think about, how do we bridge that gap so that we’re going direct to the end customer, we’re finding ways to reach out and drive awareness of what we’re doing, because we’re building this direct connection, but we’re doing it in such a way that we are the primary interface. We’re the sole LP to the GPS with whom we interface and in whom we invest, and our end customer, their I mean their experience is really single purchase point, single decision point. Do I want to have a portfolio that expands beyond stocks and bonds, and includes all of these alternative managers that they’re starting to hear about, because these alternative managers are really devoting, like I said, resources to getting the word out there about alternatives. And so I think the two worlds are coming together naturally anyway, but they’re coming together primarily in through financial advisors and through exist a lot of existing distribution channels and our, you know, you know, our business is promised on pulling the two together directly for those folks who are not necessarily today working with a financial advisor.

Earnest Sweat 19:00
Now we’re going to take a quick break to speak with our sponsor.

Jeremy Rich 19:03
Hi, I’m Jeremy Rich, senior vice president on the catalyst 2045 team at SBB, a division of First Citizens Bank. For over four decades, SBB has been the financial partner of choice for the innovation economy. We understand the unique needs of founders, fund managers and investors building in fast moving, high growth sectors, because we’ve been there every step of the way through the catalyst 2045 team. We work closely with venture firms and institutional investors to help them grow their platforms, raise capital more efficiently and unlock new opportunities across the venture landscape. When you work with SBB, you’re not just getting a bank, you’re gaining a partner with deep sector knowledge, extensive networks and tools to help you scale. We’re proud to support swimming with allocators and the people shaping the future of venture. And now back to our LP interview.

Earnest Sweat 19:54
Well, thanks for sharing Wendy the kind of nuances of just both sides for you and how. Where you’re being a key, you know, asset in the work stream, right for these investors, I was curious though that first going to the GPS, especially the ones who, you know, have said, Hey, I’m building for an institutional firm, and I’m accustomed to that. Are there any kind of differences that they should be aware of when interacting with you? And what I mean is also your end customer, and how should they prepare for that?

Wendy Li 20:33
I think one of the reasons that we’re really excited about the way we’re building our business is, I think we really seek to be easy to work with on both sides. For our end customer, who is an individual investor, who may have familiarity with other platforms like Wealthfront or Betterment or Robin Hood, right, that user experience is something that’s familiar to them and that’s very comparable to the user experience that we give to them. So on that side, we really try to meet the customer where they are with a motion that they’re used to and a familiarity from a UI standpoint. On the other end of the spectrum, when we interface with GPS, I try to do the same. It looks and feels like all of the other motions that they have had with an institutional investor, because that’s who I am. That’s how we run our business. We are the sole LP to the GPS, the fund that we manage, or IV invest, is the way I like to describe it. Is effectively an endowment in a box. We deliver that box through our technology platform to individual investors, but that box is ultimately actually a fund, and that fund serves as the sole LP to the GPS with whom we interface. And in that motion, it looks and feels like interacting with any other institutional lp. And so really try to make it look and feel really familiar. For our GPS too, which helps, because most of them have known me for a long time. That’s really where we’re starting out. I’m sure, as you can imagine, that’s really where we started. Our initial portfolio is folks I’ve known for a long time who had, there’s a lot of inherent trust built in that relationship. And you and I know this. Ultimately, these are not faceless firms. These are people businesses investing as a people business, and so so much of that is, again, looks and feels very familiar to all the other ways that they’ve previously interacted with me. I do think that is one thing that sets us apart, and why I’m really excited about war building. I do think that a lot of GPS, as they start to look to navigate to RIAs and to the wealth channels, it is a it, there are going to be differences in that experience. And I think that is something that folks are getting up to speed on very quickly. And I think the folks who navigate that experience while on the GP side, are going to be really successful in those channels too.

Earnest Sweat 23:05
One of the things that, you know, talking to a lot of allocators is that, should this be seen as a new kind of staple in institutional capital, or is it just a moment in time? And I think the risk of that is just like the education piece, right? You know, to these different individual families, and the inherent risk that, like, it’s not sticky capital right from your LPs, it changed based on, like, you know, something happened in a macro environment that might have happened yesterday as we’re taping this. And so I think your model can actually, like, have a smoothing out, because you are that one LP, like, right? And so I’m just curious, is that kind of, was that part of the thinking as well?

Wendy Li 24:12
It’s something that was not necessarily at the outset, because in some ways, we were just, I was doing what I have known, right? But as I’ve come to know more of what this side of the world looks like, I do think there is a risk to exactly what you alluded to, particularly in asset classes, where folks are coming in for the first time. I think part of that education component is making sure that there’s a real understanding. And I’ll just use venture as an example here because obviously, there has to be a real understanding that venture is a long term asset class, that real returns and results may not be visible until year seven, year eight, and that is a very, very different mindset. And so what folks are signing up for. If I’m going to invest in this fund today, when it comes back in two to three years, I have to be able and be comfortable and be willing to underwrite that when there are not yet proof points necessarily from a performance standpoint. And that’s really how that’s for, for early stage ventures. Certainly that has to be the expectation is the ability to keep underwriting and looking for other proof points that aren’t necessarily the types of proof points that you will find in other asset classes, right? And so I think that’s really important, and part of the education component, I think that both sides can get there. I do. I truly believe that both sides of the market, the GPS and the newer LPS can get there, but there has to be a clear education component and a clear and I think artist you, and I’ve talked about this before, it is important to be thoughtful in how you select your LPS as you build a firm. I know it is not an easy fundraising environment. It’s an environment in which I think having the ability to partner with the right LPS is going to set someone up for the long term, for a sustainable multi fund firm. Because the last thing you want, and I have seen this throughout my career, is that the last thing you want, as you’re thinking about building a generational firm, is to have one successful fundraise to go out to market again, and then suddenly realize you have to start all over from scratch. Your existing LPs are not coming back. And let me tell you, that is a much, much, almost a harder situation to be in than being a first time in market fund, because all of a sudden you have to answer questions about, well, why aren’t any of your other LPs returning? You’re, all of a sudden, starting all over again with a different type of, you know, market mapping

Earnest Sweat 27:22
So true, and as all spouses of VCs know, VCs don’t have transferable skills. So it’s better to be. It’s better to be, or is that what I’ve been told, it’s better to be strategic. You know, early on, you know, you’ve said that early stage venture is where math still works. Can you unpack that for us?

Wendy Li 27:47
I truly believe this, and this goes back to venture is such a different asset class versus other asset classes, and I really bring my generalist perspective to this right when you think about other asset classes, oftentimes, the types of considerations are, well, what are the risk return profiles here? What are the possible outcomes? What is the likelihood of generating the potential returns that you’re underwriting, and what are the types of outcomes that you might experience. And there’s this real consideration that it’s better to let an opportunity go than to make a real mistake, from an era of commission standpoint, right? With venture, it’s the opposite, and sort of flips. It’s the mindset of because this is an outlier business. You’re looking for outliers, and the biggest error is one of omission, where you miss out on that opportunity. And so from an LP standpoint, we have to understand that it is an asset class with fundamentally a different way of thinking, and our GP should be obviously thinking about things in that outlier model as well. And because venture provides that kind of opportunity, that kind of return profile. I think there’s also an element of, well, what sets you up for success to be able to pursue that kind of return profile, right? And so when I think about early stage ventures where we’re talking about, let’s call it two to $10 million checks, and I think a lot of folks have moved in this direction, but I have also long held the viewpoint that ownership is important. So in the early stage, you’re writing those two to $10 million checks, you’re careful and conscious and cognizant about the ownership that you’re taking as a result of that you can then depend. Spending on, you know, assuming that you’re selecting companies well,

Earnest Sweat 32:26
I think, from hearing you, it’s clear you have the generalist, multi asset class approach, right? And I think, for you know, my friends who are allocators, who are focused primarily just on venture or on privates, they’re playing something different, because, you know, their mandate is just this asset class and so but from your your seed, and there are more organizations like You, why do you think there’s been such a okay this or going along with, you know, the trend of bigger and bigger fund sizes. Is it? Because it’s just now being considered with private other private equity.

Wendy Li 33:16
So I have several thoughts on this, and I’m going to wait, and against all my better judgment, I’m going to wade into this with a pretty honest response. I love it, right? So let’s talk about what the governance model looks like in a lot of institutions, depending on the institution you’ve got the investment team, of which there’s probably somebody who’s more focused on privates and venture than other members of the team, you’ve got a CIO that CIO ultimately reports into an investment committee, and depending on the institution that CIO may or may not have discretion over the portfolio, depending on the institution, the investment committee may have the final, you know, thumbs up, thumbs down, even though, if it is a collaborative and well run Investment Office Investment Committee, that relationship is going to be pretty close and not going to have a lot of surprises if, oftentimes, if an investment office, CIO is bringing an investment To the Investment Committee, it’s because that’s been previewed and again, assuming that there’s a strong working relationship, it’s not necessarily going to be the issue. But that said, there is still that dynamic you’re working within, and there’s the second dynamic on the institutional investor side, which is, how long is that institution going to be invested with you? But as we said at the outset, this is a people to people business. So it’s how long is that allocator who’s advocating for you going to be in that seat, and if they’re not in that seat, is the next person who sits in that seat going to advocate for you, and are they going to have. Have a similar underwriting process? Are they going to have a different underwriting process? And so I think this is where there’s a little bit of, at times, a tension, you know, that tension between, of course, as investors, we want to back folks who are going to be outlier investors who are going to be at an earlier stage in that fund? Because we know math typically works better. We’ve seen the results, but at the same time, we also know that the dispersion of results is much, much wider, and if we get it wrong, that career risk for getting it wrong is much higher.

Earnest Sweat 36:49
whether you’re an emerging manager or you’re an established GP who’s taking over succession planning? A lot of times you’re not, you don’t, you don’t have that information of how actually these institutional LPS work, and what their incentive structure is. And so with that explanation, how, how would you advise emerging managers to approach institutions like that.

Wendy Li 37:22
I have two thoughts on this. One is that there’s going to be a subset of institutions who have that mandate, who have that buy in, who have a CIO that very clearly is there for the longer term, and has this, both interest and willingness, and again, that mandate to invest in this asset class, in this way, in the way that they think is obviously best from an investment standpoint, first principle standpoint. So those institutions are, I think I won’t name any of them out loud, but I think they are identifiable based on the other GPS that they have underwritten. Put it that way, yeah, the Second Avenue is for better or for worse, fund to funds, institutions continue even well staffed. I’ll step back for a second. I’ll sort of answer this a little bit differently. The second is for better, for worse, fund of funds, even institutions who are very sophisticated, who have long running investment programs in venture and in privates, some of them still work with funds of funds to identify emerging managers, because there just is such an imbalance when it comes to the amount of time it takes and the dollar size that check that you can write as an institution in those managers that it doesn’t always pencil out right? And so even those institutions that are highly sophisticated might still be working with a fund to fund manager to identify those next emerging managers that they want to support. And so oftentimes, one of the best ways to get to know an institution is just getting to know the institutional PS at some of these funds of funds that do back emerging managers

Earnest Sweat 39:25
With that time, peace is critical. I remember one of our early interviews, one of the allocators are speaking about how when I asked them, like, what advice do you give to people who are new allocators, new foundations, new fund, funds, family offices that are interested in venture and his response was that, like, you need to be okay with spending 80% you some big number of your time to only deploy 10% of your capital because of, like, just that dispersion factor and just information and. Also just so much noise. Now, where do you think alpha is going to come from? And you can talk about, kind of like, the types of firms and all that, of what you’re looking for and what you think LP should look for. But also, given your experience, I want to hear about, like, what intangibles do you want to see from those firms.

Wendy Li 40:24
I do unequivocally think that the alpha is going to come from smaller, earlier stage managers. And this is a slight tangent here, but I think what we have seen, and I don’t know necessarily if this continues, but I think what we’ve seen that’s really given venture a run for the money, is that you have seen that growth equity as an asset class as well. I’m not talking about sort of later stage crossover growth equity, but growth equity has delivered returns that are comparable to venture within a much tighter band of dispersion. And so if you have an asset class that is lower risk but capable of delivering the same type of returns that you’re underwriting for in venture, or maybe not underwriting for, but achieving in venture, all of a sudden, it makes it a much tougher case for a venture manager to say that I’m best fit for your portfolio, right? However, if you have smaller venture managers, earlier stage, venture managers who are still delivering returns above and in excess of what you can achieve in let’s call it the larger venture firms, the ones who become we’ve talked about this, maybe the closest thing to venture beta there is, even though, right? We know nobody wants venture beta. You don’t want venture beta, right? You want but let’s just use that as a proxy these larger firms who achieve some degree of, let’s call it two, two and a half X, maybe even three at the upper end, which questionable growth equity has demonstrated the ability to do so as well with, you know, shorter time frame, different type of downside risk, different type of risk profile. And so I think venture then has to be able to deliver above and beyond that. And that has to be the expectation that folks believe that they can meet with their own funds, right? And so that’s one aspect of it where I think the alpha is going to come from these smaller managers, not just because of the math, but also, you know, being at an earlier stage, you’re going to be able to find and really have a differentiated viewpoint. Oh, you have to have a differentiated viewpoint, like you’re forced to have alpha, right? The second piece of it is, actually, I lost my train of thought. Ernest, can you repeat the question, and then I’ll get to the second piece of

Earnest Sweat 42:51
it? Yeah. So just, just talking about, like one piece was where I think you were talking about and addressed was like, What are kind of like the characteristics of the firm, is that early stage, and you know, that’s where alpha is going to come from. The second piece I wanted to know is like, not the kind of squishy stuff that’s critical when you have a lot of competition in noise, and actually we think we’re going to see it with our founders too. Like the archetype for a successful once in a generational founder, when information is all equal, right, for the most part, I think that’s going to change. And so what intangibles do you are looking for now that will have the major exits in the next 1020 years?

Wendy Li 43:37
So the second point is, what type of what are the qualities and the attributes within those types of managers? Within that archetype of early stage manager is going to be able to deliver the type of alpha that you need to see from venture? Absolutely, I think going back to venture being an outlier business is. It starts and ends in many ways, with your deal flow and your sourcing and again, this goes back to the early stage. Venture is pretty squishy. There’s not a lot of numbers that you can fall back on in the way that you can with other asset classes. There’s pros and cons to that. Right. On the one hand, early stage, you’re sort of inundated from, or, sorry, you’re sort of inoculated from what’s happening in much of the rest of the world, because what you’re expecting, those outcomes are going to materialize in 710, years down the road. And so whatever sort of macro backdrop you’re investing in, no matter how disconcerting the thesis is, it’s going to have changed, you know, in the time that this fund is going to be investing and generating value. And so that’s the positive. The negative is, again, you just have a lot less to grasp onto from a hard con. Free set of data points. Certainly you can look at an early stage manager’s track record as an angel investor. And yes, that’s valuable, but it’s also and it tells you a lot about where does their sourcing and deal flow, and what is, what is their connectivity in their network? And I think that’s what I’ll come back to. But what it doesn’t tell you is their ability to construct a portfolio, ability to pick the right spots, ability to be value additive to those founders. Because as an angel investor, those are just not necessarily the things that you know. It’s different. It is different, right? And so I think first of all, that has to be something that early stage managers recognize that you can’t just go in and say, Here’s my angel track record and expect that to be the end all be. All right, it is a piece of the puzzle. And the other piece of the puzzle are those other questions around sort of network and connectivity and the ways in which you can help your companies get to that next level, get to that a round, right? So I think so much of it is going to be, does this emerging manager have the right deal flow in sourcing and networking connectivity, and then B, does this manager also have a very differentiated viewpoint? I think you have to have in order to, as you mentioned Ernest, in order to stand out from the crowd, in order to really be distinctive, there has to be a very clear viewpoint that you’re espousing that is not the exact same viewpoint that I have just heard from 20 other GPS, right? And, you know, like, in some ways, this is, this, is it being able to communicate, being able to tell your story, being able to have, like, a very clear vision for what you’re building, and then communicating that clearly, this is, this is not like, yeah, it’s not rocket science. I think this is something that’s necessary in a lot of different contexts, and it’s certainly necessary in this context too.