In this interview, Patrick O’Connor talks about how he managed to capitalize in the financial crisis of 09, how to create strong alpha in an unfavorable market, as well as how the investment strategy differs as a CIO at an educational institution versus a non-profit healthcare organization.
O'Connor is the senior vice president and chief investment officer at Cook Children's Health Care System, where he has established a fully discretionary, in-house investment office for the hospital system's $2+ billion foundations. Prior to Cook Children’s Health Care System, he was the chief investment officer at the University of Arizona. He studied at the Kellogg School at Northwestern University, The University of Arizona, Eller College of Management, London Business School and the University of New Mexico. He is also an investment committee member for the Communities Foundation of Texas and a board member of Metropolitan YMCA of Fort Worth.
O'Connor was recently named on Trusted Insight's 2018 Top 30 Health Care System Chief Investment Officers. He graciously spoke with Trusted Insight on Dec. 7, 2017. The following interview has been edited and condensed.
Trusted Insight: How has Cook Children’s Health Care System’s portfolio changed since you started in 2009? Did the financial crisis bring any capitalization opportunities as you started your new position?
Patrick O’Connor: Prior to Cook Children’s Healthcare System, I was at the University of Arizona. As I joined Cook Children’s Health Care System in September 2009, the committee gave me freedom to rebuild a new investment office with an endowment style approach.
The original portfolio, previously managed by a consultant, did not have a lot of substance. It mainly consisted of basic equity and fixed-income. The main changes consisted of building out a new infrastructure for the investment office, and ultimately investing the capital in an endowment type of framework across multiple asset classes.
Our style is viewed as a cross between a family office and an endowment. We find a lot of value in partnering with operators and GPs on a deal-by-deal basis. We never lead deals, but we certainly like to be part of a small consortium other LPs and preferably partners we know well. While we do invest in funds as well, we usually tend to invest in funds where we can be meaningful partners and form long-standing partnerships. This usually means our funds tend to raise less capital and can often be nimbler relative to larger funds. This is where we like to focus a lot of our time and is also the area where we feel we add value and ultimately alpha.
When I first came to Cook, we had quite a bit of liquidity. As far as capitalization of opportunities, when I started this new position, almost everything looked good in 2009. If you could rewind, what anyone should have done is probably to put the capital in the index and call it a day. However, we are trying to build a long-term portfolio, and it is vital to focus on building strong relationships and adding those types of relationships to our portfolio.
Trusted Insight: Tell me more about your experience of investing through the financial crisis in 2008. Did it affect how you think about risk and your asset allocation preference in any way?
Patrick O’Connor: It did not. I have a credit background, which makes my approach to risk maybe a little bit different relative to other investors. When I arrived at Arizona in 2006, I did not come from the endowment and foundation world, I came from a bond shop; I was an analyst and portfolio manager. I believe having that background might have made me look at things a little bit differently than someone on the other side of the business.
From a risk perspective, my focus had always been credit centered and quite skeptical. That just happened to marry up pretty well with what was going on prior to the financial crisis. I am not going to sit here and pretend that I predicted anything, because I did not. However, I do think we did navigate the financial crisis pretty well at Arizona in the sense that we had an investment style that focused on value rather than relying on leverage to produce returns. Moreover, at Arizona we always focused on things that we could buy at a discount. From a valuation perspective, we were pretty valuation sensitive and comfortable with being in cash when no other opportunities presented themselves.
Investing through the financial crisis, we were quite risk averse prior to the financial crisis. As a result, we were not in any kind of liquidity trouble and did relatively well. Our drawdown relative to many other institutions was a lot less simply due to the leverage that we did not employ. Back then, we also demanded a lot of transparency, which was very difficult to have, especially at our size. Having that transparency made us understand what was going on within the underlying portfolio and made it possible to evaluate, reassess and redeploy at the appropriate time.
Walking into a fairly liquid portfolio in 2009 made it possible to be opportunistic in moving forward from that point. My attitude toward risk today is influenced by my background, which means I can be risk averse at times, but also understanding that we are investing for the long term. We employ the same principles at Cook and have stayed under-levered, maintained transparency in everything we do, as well as maintain close relationships with our GPs. This has enabled us to understand all of the underlying assets within the firm/fund/operator that we are investing with.
Trusted Insight: In a market with high valuations and low expected returns, how do you allocate capital to differentiate yourself from your peers?
Patrick O’Connor: Our investment strategy is similar to an endowment in some ways, but varies on the margins. We are different in the sense that we can be a little bit more illiquid. This does not necessarily mean that we are more levered, but it gives us the ability to move into the private space in different capacities. We are looking for structural inefficiencies within different asset classes. Not to sound too generic, but we have found quite a few niche global private credit strategies. Not necessarily pure lending strategies that need a turn or two of leverage to produce decent results, but there are several opportunities we have identified where we feel the risk/reward is still exceptional.
Trusted Insight: What are the main differences between your investment strategy as a CIO at an educational institutions versus a non-profit healthcare organization?
Patrick O’Connor: At the institutional level there certainly is a difference. At the actual portfolio level and how you are actually investing the assets looks pretty similar on paper. However, I do think the thought process behind how we are actually investing is slightly different.
The health care system portfolio, in my experience, is a little bit more complex than the university portfolio with regard to structure. I certainly can’t speak for others, but there are many nuances between the types of institutions that force your management style to be slightly different.
At Cook Children Healthcare System, there are a few different entities to consider and each has its own risk profile. At the same time, as you think about investments at each entity level, you also want to think about it at the overall system level. One (university endowment versus hospital foundation) is not better than the other or even more difficult, it’s just a matter having a different structure and ultimately a different thought process when allocating capital.
Being a CIO in the healthcare industry and more specifically at Cook Children’s has been extremely rewarding. We are fortunate to have a supportive administration, board and investment committee that understands governance is the key to success in our industry. This support combined with our dedicated investment and operations team is what has made Cook successful at implementing its investment program.
You can view our full catalog of interviews with institutional investors here.
To learn more about heath care system investing, click here to view the complete list of Top 30 Health Care System Chief Investment Officers.
O'Connor is the senior vice president and chief investment officer at Cook Children's Health Care System, where he has established a fully discretionary, in-house investment office for the hospital system's $2+ billion foundations. Prior to Cook Children’s Health Care System, he was the chief investment officer at the University of Arizona. He studied at the Kellogg School at Northwestern University, The University of Arizona, Eller College of Management, London Business School and the University of New Mexico. He is also an investment committee member for the Communities Foundation of Texas and a board member of Metropolitan YMCA of Fort Worth.
O'Connor was recently named on Trusted Insight's 2018 Top 30 Health Care System Chief Investment Officers. He graciously spoke with Trusted Insight on Dec. 7, 2017. The following interview has been edited and condensed.
Trusted Insight: How has Cook Children’s Health Care System’s portfolio changed since you started in 2009? Did the financial crisis bring any capitalization opportunities as you started your new position?
Patrick O’Connor: Prior to Cook Children’s Healthcare System, I was at the University of Arizona. As I joined Cook Children’s Health Care System in September 2009, the committee gave me freedom to rebuild a new investment office with an endowment style approach.
The original portfolio, previously managed by a consultant, did not have a lot of substance. It mainly consisted of basic equity and fixed-income. The main changes consisted of building out a new infrastructure for the investment office, and ultimately investing the capital in an endowment type of framework across multiple asset classes.
"If you could rewind, what anyone should have done is probably to put the capital in the index and call it a day."
Our style is viewed as a cross between a family office and an endowment. We find a lot of value in partnering with operators and GPs on a deal-by-deal basis. We never lead deals, but we certainly like to be part of a small consortium other LPs and preferably partners we know well. While we do invest in funds as well, we usually tend to invest in funds where we can be meaningful partners and form long-standing partnerships. This usually means our funds tend to raise less capital and can often be nimbler relative to larger funds. This is where we like to focus a lot of our time and is also the area where we feel we add value and ultimately alpha.
When I first came to Cook, we had quite a bit of liquidity. As far as capitalization of opportunities, when I started this new position, almost everything looked good in 2009. If you could rewind, what anyone should have done is probably to put the capital in the index and call it a day. However, we are trying to build a long-term portfolio, and it is vital to focus on building strong relationships and adding those types of relationships to our portfolio.
Trusted Insight: Tell me more about your experience of investing through the financial crisis in 2008. Did it affect how you think about risk and your asset allocation preference in any way?
Patrick O’Connor: It did not. I have a credit background, which makes my approach to risk maybe a little bit different relative to other investors. When I arrived at Arizona in 2006, I did not come from the endowment and foundation world, I came from a bond shop; I was an analyst and portfolio manager. I believe having that background might have made me look at things a little bit differently than someone on the other side of the business.
From a risk perspective, my focus had always been credit centered and quite skeptical. That just happened to marry up pretty well with what was going on prior to the financial crisis. I am not going to sit here and pretend that I predicted anything, because I did not. However, I do think we did navigate the financial crisis pretty well at Arizona in the sense that we had an investment style that focused on value rather than relying on leverage to produce returns. Moreover, at Arizona we always focused on things that we could buy at a discount. From a valuation perspective, we were pretty valuation sensitive and comfortable with being in cash when no other opportunities presented themselves.
Investing through the financial crisis, we were quite risk averse prior to the financial crisis. As a result, we were not in any kind of liquidity trouble and did relatively well. Our drawdown relative to many other institutions was a lot less simply due to the leverage that we did not employ. Back then, we also demanded a lot of transparency, which was very difficult to have, especially at our size. Having that transparency made us understand what was going on within the underlying portfolio and made it possible to evaluate, reassess and redeploy at the appropriate time.
Walking into a fairly liquid portfolio in 2009 made it possible to be opportunistic in moving forward from that point. My attitude toward risk today is influenced by my background, which means I can be risk averse at times, but also understanding that we are investing for the long term. We employ the same principles at Cook and have stayed under-levered, maintained transparency in everything we do, as well as maintain close relationships with our GPs. This has enabled us to understand all of the underlying assets within the firm/fund/operator that we are investing with.
Trusted Insight: In a market with high valuations and low expected returns, how do you allocate capital to differentiate yourself from your peers?
Patrick O’Connor: Our investment strategy is similar to an endowment in some ways, but varies on the margins. We are different in the sense that we can be a little bit more illiquid. This does not necessarily mean that we are more levered, but it gives us the ability to move into the private space in different capacities. We are looking for structural inefficiencies within different asset classes. Not to sound too generic, but we have found quite a few niche global private credit strategies. Not necessarily pure lending strategies that need a turn or two of leverage to produce decent results, but there are several opportunities we have identified where we feel the risk/reward is still exceptional.
Trusted Insight: What are the main differences between your investment strategy as a CIO at an educational institutions versus a non-profit healthcare organization?
Patrick O’Connor: At the institutional level there certainly is a difference. At the actual portfolio level and how you are actually investing the assets looks pretty similar on paper. However, I do think the thought process behind how we are actually investing is slightly different.
The health care system portfolio, in my experience, is a little bit more complex than the university portfolio with regard to structure. I certainly can’t speak for others, but there are many nuances between the types of institutions that force your management style to be slightly different.
"We are fortunate to have a supportive administration, board and investment committee that understands governance is the key to success in our industry."
At Cook Children Healthcare System, there are a few different entities to consider and each has its own risk profile. At the same time, as you think about investments at each entity level, you also want to think about it at the overall system level. One (university endowment versus hospital foundation) is not better than the other or even more difficult, it’s just a matter having a different structure and ultimately a different thought process when allocating capital.
Being a CIO in the healthcare industry and more specifically at Cook Children’s has been extremely rewarding. We are fortunate to have a supportive administration, board and investment committee that understands governance is the key to success in our industry. This support combined with our dedicated investment and operations team is what has made Cook successful at implementing its investment program.
You can view our full catalog of interviews with institutional investors here.
To learn more about heath care system investing, click here to view the complete list of Top 30 Health Care System Chief Investment Officers.