William Orum is partner at Capricorn Investment Group, where he leads marketable investment strategies and oversees asset allocation and risk management. In this interview Orum discusses how family offices are forcing change in terms of LP-GP alignment of interests, how Capricorn is marrying strong risk-adjusted returns with sustainable investing and the important factors in landing a family office job.
Orum was recently named on Trusted Insight’s 2017 Top 30 Family Office Rising Stars. He graciously spoke with us on Aug. 18, 2017. The following interview has been edited and condensed.
Trusted Insight: In what ways are family offices quietly changing the way institutions invest that may not be as apparent to the outside world?
William Orum: The idea of alignment of interests and direct ownership of assets is in large part created by the family office communities. In many cases, people that were entrepreneurs understand the idea of deep alignment of interest, having the right time horizon, right partnership structure and getting closer to the assets.
Large private equity platforms have been creating individual teams who are solely focused on serving the family offices with best ideas and co-investments, because family outfits don't tend to be quite as siloed as their institutional peers. They'll have one point of contact whereby large asset management firms can basically funnel ideas to one individual on the family office side as opposed to having to go to the private equity or hedge fund person.
"I think family offices have been more efficient than most, because they tend to be more entrepreneurial, smaller and leaner organizations."
Family offices are more focused on this kind of deep alignment and more balanced relationship in terms of LPs and GPs. It's more balanced where family offices in certain areas can add a lot of value, and they're usually led by people that have had extraordinary success in one or multiple businesses. Increasingly, large asset management firms are looking for an edge, and if your edge can be that you have a great relationship with an entrepreneur in healthcare or wherever, that’s something they want to figure out how to formalize.
On the flexibility side, people are trying to simplify their asset allocation and diversification. How can we create a mechanism to flexibly go after the best kind of opportunities? They try reduce some of the siloed nature that exists in a lot of firms. Whether they do risk-parity or the endowment model, everyone understands the value of diversification. We can create a reasonably diversified portfolio, but then the magic is in the bottom-up security selection. It’s about thinking of the risk-adjusted return across various assets and timeframes, and how do you create a good process for doing that? I think family offices have been more efficient than most, because they tend to be more entrepreneurial, smaller and leaner organizations.
Trusted Insight: You list an expertise on the Capricorn website as "environmental sustainability." How does that translate into your role at Capricorn and the investments that you've been part of?
William Orum: Capricorn’s investment strategy, at the highest level, is quite similar to most large institutions. From an overall asset allocation and risk standpoint we tend to look similar. Within each asset class, however, we orient the capital toward investments that integrate sustainability considerations broadly as well as into companies which are providing a specific solution to address global challenges. For certain members of our team that's a very targeted focus where they're looking at clean technology or renewable infrastructure investments.
For me, it tends to be relevant in that we integrate environmental, social and governance factors as broadly across the portfolio as we can. We underwrite managers with a specific focus in those areas. We do our own research on how those factors impact our prospective return as well as risk. We’re looking for materiality as it relates to individual securities and strategies. We also look in public markets at specific thematic opportunities. We've underwritten managers that do renewable infrastructure, or energy efficiency.
"Mitigation banking is likely one of those areas since it's relatively niche, has very attractive uncorrelated characteristics, has a nice cash flow and yield component."
We're always looking to understand how are our managers accounting for these risks? How are they thinking about sustainability in terms of companies that might have a competitive advantage? They're more forward thinking about carbon pricing or resource scarcity, as well as those that might just be thinking about it from a risk management standpoint--similar factors, but from a different angle. Take the energy complex broadly, we’re looking at companies that are particularly exposed to environmental regulation or carbon pricing on the risk side.
Trusted Insight: In terms of sustainability and investing, are you involved with mitigation banking?
William Orum: We have some exposure to mitigation banking in Texas. It's not a huge allocation, but it has some very interesting characteristics. We obviously believe in the opportunity to align our capital with fundamental values, but equal to that is we just think there's opportunity to generate excess return by focusing in areas that are less understood, potentially mispriced by the market.
Mitigation banking is likely one of those areas since it's relatively niche, has very attractive uncorrelated characteristics, has a nice cash flow and yield component. We think we can earn excess return relative to the risk that we're taking. That example is actually pretty relevant and illustrative of broader approach.
Trusted Insight: To what degree have you seen machine learning and artificial intelligence impact how you’re investing?
William Orum: Our approach is not one that's overly quantitative, and I don't think it's necessarily an area in which we have a discernible edge in terms of underwriting individual teams, strategies or approaches. With that said, I think everything outlined above is impacting the investment industry.
Managers are increasingly using quantitative tools to complement the fundamental or discretionary approach to management. We have a few managers that are increasingly using technology and systematic processes to replicate what a human decision maker would do. For us, it's really on the complementary side, as opposed to trying to find AI-oriented, or machine learning-dependent strategies.
On the private side, we tend to have more of a focus in asset-based investing, or segments of the venture capital world. Those tend not to be in the areas you mentioned. We don't have a new program related to investing around AI. However, some companies are using that in their own processes. It's part of the solution, not the solution.
Trusted Insight: What advice would you give to someone who is looking to join a family office?
William Orum: Certain aspects of the family office are not dissimilar from going to work at an endowment or foundation. Certain aspects are not dissimilar from going to work for a private equity fund or a long-term investment management firm. It depends on where you want to focus.
One aspect that is valued is intellectual curiosity and knowledge across markets, because many family offices are specifically intended to be flexible investment portfolios. One needs to have either experience or the ability to learn, at least at the junior level. One needs to have a fair degree of intellectual curiosity about investing and be open minded to the ways in which one can generate high quality risk-adjusted returns.
"Someone that can marry the idea of positive outcomes, both environmental and social, with high quality investment strategies, will be increasingly important."
Part of being at a family office, an endowment or a foundation is that you have the ability to look at different strategies. You don't want to get so stretched that you start to have no core or fundamental investment philosophy. It’s a balance of having a core investment philosophy, certain characteristics that are consistent across the portfolio and enough flexibility and interest in different asset classes and geographies.
In terms of other aspects specific to a family office, and particularly in this day and age, one should think about alignment of capital. Increasingly, people with significant resources are considering how they can utilize all of their balance sheet and capital to further a mission with their philanthropic strategy. Someone that can marry the idea of positive outcomes, both environmental and social, with high quality investment strategies, will be increasingly important. It’s already come up in almost every endowment and foundation investment committee meeting. For family offices, that’s also the case.
When you're going to a multi-asset-class portfolio, developing expertise in at least one area is important. These days, a lot of value is in private markets where family offices are trying to invest more directly and do less through funds. That is likely to continue. Having expertise in those areas would be relevant. My role is slightly different, but I think that having an anchor around your experience, your edge or specific expertise is important. From that, you can build into other areas.
Click here to view the complete list of Top 30 Family Office Rising Stars.