Daniel Parker is an investment officer at the Helmsley Charitable Trust. He is responsible for contributing to strategy and policy development, and driving portfolio construction and management, including market and manager research with a focus on alternative investments (hedge funds, private equity and venture capital). Prior to joining the Trust, Dan was a vice president in private equity at BlackRock and before that, he was an associate in Investment Banking at Citigroup. Dan began his career serving as an officer in the United States Marine Corps where he commanded infantry and reconnaissance units. He received an MBA from The College of William and Mary and a BA from Tulane University.
Mr. Parker was recently named to Trusted Insight’s ranked list of the Top 30 Limited Partner Rising Stars In Venture Capital. He graciously spoke with Trusted Insight on January 13, 2016. The following interview has been edited and condensed for clarity.
Trusted Insight: I'd like to begin by talking about your background. You received your bachelor's in History from Tulane, served in the Marines for eight years and then earned your MBA. Surely, the MBA program taught you the fundamentals of finance, analyzing risk/reward trade offs, et cetera. Tell me about these experiences and how they inform your thought process. In particular, how your Marine Corps training been beneficial in the investment world?
Daniel Parker: There are two key lessons from my Marine Corps experience that carry over to investing very well. The first is that tactical decision making is not a turn based game. It's the difference between Chess and a competition where your opponent doesn’t have to wait to move until after you act. This is a great parallel to the markets and investing, which are always evolving in real time based on the actions of a large number of participants.
Another lesson that the Marine Corps teaches is that a critical decision making skill is understanding the difference between insufficient and incomplete information. Acting on the basis of insufficient information imposes unnecessary risk, while a failure to act with sufficient but incomplete (perfect) information imposes unnecessary delays. Understanding the difference between insufficient and incomplete is an essential skill for investing and for operating in the markets. Waiting for perfect information can paralyze an investment process. The critical skill in decision making is finding the optimal time to make a decision and execute.
If you supplement that skill with an effective analytic framework, you optimize your ability to impact future events, or, in the case of investing, to profit from them. If you make a decision too soon, you forego useful information and are more likely to make a sub-optimal decision. If you make a decision too late, you reduce your ability to profit from future events. I think that finding that balancing point is a critical skill for investors.
Trusted Insight: The Helmsley Trust has experienced considerable growth over the past few years. Between FY13 and FY14, AUM increased by roughly $1.2 billion. And since you’ve been at the Trust, the investment team has grown to twelve people from four. Tell me about that growth and your role in fostering that.
Daniel Parker: It's been an exciting time at the foundation. I started in 2012 and the Trust has grown significantly in terms of both AUM and the investment team since then. It's been fun to be a part of something where we're building out an investment program almost from scratch. They had a portfolio in place when I started, but the Trust is a very young organization that started in 2008. The portfolio's inception date was August 2008, which was a very interesting time to begin deploying capital.
The initial allocation from the Estate to the Trust was $2 billion, with the stipulation that the Estate would be liquidated and that the proceeds would flow into the Trust. As that process progressed, they built out an internal investment team. Being a part of that -- ramping up the team and the assets -- has really been a great opportunity. I think the fact that it all took place post 2008 and post global financial crisis for the most part, has been an incredible opportunity for the Trust. As we built out the portfolio, we've had fewer of the legacy issues that other organizations might have when they have changes in leadership or changes in personnel. We're all pretty much starting from scratch. There have been significant changes in the portfolio as the team has grown, since the initial portfolio was built by external advisors.
It's been a neat opportunity to kind of start with a blank piece of paper, and the portfolio is now more $5 billion.
Trusted Insight: What has driven that growth?
Daniel Parker: Two things: Performance has been positive since I started. Equally important was the estate liquidation that was underway. The Helmsley Estate was overwhelmingly a Manhattan real estate portfolio, which has been being liquidated since even before 2008. The biggest components of that $1.2 billion were the Empire State Building and the Helmsley Hotel on Central Park South – the Estate owned approximately half of the Empire State Building and all of the hotel.
Trusted Insight: Tell me about the investment team at Helmsley. What's the team dynamic and how does the team differ from peer institutions?
Daniel Parker: Probably the most unique feature of the Helmsley Trust investment team relative to our peers is that again because it's such a young organization, everybody on the investment team came from for-profit organizations. Everybody on the team has a range of experience, typically on both the sell side and the buy side and/or consulting. But it's not a team that came over from endowments and foundations, and now we are collectively applying the endowment model. Also, the team is very close to and has good networks with managers as well as the sell side, and these relationships have been advantageous.
Trusted Insight: Tell me about the allocation of the Helmsley portfolio that you control, particularly the venture capital and private equity side of things.
Daniel Parker: First, there are no sub-allocations within the portfolio – it is a generalist structure in which we all report directly to the CIO. The investment process is highly collaborative. The Trust has had an active venture capital allocation plan from the beginning, which has become a significant part of the portfolio. One of the unique features of our portfolio is that we are extremely concentrated with fewer than fifty managers across all asset classes in the portfolio. Everything from long-only through VC is fewer than fifty managers. There are multiple product relationships with some managers, but it's a pretty concentrated manager list.
So VC, as you might imagine, is a disproportionately large share of the manager head count because it’s such an inherently capital constrained strategy. It's a decently sized portion of the capital at this point, but a significant percentage of the fifty are taken up with VC managers. On a capital basis it's rapidly approaching our target allocation of approximately 25% of the portfolio. We are still in the process of building out the private capital portfolio, but have made significant progress.
Trusted Insight: As a foundation, Helmsley has a mandatory annual payout. This is a particularly tough time in the markets, both public and private. Please tell me about you or your team's overall strategy to achieve the proper risk/return profile amid current market turmoil?
Daniel Parker: We had a big project last year to update the Strategic Plan for the portfolio and that project absorbed the majority of our time during the first half of last year. The time was well spent and recent market events have demonstrated that the timing was fortuitous. One of the changes that was implemented as a result of research, was to incrementally flex exposures through a market cycle. We did the research during the first half of last year and then started aligning the portfolio with the new plan during the second half of last year.
One of the results of that is that we have a view that the current market cycle is probably closer to the next recession than we are to the last one. Based on the last couple months, that seems prescient, but our goal wasn’t to try to top tick a market call. Fortunately, as part of the implementation of the new strategic plan, we've been incrementally de-risking the portfolio since the second half of 2015.
I think we came into the end of last year, the beginning of this year with a relatively high percent of the portfolio in what we consider to be safe assets, which are really cash and cash proxies. Like I said, the way that last year wrapped up and the way that this year has begun, it makes that look like maybe the cycle's turning faster than we had expected. As a result, our portfolio is relatively well positioned.
While protecting capital has become a greater near-term priority for many investors, the Trust also has a statutory obligation to spend 5% a year and so to maintain the Trust as a perpetuity, we have to generate a real return of 5%. With asset prices having been boosted by QE, forward looking expected returns across asset classes are generally below the Trust’s strategic return requirement, so alternative strategies (including venture capital) will be critical to the success of the Trust over the next decade.
Trusted Insight: Q4 2015 was characterized by a slowdown in venture capital investment, but 2015 as a whole was a record year for venture capital investment. What is your outlook for venture capital in 2016?
Daniel Parker: We expect that recent signs of stress on valuations will create an attractive opportunity set for investors able to deploy capital over the medium term. One challenge for investors (including GPs) is that the deployment of capital incrementally erodes returns. Your best forward-looking return expectations are probably in places where there aren't massive capital flows. That is likely to prove challenging for investments made during the last few years, and there is still a highly competitive environment for venture capital. There is still a lot of capital out there, even if terms and valuations have become more conservative.
Funds that are able to invest over the next two-to-three years are likely to have a relatively better investment climate in that the VC cycle seems to have begun to turn toward the end of last year. I think that's anecdotally visible all the way from capital terms being imposed on new companies to the fundraising environment to the investment environment within VC. As that cycle turns, the opportunity set over the next two-to-three years could be relatively attractive.
Trusted Insight: What geographies and what sectors are most intriguing to you right now in terms of venture capital?
Daniel Parker: That's a big question. The U.S. continues to be a global innovation engine and center of excellence, and I don't expect that to change. One thing that's interesting within the U.S. is Silicon Valley has been and remains the hub for a lot of that activity, but there have also been great developments in other locations within the U.S. also. The tech ecosystem, including the ability to deploy capital, is becoming more diversified within the U.S., and that's a good thing.
We have some exposure in Asia, and that continues to be a rapidly evolving VC market. There will be ongoing opportunities there. As that market has scaled dramatically over the last decade, there are and will remain interesting focused opportunities despite the macro-level stress in China.
We are active in Israel in VC, and we see that as another global center of excellence for hard science, original research and early stage VC opportunities. Obviously geopolitical risk in that region is high, but it may be mispriced. Also, strategies that are driven primarily by intellectual capital may be less exposed to that risk than traditional assets on the ground in Israel.
I would like to learn more about the opportunity set in Europe – my expectation is that it may be a market that U.S. investors overlook when we think about technology and innovation.
Trusted Insight: What trends have you identified during your time as an institutional investor?
Daniel Parker: Realistically, the last few years have been pretty aggressive environment for capital deployment. I think it's been a party for the last few years. Now that the Fed has explicitly started removing the punch bowl, we'll see what affect that has. The cost of capital is likely to rise. Since early ’09, optimal results have basically been to be levered long risk assets. That is likely to change as monetary policy shifts and the cost of capital changes.
Trusted Insight: What challenges does Helmsley Trust face that are unique to foundation investing?
Daniel Parker: Relative to other foundations, one of our challenges is that we’re a relatively young organization, so we are still evolving and learning.
Even though endowments and foundations are typically grouped together by GP's, there are significant structural differences. Especially in an environment where the cost of capital has been so low that the front end of the curve has been pegged basically at zero for several years. The difference is driven by the fact that foundations, as opposed to endowments, have a statutory spending requirement. Endowments obviously have a budgeted spending requirement, but that's a potentially significant difference when an organization is under some degree of stress if you have the ability to adjust the budgeted spending plan. The statutory spending requirement for foundations does not flex with market performance. It's not a spread over LIBOR, T-bills or anything else, it's a flat five percent spending requirement. When the front of the curve is pegged at zero, it becomes a challenging hurdle.
To maintain the organization as a perpetuity (not all foundations are structured that way but many are), you then have to generate five percent real over time to achieve that mission of maintaining the organization as a perpetuity. That's probably the most significant challenge that we face that's maybe a little bit unique between foundations and endowments.
Trusted Insight: What's the number one lesson that you've learned so far during your career as an institutional investor?
Daniel Parker: The most significant lesson I’ve learned as an institutional investor is the importance of an empirically and analytically grounded investment framework, which also draws on a diversified background and skill set. I initially believed that my unconventional background (liberal arts undergrad major followed by service all over the world as a Marine before receiving an MBA) wasn’t particularly relevant to investing, but I have since learned the opposite. I now know that a broad perspective (geographically, culturally and historically) is indispensable for evaluating risk/return relationships in a world where markets are increasingly linked and time is increasingly compressed.
For more information on the Top 30 LP Rising Stars In Venture Capital, click here.
Mr. Parker was recently named to Trusted Insight’s ranked list of the Top 30 Limited Partner Rising Stars In Venture Capital. He graciously spoke with Trusted Insight on January 13, 2016. The following interview has been edited and condensed for clarity.
Trusted Insight: I'd like to begin by talking about your background. You received your bachelor's in History from Tulane, served in the Marines for eight years and then earned your MBA. Surely, the MBA program taught you the fundamentals of finance, analyzing risk/reward trade offs, et cetera. Tell me about these experiences and how they inform your thought process. In particular, how your Marine Corps training been beneficial in the investment world?
Daniel Parker: There are two key lessons from my Marine Corps experience that carry over to investing very well. The first is that tactical decision making is not a turn based game. It's the difference between Chess and a competition where your opponent doesn’t have to wait to move until after you act. This is a great parallel to the markets and investing, which are always evolving in real time based on the actions of a large number of participants.
Another lesson that the Marine Corps teaches is that a critical decision making skill is understanding the difference between insufficient and incomplete information. Acting on the basis of insufficient information imposes unnecessary risk, while a failure to act with sufficient but incomplete (perfect) information imposes unnecessary delays. Understanding the difference between insufficient and incomplete is an essential skill for investing and for operating in the markets. Waiting for perfect information can paralyze an investment process. The critical skill in decision making is finding the optimal time to make a decision and execute.
If you supplement that skill with an effective analytic framework, you optimize your ability to impact future events, or, in the case of investing, to profit from them. If you make a decision too soon, you forego useful information and are more likely to make a sub-optimal decision. If you make a decision too late, you reduce your ability to profit from future events. I think that finding that balancing point is a critical skill for investors.
Trusted Insight: The Helmsley Trust has experienced considerable growth over the past few years. Between FY13 and FY14, AUM increased by roughly $1.2 billion. And since you’ve been at the Trust, the investment team has grown to twelve people from four. Tell me about that growth and your role in fostering that.
Daniel Parker: It's been an exciting time at the foundation. I started in 2012 and the Trust has grown significantly in terms of both AUM and the investment team since then. It's been fun to be a part of something where we're building out an investment program almost from scratch. They had a portfolio in place when I started, but the Trust is a very young organization that started in 2008. The portfolio's inception date was August 2008, which was a very interesting time to begin deploying capital.
The initial allocation from the Estate to the Trust was $2 billion, with the stipulation that the Estate would be liquidated and that the proceeds would flow into the Trust. As that process progressed, they built out an internal investment team. Being a part of that -- ramping up the team and the assets -- has really been a great opportunity. I think the fact that it all took place post 2008 and post global financial crisis for the most part, has been an incredible opportunity for the Trust. As we built out the portfolio, we've had fewer of the legacy issues that other organizations might have when they have changes in leadership or changes in personnel. We're all pretty much starting from scratch. There have been significant changes in the portfolio as the team has grown, since the initial portfolio was built by external advisors.
It's been a neat opportunity to kind of start with a blank piece of paper, and the portfolio is now more $5 billion.
Trusted Insight: What has driven that growth?
Daniel Parker: Two things: Performance has been positive since I started. Equally important was the estate liquidation that was underway. The Helmsley Estate was overwhelmingly a Manhattan real estate portfolio, which has been being liquidated since even before 2008. The biggest components of that $1.2 billion were the Empire State Building and the Helmsley Hotel on Central Park South – the Estate owned approximately half of the Empire State Building and all of the hotel.
Trusted Insight: Tell me about the investment team at Helmsley. What's the team dynamic and how does the team differ from peer institutions?
Daniel Parker: Probably the most unique feature of the Helmsley Trust investment team relative to our peers is that again because it's such a young organization, everybody on the investment team came from for-profit organizations. Everybody on the team has a range of experience, typically on both the sell side and the buy side and/or consulting. But it's not a team that came over from endowments and foundations, and now we are collectively applying the endowment model. Also, the team is very close to and has good networks with managers as well as the sell side, and these relationships have been advantageous.
Trusted Insight: Tell me about the allocation of the Helmsley portfolio that you control, particularly the venture capital and private equity side of things.
Daniel Parker: First, there are no sub-allocations within the portfolio – it is a generalist structure in which we all report directly to the CIO. The investment process is highly collaborative. The Trust has had an active venture capital allocation plan from the beginning, which has become a significant part of the portfolio. One of the unique features of our portfolio is that we are extremely concentrated with fewer than fifty managers across all asset classes in the portfolio. Everything from long-only through VC is fewer than fifty managers. There are multiple product relationships with some managers, but it's a pretty concentrated manager list.
So VC, as you might imagine, is a disproportionately large share of the manager head count because it’s such an inherently capital constrained strategy. It's a decently sized portion of the capital at this point, but a significant percentage of the fifty are taken up with VC managers. On a capital basis it's rapidly approaching our target allocation of approximately 25% of the portfolio. We are still in the process of building out the private capital portfolio, but have made significant progress.
Trusted Insight: As a foundation, Helmsley has a mandatory annual payout. This is a particularly tough time in the markets, both public and private. Please tell me about you or your team's overall strategy to achieve the proper risk/return profile amid current market turmoil?
Daniel Parker: We had a big project last year to update the Strategic Plan for the portfolio and that project absorbed the majority of our time during the first half of last year. The time was well spent and recent market events have demonstrated that the timing was fortuitous. One of the changes that was implemented as a result of research, was to incrementally flex exposures through a market cycle. We did the research during the first half of last year and then started aligning the portfolio with the new plan during the second half of last year.
One of the results of that is that we have a view that the current market cycle is probably closer to the next recession than we are to the last one. Based on the last couple months, that seems prescient, but our goal wasn’t to try to top tick a market call. Fortunately, as part of the implementation of the new strategic plan, we've been incrementally de-risking the portfolio since the second half of 2015.
I think we came into the end of last year, the beginning of this year with a relatively high percent of the portfolio in what we consider to be safe assets, which are really cash and cash proxies. Like I said, the way that last year wrapped up and the way that this year has begun, it makes that look like maybe the cycle's turning faster than we had expected. As a result, our portfolio is relatively well positioned.
While protecting capital has become a greater near-term priority for many investors, the Trust also has a statutory obligation to spend 5% a year and so to maintain the Trust as a perpetuity, we have to generate a real return of 5%. With asset prices having been boosted by QE, forward looking expected returns across asset classes are generally below the Trust’s strategic return requirement, so alternative strategies (including venture capital) will be critical to the success of the Trust over the next decade.
Trusted Insight: Q4 2015 was characterized by a slowdown in venture capital investment, but 2015 as a whole was a record year for venture capital investment. What is your outlook for venture capital in 2016?
Daniel Parker: We expect that recent signs of stress on valuations will create an attractive opportunity set for investors able to deploy capital over the medium term. One challenge for investors (including GPs) is that the deployment of capital incrementally erodes returns. Your best forward-looking return expectations are probably in places where there aren't massive capital flows. That is likely to prove challenging for investments made during the last few years, and there is still a highly competitive environment for venture capital. There is still a lot of capital out there, even if terms and valuations have become more conservative.
Funds that are able to invest over the next two-to-three years are likely to have a relatively better investment climate in that the VC cycle seems to have begun to turn toward the end of last year. I think that's anecdotally visible all the way from capital terms being imposed on new companies to the fundraising environment to the investment environment within VC. As that cycle turns, the opportunity set over the next two-to-three years could be relatively attractive.
Trusted Insight: What geographies and what sectors are most intriguing to you right now in terms of venture capital?
Daniel Parker: That's a big question. The U.S. continues to be a global innovation engine and center of excellence, and I don't expect that to change. One thing that's interesting within the U.S. is Silicon Valley has been and remains the hub for a lot of that activity, but there have also been great developments in other locations within the U.S. also. The tech ecosystem, including the ability to deploy capital, is becoming more diversified within the U.S., and that's a good thing.
We have some exposure in Asia, and that continues to be a rapidly evolving VC market. There will be ongoing opportunities there. As that market has scaled dramatically over the last decade, there are and will remain interesting focused opportunities despite the macro-level stress in China.
We are active in Israel in VC, and we see that as another global center of excellence for hard science, original research and early stage VC opportunities. Obviously geopolitical risk in that region is high, but it may be mispriced. Also, strategies that are driven primarily by intellectual capital may be less exposed to that risk than traditional assets on the ground in Israel.
I would like to learn more about the opportunity set in Europe – my expectation is that it may be a market that U.S. investors overlook when we think about technology and innovation.
Trusted Insight: What trends have you identified during your time as an institutional investor?
Daniel Parker: Realistically, the last few years have been pretty aggressive environment for capital deployment. I think it's been a party for the last few years. Now that the Fed has explicitly started removing the punch bowl, we'll see what affect that has. The cost of capital is likely to rise. Since early ’09, optimal results have basically been to be levered long risk assets. That is likely to change as monetary policy shifts and the cost of capital changes.
Trusted Insight: What challenges does Helmsley Trust face that are unique to foundation investing?
Daniel Parker: Relative to other foundations, one of our challenges is that we’re a relatively young organization, so we are still evolving and learning.
Even though endowments and foundations are typically grouped together by GP's, there are significant structural differences. Especially in an environment where the cost of capital has been so low that the front end of the curve has been pegged basically at zero for several years. The difference is driven by the fact that foundations, as opposed to endowments, have a statutory spending requirement. Endowments obviously have a budgeted spending requirement, but that's a potentially significant difference when an organization is under some degree of stress if you have the ability to adjust the budgeted spending plan. The statutory spending requirement for foundations does not flex with market performance. It's not a spread over LIBOR, T-bills or anything else, it's a flat five percent spending requirement. When the front of the curve is pegged at zero, it becomes a challenging hurdle.
To maintain the organization as a perpetuity (not all foundations are structured that way but many are), you then have to generate five percent real over time to achieve that mission of maintaining the organization as a perpetuity. That's probably the most significant challenge that we face that's maybe a little bit unique between foundations and endowments.
Trusted Insight: What's the number one lesson that you've learned so far during your career as an institutional investor?
Daniel Parker: The most significant lesson I’ve learned as an institutional investor is the importance of an empirically and analytically grounded investment framework, which also draws on a diversified background and skill set. I initially believed that my unconventional background (liberal arts undergrad major followed by service all over the world as a Marine before receiving an MBA) wasn’t particularly relevant to investing, but I have since learned the opposite. I now know that a broad perspective (geographically, culturally and historically) is indispensable for evaluating risk/return relationships in a world where markets are increasingly linked and time is increasingly compressed.
For more information on the Top 30 LP Rising Stars In Venture Capital, click here.