The James Irvine Foundation’s Size ‘Provides A Set Of Competitive Advantages’ | CIO, Treasurer Tim Recker | Q&A
Tim Recker is the chief investment officer and treasurer at The James Irvine Foundation, where he manages the foundation’s $2.3 billion endowment, and develops its investment policy and strategy. In this interview, he discusses the Foundation's set of competitive advantages that allow them to generate attractive returns over the long term; why the Foundation's allocation to venture capital is overweight relative to its peers; and his take on artificial intelligence and investing in businesses that properly harness AI.
He is a member of the foundation’s executive team. Previously, Recker served for 10 years as the managing director of private equity and real assets for the Regents of the University of California. Prior to that, he was the director of alternative investments at the Michigan Retirement System and a portfolio manager of a $5 billion multi-asset portfolio for GE Asset Management.
Tim Recker spoke on the 'Distinguished CIO' panel at our Machine Learning Summit in June 2018. He was recently named as one of Trusted Insight's 2018 Top 30 Foundation Chief Investment Officers.
Trusted Insight: You were previously at the University of California Regents, with over $9 billion in assets. What are the key differences between working at a large institution versus a smaller one?
Tim Recker: The University of California has more than a $100 billion dollars in total assets. The scale between the two programs is substantially different. The private equity portfolio, which is a subset of the overall program at Regents, is more than double the size of Irvine's entire portfolio.
"Smaller pools of capital, such as Irvine's size, provides a lot of flexibility and nimbleness and provides a set of competitive advantages that allow us to generate attractive returns over the long term."
First and foremost, you have to look at each organization. Look at your competitive advantages to determine the best way to align your investment strategy. When you're investing at that scale, it requires a different strategy and implementation to be effective. Smaller pools of capital, such as Irvine's size, provides a lot of flexibility and nimbleness and provides a set of competitive advantages that allow us to generate attractive returns over the long term.
Trusted Insight: How has the Foundation's portfolio evolved under your leadership?
Tim Recker: First and foremost, I was fortunate to inherit an exceptional portfolio from my predecessor who was with Irvine for 15 years. The portfolio was already concentrated, but I increased it by taking from a top 25 managers across the entire portfolio from two-thirds to 80 percent of the portfolio today. That has been an intentional decision to concentrate further into our highest conviction partners.
"In terms of our venture capital allocation, it's a high-class problem. We have a high concentration of unicorns with almost 10 percent of the entity in 12 unicorns."
Private investments were almost 40 percent of the portfolio. We brought that down to 32 percent. More importantly, our venture capital exposure was 29 percent of the total portfolio and it is currently 24 percent of the entity. Those are the most immediate changes. Now, some of that is just natural liquidity coming out of the portfolio, but we also took some actions to realign the venture capital exposure in the portfolio.
Trusted Insight: The James Irvine Foundation has 24 percent of the portfolio in venture capital. Do you see any upcoming structural changes or trends in the VC space?
Tim Recker: Venture capital is a strategic part of the portfolio. We have a significant overweight relative to our peers and a lot of that is due to great access. I think venture can be very different for each investor depending on their own access. In terms of our venture capital allocation, it's a high-class problem. We have a high concentration of unicorns with almost 10 percent of the entity in 12 unicorns. How we get liquid on these in the future is a really critical component of our success.
Venture as a whole seems frothy as the industry has been raising a lot of money and the valuations are much higher than they used to be. That said, there's a lot of innovation and technology is impacting almost every industry.
Trusted Insight: Many claims that there is some kind of bubble in the space. What are your thoughts on that?
Tim Recker: I think valuations are certainly robust. As an outsider looking in, yes, it's logical to look at it and say, "Wow, it feels like a bubble." But the companies created are real. When I look at the unicorns in our portfolio, am I'm confident that Airbnb is a real company? It is. Do I think it's going to go away tomorrow? No.
What's it worth? That's a much harder question. Do I want to own that over the next decade? Yes. Valuation questions are tough to answer. If you look at the top 10 public companies by market cap in the U.S. today, you'll see a major shift compared to a decade ago. Today, most of those public companies are technology-oriented. Technology is no longer within its own sector. It's affecting all industries. It really is about the transformation of the economy from technology.
"We've had our best venture managers investing in AI before it has been properly coined. Those are more likely to be the big winners."
Back to venture, is it a bubble? I don't know. I think valuations may be ahead of themselves, but I don't think it's an issue of real companies not being created. This is not 98-99 of just things that are a flash in the pan. There are real businesses and real activity with the ability to make profits. Are there a lot of other companies that have elevated valuations as a result? Probably. It's the ones that aren't going to achieve a great outcome where you're going to feel the pain. It's the handful that makes it that are going to justify the portfolio. This goes back to access and how many of those great companies are your managers able to capture.
Let’s look at it from a different lens. If you invested at today's valuations, the sort of gain that you would have is nowhere near what people made from investing in venture companies in 2011 and 2012. In the buyout realm, if you look at purchase price multiples and think about the implications and say, "Wow, it's really at peak pricing." Venture is about what ownership you get for the dollars you put in. Currently, it quite expensive by historical standards, so you get a lot less ownership for more money, and that means effectively you're paying a higher price. Even if you pick right, will you make the same attractive returns in the future? It will definitely be lower than what it has been for equivalent companies. But the question is, is there enough innovation, enough value being created that justifies that pricing?
Trusted Insight: Facebook recently lost over $120 billion. Do you see any domino effect from this in the foreseeable future?
Tim Recker: Honestly, we just don't think in months, we think in years and hopefully decades. Obviously, the months create the years and the decades, but there is a long-term secular shift in the economy due to technology. Obviously, Facebook and Google and others have been the beneficiary of that. I have a strong belief that there will be more technology companies that will be created, that will add value.
Could there be short-term disruptions like this because valuations get ahead of themselves and expectations? Yes, but it's a longer arc and I think you're going to see a pretty positive, upward trend.
Trusted Insight: About a century ago, electricity started disrupting every major industry like agriculture, health, etc. Some consider AI the new electricity. What are your thoughts on AI and its impact on your organization?
Tim Recker: There's no question that AI is going to be impactful. How it will work its way through the economy and impacts businesses, we're all still learning that. Clearly, a lot of existing businesses are applying techniques that new businesses are creating. The opportunity is to invest in new businesses that take advantage and harness AI and you'll have a lot of value creation. You have to also look at legacy businesses and their ability to apply AI. If they are successful, how does that change their trajectory? Does that rearrange the competitive landscape?
Trusted Insight: Are you currently speculating and waiting for technology to mature a bit more before you'd invest more into AI companies?
Tim Recker: By the time the word is commonly understood, the best investment ideas have already been created and invested at the early stage in venture. We've had our best venture managers investing in AI before it has been properly coined. Those are more likely to be the big winners. Some of those companies are formed earlier in the process and therefore get an early lead. In order for us to make a more tactical tilt in our own portfolio, that would apply to something more dramatic and we haven't chosen to target a dedicated AI fund. We feel that we have a great set of long-term venture partners and they are able to pivot and strategically adjust their portfolio based on these type of opportunities. This provides us with a significant exposure to AI in our venture portfolio.
Trusted Insight: Is there anything that you'd like to add?
Tim Recker: Irvine's mission is to help the people of California. We're solely focused on the state of California. Our mission is to create opportunities for the people, particularly for families that are working and struggling with poverty. We are very proud of that mission and it's really important that our investment partners understand that their success is what allows us to meet our mission as an organization. Currently, this allows us to give away about $100 million a year towards that objective. We are a mission-driven organization and everything that we do is about impacting the lives of Californians in a positive manner.
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