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Exclusive Q&A: Kim Lew, Co-CIO At Carnegie Corporation, A $3.4B Foundation

by trusted insight posted 6years ago 5918 views
Kim Lew is vice president and co-chief investment officer at the Carnegie Corporation of New York. Together with Meredith Jenkins, Lew’s counterpart, the foundation controls $3.4 billion in assets under management. Previously, Lew managed venture capital and private equity investments and before that public equities at the Ford Foundation for thirteen years. Before joining Ford, she worked in the Private Placement Group of Prudential and in the Middle Market Banking Group of the former Chemical Bank. Lew holds a bachelor of science in economics from the University of Pennsylvania’s Wharton School of Business and an MBA from Harvard Business School (HBS). Lew is also a chartered financial analyst. 

Lew was recently named to Trusted Insight’s list of the Top 30 Chief Investment Officers at Foundations. She graciously spoke with Trusted Insight on Oct. 27. The following interview has been edited and condensed for clarity.

Trusted Insight: You are a graduate of both the Wharton School of Business and Harvard Business School. Tell me about those experiences and how they led you to the Carnegie Foundation?

Kim Lew: When I went to Wharton, I didn’t go there for the purpose of becoming an investment manager. I didn’t know anything about investment management. In fact, I majored in accounting and thought I was going to be an accountant. 

I realized quickly I liked accounting, but I didn’t want to be an accountant. So I went into commercial banking after college. I went to HBS after that because I didn’t have a great experience with the team I was working with in the commercial banking group I was in at Chemical. Even though Chemical was a great place to work, and I had an amazing training program where I learned a lot, it was a tough environment to work in. 

I decided to go back to business school at HBS, because I thought it was something I needed at the time. One of the things I struggled with was public speaking, and I thought that being at HBS, where class participation was such a huge part of their program, would serve me well. I can’t say that it worked, because I still had a hard time with public speaking then. It probably took me until 10 years ago to decide that it was something I was going to get better at and do. I was probably too young at the time. I probably needed a little more time. I went to HBS, came out and did private placements at prudential for a couple of years.

I’ve figured out that I am a negative indicator. Every time I go into a new position, things fall apart. I came out of college in 87, the market fell apart. I came out of business school in 92, the market fell apart. Then I was a prudential, it was a really hard time to be there. So I started to look for another opportunity. 

A friend of mine from business school, who knew almost nothing about finance – super smart, but not a finance person – let me know that his mother worked at the Ford Foundation. She was the director of research there, and perhaps I should talk to her if I was looking to make a move, because they were hiring. I’m not sure how I managed to do it, but I convinced the Ford Foundation that a person who had only done fixed income in their whole career could be an equity analyst. 

They created a position for me, and I became an equity analyst. I was fortuitously responsible for the technology sector in 94, right at the best time in the technology market and a huge run in those stocks. I was a tech analyst at the Ford Foundation from 94 to January 2000. I changed to private equity and as has been the pattern of my past, as soon as I got to private equity, the market fell apart. I did private equity at Ford until 2007. Then I came to Carnegie in late 2007, and in 2008, the market fell apart. I have been here since then. So when you hear that I am moving to a new job, you should be worried.

Trusted Insight: What is your investment philosophy, and how has that train of thought been informed by your time at Wharton and Harvard?

Kim Lew: My investment philosophy fundamentally was shaped by being at Foundations for the bulk of my career. But for sure, both of my educational experiences supported it. 

I would say that my philosophy is to look for inefficiencies, to be a value investor and to take advantage of the fact that we have really long-term capital. We really look for opportunities where people who have a short-term mindset can’t play effectively. I think that’s the only thing that really differentiates us. Also our size. We are big enough to be relevant, but small enough that we can go into esoteric markets. 

That’s fundamentally how we invest. We analyze inefficient assets, assess how they compare to each other, their risk-reward tradeoffs and we focus a lot on manager selection. 

We understand very clearly that we are in the business of taking risk, and we know that we have to do that. Our job is to take risk and mitigate it. That’s the philosophy on this team and we try to impress upon the team that everything is not going to go well. It’s something I learned once I got to the Ford Foundation, because the woman I reported to said to me “You don’t have to be right all the time. You just have to be right 51% of the time. And you have to be more committed to your winners than your losers.” 

That’s the philosophy we have here. I tell people all the time, “If you are afraid to take risk, then we are never going to make money. There’s not a problem if we make an investment and it doesn’t go well. There is a problem if we make an investment and something happens that we did not price into our underwriting.” 

So if a risk happens that we had no idea about and we are caught off guard, then the team has failed, because the team is supposed to identify potential risks. If something happens and we knew it was a risk, that’s just what investing is. We underwrote to that, and the return potential hopefully compensated us for that. There is a real push for us to identify risk and be able to decide for ourselves how much money it’s going to cost to take on that risk.

I think that HBS is so holistic, and it really does spend a lot of time thinking about all the factors that go into creating and destroying value. The integrated way the school happens influenced me. Wharton teaches value investing. They teach all kinds of strategies to look for inefficiencies. It was a good combination, the two. 

I worry sometimes that the big downside of my education is that I didn’t do enough liberal arts. I think that’s important. I think that’s a correction in our team. We have a team full of people that have a much broader set of backgrounds and skills. A diversity of backgrounds, a diversity of opinions makes a huge difference in how we think about things. I was an accounting major and Meredith was an English major. I think that’s a good combination. People need to see things from different perspectives for us to be really good at what we do. The world is changing, we have to invest globally in order to be effective, and we have to understand how all the parts work together. School helped a lot, and how we’ve constructed the team makes a big difference there.

Trusted Insight: I’m glad you brought up Meredith Jenkins, your co-chief investment officer, and the overall structure of your team. Tell me about your dynamic with Ms. Jenkins and how that fits into the team. 

Kim Lew: The reason why it works is because we had a relationship before this construct was put in place. We had, in the past, talked about working with each other and doing something more entrepreneurial. That would have been in a partnership structure. That is very much the way we operate now, in a partnership structure. If this was a GP, we would be the two lead GPs of an organization. They make decisions, and they have different strengths. That’s the way we look at it. 

In order to make sure we don’t bottleneck the way our team flows, we have divided the universe in a not elegant way and not always a clear way. For half of the portfolio, Meredith is the primary and I am the secondary, and vise versa for the other half. 

When you are the primary of an asset class, your role is to support the directors with respect to those types of investments, help them do due diligence, help them to cultivate relationships, make sure that they have a developed and well-thought out strategy for executing in their asset class that is commensurate in our overall strategy for the portfolio. 

If you are the secondary, you are the devil’s advocate for that investment. Your job is to really come up with and think strategically about risks that may or may not be possible for someone really close to it to identify. We are also supposed to be able to think of alternatives to investing in that asset class that would get us the same thing in a more liquid fashion or a lower risk or a lower volatility way. You just want to look at it very objectively. You are not as close to it, not as intimate with the manager. You think about its role in the portfolio over its role in the asset class. 

The primary really focuses on finding the best in an asset class or best in a structure, and the secondary focuses on its role in the portfolio and how good or bad of a fit it would be for what we’re doing overall. 

We divide administrative things, which is great because things that might take up a lot of time, we do half of it. Each of us does half of the performance appraisals. One person does contracts, and another person does budgeting. We switch off auditing between us every other year. All the administrative stuff, we divide and switch back and forth. 

For big things like asset allocation and investment committee management, we do that together. Because we are sort of grounded in the same philosophy of how to manage assets, we don’t tend to have a struggle when coming up to what we are most comfortable with. Oftentimes, if there are things that we marginally think of differently, the market sort of dictates in some respects where we go, and we spend a lot of time with the team getting input. We talk it out. 

It’s in many respects a marriage, and we have a lot respect for the way the other person thinks. So far it’s not been a problem. With these type of things, you never know if something’s going to be different at some point, but right now it’s worked out really great. 

I think one of the challenges that CIOs have is not having anyone to talk to. You clearly don’t want to expose yourself to the investment committee in things that you are concerned about and challenges that you might be having, both with respect to markets and with respect to team. We have each other. We can bounce ideas off each other, and we can come up with really constructive ways to handle things that arise, because we are both vested in the same portfolio and its success. We are not in a position to judge each other, like the way an investment committee judges you.

It’s been wonderful. I don’t think it could work with everybody, because you have to fundamentally trust the person and believe that the person is not trying to do anything destructive to the relationship. 

Trusted Insight: At the ford foundation, you were heavily involved in venture capital and private equity. What is your outlook for the industry? Are we in a bubble? 

Kim Lew: The very nature of venture creates bubbles and bursts. 

The bottom line is that as an investor the one thing I want my venture capitalists to have is optimism. You can’t be a good venture capitalist if you don’t believe you can create something out of nothing, or the potential exists to create something out of nothing. Fundamental to their core is a sense of optimism and a little bit of master of the universe. 

Making sure that they can operate in the context of the market, that they can dampen down the optimism, and there’s some arms around it to keep it from getting crazy, is important. However, the market will have bubbles by nature of who the people are and by nature of what the market is.

Do I think we are getting close to bubble territory? Things are over valued for sure. There are things that are going on, that we keep saying we are not going to do again, that are definitely happening. For sure, the venture capital market was in a bubble all the way from 1997 to 2000. It took until March 2000 for it to burst. 

These bubbles can last for a while, and it’s hard for me to tell you when the bubble is going to burst. Do I think that things are overvalued, strictly based on long-term potential of some of these assets, I would say yes. But arguably not, if you think about where venture capitalists might or might be able to exit. That timing game is something venture capitalists are going to get caught up in over and over again. We, as LPs, have to be cognizant of that and size it accordingly and make sure that we are comfortable with the level of risk in our portfolios with respect to venture. The ability to navigate these cycles is tough, and it is one of the things that really differentiates a top quartile venture capitalist from an average venture capitalist who will often give back all of the good performance when the market corrects. It will play out, over and over again, in a cyclical way. 

Private equity, people often argue that it’s different from equity, but it’s equity. It’s just equity without as much perceived volatility, and with leverage. You have the same market dynamic. Exit values are tied to the public markets even if it is an acquisition. There are tons of different factors that go into making buyouts good or not, such as operational improvement and economic factors, but valuations are tied to public market multiples. 

We are concerned about what rising interest rates will do to the buyout space, in real estate specifically because those are leverage markets. We are focusing much more on strategies that don’t require a lot of leverage or have strategies that allow it to have fixed rate debt, if they’ve got to have debt at all.  Preferably debt that is paid down and possibly assume-able by a buyer.

We know that when interest rates rise, there will be margin compression. We want people to be disciplined about how they are buying, because we think that the selling market we be very different than the market we are in right now. That naturally pushes us toward turn-around and more distress-y type things, because that’s where the valuations are a little lower. That said, there’s not a lot of it out there. For a variety of reasons, there are issues. That’s how we think about privates right now. 

Trusted Insight: Is there anywhere, either geographically or a certain sector, where you are looking for sustained growth?

Kim Lew: The market for private equity and venture is a global market, unfortunately. In the past, you could go to different markets and get a discount in valuations. That’s harder to do now. Usually the discount is because of a reason, and you have to know that your GP is good at navigating those reasons or that people are mispricing them. 

Global growth is slowing. There are pockets of growth in different places, but where there’s growth, there’s oftentimes underdeveloped markets that make it challenging for you to have good quality exits. 

We are biased, quite honestly, to the U.S., because it takes out some risk that we are not as comfortable pricing. You take out rule of law in some respects. Look, things happen here where regulations and laws change that will disrupt your investing, but you have at least a little bit more, or a lot more, of an ability to look through and rely on the rule of law here. We are a U.S.-based foundation, and we mostly invest in the U.S.; we don’t have currency risk that might be a problem for us. 

The tendency to be biased toward the U.S. and the way we invest, that’s true about private equities and venture as well. However, we do invest in Asia in our private equity portfolio. There was greater evidence of a strong local market that could support the growth of these companies and improving talent. They are not as developed markets, and there is a ton of risk in that. 

In all cases, there is not an asset class or geography, at this point, that we don’t feel strongly that you have to be a good manager and a good asset selector. I don’t know that we can say that we love any one market. We love managers within a market that we think see things differently.

Trusted Insight: What trends have you identified that are unique to foundation investing?

Kim Lew: Foundations are very aware of the fact that we have no inflow of capital. As a result, we faced a liquidity crisis last time [the market crashed]. As much as people thought it was an asset allocation issue, it was really a liquidity issue. 

You had to make sure you had enough money to support the organizations that are the principal business of what is done at our firm. The principal business of the Carnegie Corporation is not investing. It is grant making to education, immigration and world peace. As the markets go down, the needs of our grant makers does not change. We have to be very conscious of the fact that we have to meet our obligations. 

There is an increased focus on liquidity management and liability management. That’s the lesson learned in 2008. I don’t think that’s changed. The way people are attacking it is different, and the way people are thinking about it may be different, but in reality I think foundations are stretching for returns, oftentimes taking on more risk. Sometimes it’s real, sometimes it’s perceived, but there is a lot of risk in foundation portfolios. 

Foundations are starting to think a lot more about the globe and looking for opportunities around the world. I think there’s a real bifurcation in the market between the really large foundations and the small ones and how they are managed. The outsourced CIO model is an interesting trend. We will see how that develops. 

There are a lot of different things happening in the foundation community, but the focus is on returns in a slowing environment, because we do have what is basically an 8% hurdle, no inflows of capital and no security blanket in the way that others can look to their tuition or fundraising as a way to supplement when markets are bad. We don’t have that option. I think people are really aware of that, and it became clear in 2008.

Trusted Insight: What is the #1 lesson you’ve learned during your career as an institutional investor?

Kim Lew: The number one thing I would tell people: choose a good team. You will get the best experience with a good team - a team of quality people who are going to invest time in developing you and making sure you are learning the lessons. 

The biggest benefits to my career and my ability to be a good investor had to do with great sponsorship and great mentorship from talented investors. That made all the difference in the world. I think there should be increased emphasis on making sure you choose good places with talented people. 

I would advise people to be intellectually curious and be continuously looking for new and interesting things, because it’s awfully hard to say what the next great thing is going to be. If you have a broad block of knowledge, which is to my point about having diverse teams where people have different strengths, it is important. It is hard to predict which thing is going to take off at any moment and being able to translate what you’ve learned in one area into another is important. It goes back to having good teams and having a good base of support. 

Trusted Insight: What is the most exciting thing your foundation is helping to fund right now?

Kim Lew: One of the great things about Carnegie is that it has stayed amazingly close to his founding mission of the organization. Andrew Carnegie felt like and actually did pull himself up by his bootstraps and was able to come from being a poor immigrant to the United States to being the wealthiest man of his time and probably of any time. We show on our website that his equivalent wealth in today’s dollars would be about $309 billion - sort of dwarfing Bill Gates. 

His idea was that the way to be successful was to have access to information and access to education. During his period of time, he did that through funding public libraries. We do it through K-12 public education and trying to improve the quality of that. We do great work in that.

He was also an immigrant and felt strongly that this country needs immigration. But If you came here, you should become an American citizen, and you should be engaged in the process. Our democracy program is still focused on civic engagement and democracy and immigrant rights.

Lastly, he fundamentally believed that if people just talked to each other and if people understood each other, there would be no more wars. So he funded the peace palace in The Hague, and we continue to focus on our international peace efforts. We are trying to get rid of nuclear weapons and lots of pressure points throughout the world. We have a Russia program; we have a China program; we have a Middle East program. We spent a lot of time bringing together people who dialogue on the points that are creating conflict and try to build some understanding. It’s the same philosophy that Andrew Carnegie had originally, and we continue to promote that.

I think that we do good work. We do a lot of stuff that people don’t do anymore. People don’t fund world peace. It’s hard, it’s amorphous, it’s immeasurable. The fact that we continue to support that is great. There’s not a lot of support for immigration work in civic engagement and democracy either. I think all of the things we do, we are investing in the long-term health of the United States and the world. I’m grateful for this work.

Trusted Insight: What does it mean to you to be a part of one of the oldest, most prestigious foundations in the U.S.?

Kim Lew: I tell people all the time: If you want to work in investments at a foundation, then your principal passion should be investing. If your principal passion is the work of the organization, there’s going to be a disconnect. 

That said, you have to care about the work that is being done, and it has to motivate you, and it has to reward you. We all know you make a lot less money working at a foundation than you would working at a for-profit organization. In order for you to be happy, that has to be meaningful to you. 

I feel pretty passionately about the work we do here. I can’t say that I knew that I would when I joined, but I’ve grown to love it. I grew up a poor kid in the Bronx, and education made a huge difference in my life. If it weren’t for access to public education and what it did for me, I wouldn’t be here. I come from an immigrant family, who became citizens and became engaged. The work we do here resonates powerfully with me. I don’t think there’s anyone out there that doesn’t care about world peace, even if they decided they can’t tackle it because it’s too big. 

Trusted Insight: What have I failed to ask that I should know about you, Carnegie Corp. or foundations in general?

Kim Lew: I can’t put enough of an exclamation point on how what we do, how we do it and how it will ultimately continue to make us really good at Carnegie is the fact that we have a really great team with diverse thoughts and diverse backgrounds. 

Diversity is such a huge part of Carnegie, and it has made a huge difference in the dialogue we have, how we engage and how we create value. I would be remiss in not saying that we are a team that is more women than is probably typical, even in the foundation space. We have people from all over the globe, as far as where they’ve lived and where they grew up. The one thing that we are not sufficiently diverse in is schools. We all come from the same schools and that’s the common strategic bent that binds us. 

We think about things from a slightly different perspective. Some people come from a not-for-profit background, a development background. Some people come from real estate. Some people come from a much more technical background. We have east coast, we have west coast, we have people from the middle. All of that makes for really healthy conversation. That’s an important part of who we are. 

To learn more about the investors powering the world's top foundations, check out Trusted Insight's list of The Top 30 Chief Investment Officers At Foundations.