Steve Groves is an investment officer at University of Rochester where he is responsible for the endowment's real assets holdings. In the following interview, Groves speaks about high real estate valuations, de-risking the portfolio and the team effort that makes the University of Rochester investment office successful.
Previously, Groves worked in the risk department of Manning & Napier. Groves holds a B.S. and B.A. from State University of New York at Fredonia and an MBA from the University of Rochester.
Mr. Groves was recently named on Trusted Insight’s ranked list of the Top 30 Real Estate Investors At Endowments. He graciously spoke with Trusted Insight on May 31, 2016.
Trusted Insight: You've worked at the University of Rochester for more than sixteen years. What has kept you around?
Steve Groves: It's a few things. The work is always interesting and continues to get more interesting as conditions change in the world. The ever-evolving conditions in the world always make it interesting for us as we adapt to the changes.
We've got a good team here. Most of us have worked together for a long time. Several of us have been here for the sixteen years I’ve been here. Even our “new” folks have been here for quite a number of years now. We have a solid and stable team that really enjoys working together. The combination of the work and the team has helped keep me here.
Additionally, it's also knowing how the end result of our work benefits the University community; that is always something that we keep in mind. Whether it's paying for student financial aid, faculty salaries, etc., there's that knowledge that what you’re doing really benefits the University stakeholders.
And lastly, it’s a great feeling working at your alma mater and being able to work to help your school in this way.
Trusted Insight: During your time at the University of Rochester, what trends have you identified that have shaped or are shaping institutional real estate investment?
Steve Groves: I think one interesting trend has been the growth of real estate managers - how large some firms and their funds have gotten. Often to be of detriment for returns. As we’ve observed fund sizes grow, or the number of strategies may grow at a firm, the results often don’t hold up.
I think it’s natural for managers to want to grow larger, with a few exceptions, both for the economics of it as well as the prestige of it. It's always a factor to watch out for, because many groups have not been able to maintain the returns that they generated when they were much smaller. It may result from targeting different size or types of transactions, it may be growth in the team, it may be the loss of talented personnel – there are just a number of red flags to monitor.
Trusted Insight: What do you look for in a manager?
Steve Groves: We’re typically looking for the sweet spot of talented managers that have not grown too large, but conversely, not targeting newer, smaller managers either. For the new managers, there are often growing pains with a first-time fund. They may be the size that you're looking for, but there's a lot of learning as they form their own firm. You can find talented teams or even a talented individual who spins out of another firm, and they've got a great track record, but they may not have the experience managing an organization, pulling a team together and overseeing a group like that without the broader organizational support that they previously had around them.
We try to find the happy medium in there. There are, of course, many other factors including independent ownership, a large GP commitment to the fund to ensure that they are properly aligned with the LPs and a repeatable, understandable investment process.
Most importantly, it’s a people business. We seek experienced managers with a strong track record, who have worked together as a team for some time. We’re obviously writing large checks, so they must have the highest integrity and strong references.
Trusted Insight: What did the real estate portfolio look like when you arrived, and how have you evolved it since?
Steve Groves: It was fairly small back then, as was our overall alternative program. The real estate program was a pretty undeveloped area as there were not specific criteria that the University was targeting. Over time, I think we've really built up a strong roster of quality managers that are positioned to have success going forward. We've identified a core group of managers that will make up the bulk of our exposure. We expect to be a little more concentrated to this core group than in our early days in real estate.
Trusted Insight: While we're talking about is mostly real estate. You're also in charge of the larger real assets umbrella. How are you positioning the real assets allocation to mitigate current market challenges?
Steve Groves: We try to have a balance between the two sides of the portfolio. Knowing that these are cyclical industries, we're trying to balance exposure in the real estate and natural resources side as we know they may not both perform well at the same time. We try to identify lower risk strategies in the real estate portfolio to help to offset some of the higher volatility or higher risk managers we have in the resources portfolio. That's not to say there is low risk in the real estate program; we tend to focus mostly in the moderate risk area of the value-add space.
Trusted Insight: What's your outlook for real assets in the near to medium term?
Steve Groves: We're trying to be opportunistic and take advantage of the lower price environment, and I think we've been pretty effective there in finding some quality managers that are just starting to deploy capital – either recently or in the immediate future – and closing in on some attractive transactions in this environment, especially in energy and oil in particular. Besides oil, commodities have been tougher because the oversupply there makes it hard to predict when a recovery is going to come. That's an area where we're pretty cautious these days.
Trusted Insight: What keeps you up at night?
Steve Groves: Valuations are always a concern. As mentioned, real estate valuations are getting up to pretty high levels again with high levels of debt. Conditions that many said we'd never see again just a few years ago have come back into play now. It's definitely harder to find attractive transactions now. But we think we've found a few talented, experienced managers that are identifying some opportunities, though they can be a little bit harder to find.
Trusted Insight: What lessons did you learn from the last period of high valuation and high debt? How are you applying those lessons to avoid the pitfalls that may present themselves again?
Steve Groves: It's a combination of things that we mentioned. Finding that sweet spot between the small, emerging managers and the very large managers that are out there. Choosing managers with adequate flexibility to adapt to market conditions, but with the discipline to stick to their strengths. Concentrating more on the best ideas, not allocating to too many managers. There are plenty of good managers, but we’re looking for great ones to fit within our portfolio.
We have a fairly cautious approach, with a high hurdle for new funds that may be an upgrade or else a compliment to the portfolio. We're not necessarily swinging for the fences with the highest risk strategies, but instead trying to get good, solid, consistent returns and being mindful of the risk that some of the managers are taking. I think we've dialed back the risk level a little bit in the real estate portfolio.
Trusted Insight: What's the most important lesson that you've learned in your career so far?
Steve Groves: One of the big issues is just being cautious, being a constant cynic. I generally say, "Everything is a 'no' until you're overwhelmed and really convinced that something is a good idea." Sometimes investors can be a little too eager to chase the hot new idea or the hot new manager, and I think that risky approach can backfire. I think a healthy amount of skepticism, being the constant cynic has been pretty helpful.
Trusted Insight: What have I failed to ask that I should know about you, about real estate investment in general or about the University of Rochester Investment Office overall?
Steve Groves: One thing that is helpful to keep in mind is that it's a team effort here. Even though I'm the "real estate guy," it's still a team effort, and we’re all really generalists here. Any investment that gets some serious consideration is shared with the broader group for review. We try to make sure there's a consensus amongst the whole team and our CIO. Everything is presented to our investment committee for review and approval. It's not a one-man operation, and I would hate to have it labeled as such. We've got a good solid group working together here, and with our committee, to help build a quality real estate program.
To learn more about the the Top 30 Real Estate Investors At Endowments, click here.
Previously, Groves worked in the risk department of Manning & Napier. Groves holds a B.S. and B.A. from State University of New York at Fredonia and an MBA from the University of Rochester.
Mr. Groves was recently named on Trusted Insight’s ranked list of the Top 30 Real Estate Investors At Endowments. He graciously spoke with Trusted Insight on May 31, 2016.
Trusted Insight: You've worked at the University of Rochester for more than sixteen years. What has kept you around?
Steve Groves: It's a few things. The work is always interesting and continues to get more interesting as conditions change in the world. The ever-evolving conditions in the world always make it interesting for us as we adapt to the changes.
We've got a good team here. Most of us have worked together for a long time. Several of us have been here for the sixteen years I’ve been here. Even our “new” folks have been here for quite a number of years now. We have a solid and stable team that really enjoys working together. The combination of the work and the team has helped keep me here.
Additionally, it's also knowing how the end result of our work benefits the University community; that is always something that we keep in mind. Whether it's paying for student financial aid, faculty salaries, etc., there's that knowledge that what you’re doing really benefits the University stakeholders.
And lastly, it’s a great feeling working at your alma mater and being able to work to help your school in this way.
Trusted Insight: During your time at the University of Rochester, what trends have you identified that have shaped or are shaping institutional real estate investment?
Steve Groves: I think one interesting trend has been the growth of real estate managers - how large some firms and their funds have gotten. Often to be of detriment for returns. As we’ve observed fund sizes grow, or the number of strategies may grow at a firm, the results often don’t hold up.
I think it’s natural for managers to want to grow larger, with a few exceptions, both for the economics of it as well as the prestige of it. It's always a factor to watch out for, because many groups have not been able to maintain the returns that they generated when they were much smaller. It may result from targeting different size or types of transactions, it may be growth in the team, it may be the loss of talented personnel – there are just a number of red flags to monitor.
Trusted Insight: What do you look for in a manager?
Steve Groves: We’re typically looking for the sweet spot of talented managers that have not grown too large, but conversely, not targeting newer, smaller managers either. For the new managers, there are often growing pains with a first-time fund. They may be the size that you're looking for, but there's a lot of learning as they form their own firm. You can find talented teams or even a talented individual who spins out of another firm, and they've got a great track record, but they may not have the experience managing an organization, pulling a team together and overseeing a group like that without the broader organizational support that they previously had around them.
We try to find the happy medium in there. There are, of course, many other factors including independent ownership, a large GP commitment to the fund to ensure that they are properly aligned with the LPs and a repeatable, understandable investment process.
Most importantly, it’s a people business. We seek experienced managers with a strong track record, who have worked together as a team for some time. We’re obviously writing large checks, so they must have the highest integrity and strong references.
Trusted Insight: What did the real estate portfolio look like when you arrived, and how have you evolved it since?
Steve Groves: It was fairly small back then, as was our overall alternative program. The real estate program was a pretty undeveloped area as there were not specific criteria that the University was targeting. Over time, I think we've really built up a strong roster of quality managers that are positioned to have success going forward. We've identified a core group of managers that will make up the bulk of our exposure. We expect to be a little more concentrated to this core group than in our early days in real estate.
Trusted Insight: While we're talking about is mostly real estate. You're also in charge of the larger real assets umbrella. How are you positioning the real assets allocation to mitigate current market challenges?
Steve Groves: We try to have a balance between the two sides of the portfolio. Knowing that these are cyclical industries, we're trying to balance exposure in the real estate and natural resources side as we know they may not both perform well at the same time. We try to identify lower risk strategies in the real estate portfolio to help to offset some of the higher volatility or higher risk managers we have in the resources portfolio. That's not to say there is low risk in the real estate program; we tend to focus mostly in the moderate risk area of the value-add space.
Trusted Insight: What's your outlook for real assets in the near to medium term?
Steve Groves: We're trying to be opportunistic and take advantage of the lower price environment, and I think we've been pretty effective there in finding some quality managers that are just starting to deploy capital – either recently or in the immediate future – and closing in on some attractive transactions in this environment, especially in energy and oil in particular. Besides oil, commodities have been tougher because the oversupply there makes it hard to predict when a recovery is going to come. That's an area where we're pretty cautious these days.
Trusted Insight: What keeps you up at night?
Steve Groves: Valuations are always a concern. As mentioned, real estate valuations are getting up to pretty high levels again with high levels of debt. Conditions that many said we'd never see again just a few years ago have come back into play now. It's definitely harder to find attractive transactions now. But we think we've found a few talented, experienced managers that are identifying some opportunities, though they can be a little bit harder to find.
Trusted Insight: What lessons did you learn from the last period of high valuation and high debt? How are you applying those lessons to avoid the pitfalls that may present themselves again?
Steve Groves: It's a combination of things that we mentioned. Finding that sweet spot between the small, emerging managers and the very large managers that are out there. Choosing managers with adequate flexibility to adapt to market conditions, but with the discipline to stick to their strengths. Concentrating more on the best ideas, not allocating to too many managers. There are plenty of good managers, but we’re looking for great ones to fit within our portfolio.
We have a fairly cautious approach, with a high hurdle for new funds that may be an upgrade or else a compliment to the portfolio. We're not necessarily swinging for the fences with the highest risk strategies, but instead trying to get good, solid, consistent returns and being mindful of the risk that some of the managers are taking. I think we've dialed back the risk level a little bit in the real estate portfolio.
Trusted Insight: What's the most important lesson that you've learned in your career so far?
Steve Groves: One of the big issues is just being cautious, being a constant cynic. I generally say, "Everything is a 'no' until you're overwhelmed and really convinced that something is a good idea." Sometimes investors can be a little too eager to chase the hot new idea or the hot new manager, and I think that risky approach can backfire. I think a healthy amount of skepticism, being the constant cynic has been pretty helpful.
Trusted Insight: What have I failed to ask that I should know about you, about real estate investment in general or about the University of Rochester Investment Office overall?
Steve Groves: One thing that is helpful to keep in mind is that it's a team effort here. Even though I'm the "real estate guy," it's still a team effort, and we’re all really generalists here. Any investment that gets some serious consideration is shared with the broader group for review. We try to make sure there's a consensus amongst the whole team and our CIO. Everything is presented to our investment committee for review and approval. It's not a one-man operation, and I would hate to have it labeled as such. We've got a good solid group working together here, and with our committee, to help build a quality real estate program.
To learn more about the the Top 30 Real Estate Investors At Endowments, click here.