Daniel Parker is the deputy chief investment officer at Texas Tech University. Prior to joining Texas Tech, Dan was a senior investment officer at Helmsley Charitable Trust, a vice president in private equity at BlackRock and 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 B.A. from Tulane University. Daniel was named on Trusted Insight's list of Top 30 LP Rising Stars in Venture Capital in 2015.
Dan will be discussing the future of investment management at the Trusted Insight Alpha Conference on Wednesday, June 14, 2017 in San Francisco. Here, he gives us a sneak preview of what to expect:
Trusted Insight: Congratulations on your new role as Deputy Chief Investment Officer at Texas Tech. How have you been adjusting to your new position?
Daniel Parker: Thanks. This is a fantastic opportunity. First, the transition to Austin, Texas after several years in New York is a big change. Professionally, it's a chance to assume a senior role on a very capable team and ramp up on a new portfolio. The portfolio construction here is relatively unconventional. I'm still getting up to speed on the asset allocation framework and the managers within the portfolio. We’ll be focused on optimizing both portfolio structure and specific allocations going forward.
Trusted Insight: How do you plan on repositioning the private equity and public equity portfolio looking forward?
Daniel Parker: On the public equity side, the most unique thing about the Texas Tech University portfolio is that a lot of the exposure to relatively efficient sectors or geographies (typically characterized by lower dispersion) within public equity are achieved synthetically, using a pool of low-volatility, absolute-return streams, which are collateralized to fund the derivatives. That is an unusual portfolio framework, but the purpose is to both be cash efficient and also allow the staff to focus on alpha-oriented strategies and opportunity sets rather than devoting a large amount of time and effort to selecting managers and strategies with low dispersion. That said, there are still some less efficient markets where more direct active management makes sense, such as emerging and frontier markets.
On the private side, the biggest change is that the University has not previously been very active in venture capital. Having been part of building out Helmsley Trust's venture capital program over the last few years, I have an opportunity to build a program from scratch. It's something that we're very excited about. It is an unusual opportunity and the potential positive impact on the portfolio, if we're able to develop the right relationships, can be significant. Across the rest of the private capital portfolio, we will be working to optimize both the structure and the specific relationships.
Trusted Insight: We're honored that you'll be joining us as a speaker at the Trusted Insight Alpha Conference, where you will be participating in a panel on the future of investment management. Do you see any real world weaknesses or problems with the 2 and 20 fund fee model and, if so, are there any viable alternative fee structures?
In private capital, the crystallization of carry before there are distributions, as well as the use of aggressive manager catch-ups, are likely to come under increasing scrutiny and pressure.
Daniel Parker: There are a lot of problems with it. The biggest is that in many cases, the fees have not been justified by performance (including disappointing absolute and risk-adjusted returns, as well as both higher betas and lower alphas than advertised). Another is that management fees have been allowed to become a significant driver of profits for many mature GPs and that creates an incentive misalignment. In private capital, the crystallization of carry before there are distributions, as well as the use of aggressive manager catch-ups, are likely to come under increasing scrutiny and pressure.
Viable alternative fee structures going forward are likely to include a combination of lower management fees, preferred returns or hard hurdles for incentive fees/carry and the alignment of carry with distributions to LPs. Managers who are consistently able to produce alpha deserve to be compensated, but there are more pretenders than contenders.
Trusted Insight: What are your thoughts on this year's public markets? Why have so many funds, especially endowment funds, have been losing money recently in the public equities category?
Daniel Parker: There are a few reasons for it. One, it's a broadly challenging time to be an investor, whether a general partner or an allocator. Sustained low rates globally and the continued trend downward, including negative rates, imply both low inflation and low future returns. These policies have now been in place for eight years, and while they managed to alleviate the global financial crisis, they have failed to reignite growth. Geopolitical risk is also high, as illustrated by a series of recent events, including the Arab Spring, Brexit and the U.S. Presidential Election. There is broad discontent globally with the structure and solutions that have been imposed on markets and political systems. Policy responses have not proven to be solutions, and so the discontent continues to percolate.
Trusted Insight: Do you believe there's a high correlation between public markets and private markets?
The search for increasingly esoteric diversification parallels the search for yield in a world of persistently low interest rates.
Daniel Parker: Yes, there is a much stronger connection between public and private markets than many private markets managers generally acknowledge. Within that relationship, the biggest variable is time, since there is a much lower sampling frequency in private markets. This contributes to an illusion that public and private markets are more distinct than they actually are. For companies competing within a specific sector, the private or public nature of their competitive set is not as relevant as dynamics like Porter’s Five Forces, SWOT analysis, etc.
Trusted Insight: As somebody who has a lot of experience in both public and private equities, if you're a portfolio manager, would you monitor the covariance risk between your public holdings and your private holdings to make sure you're well-hedged? Or would you treat public and private portfolios completely separate?
Daniel Parker: No, it is important to think about them as an integrated entity (the same is true of portfolios as a whole). The differences between which side of the balance sheet you're on (equity versus fixed income) are more significant than public equity versus private equity. The covariance of public and private equity, viewed over longer time frames and at a parallel sampling frequency, is likely to be high. At shorter time intervals, the normal difference in sampling frequency (intra-day versus quarterly) may be deterministic and can cause public and private markets to appear less connected than they are.
Trusted Insight: Recently there's been a lot of chatter around tech IPOs. There's been a surge in tech IPO filings. Do you have an opinion on the public tech market within the next year?
Venture capital has already come to see IPOs over the last year or so as the new down round. If there's a glut of IPOs during a relatively limited window, that could reinforce that impression. At the same time, it creates an opportunity to recycle capital and asset-level performance has been strong, then even if managers give back a portion of the most recent NAV mark in the process of generating that exit, it could still be very positive for realized returns. It will be interesting to see how long this IPO window stays open.
Trusted Insight: How do you see investment and diversification strategies changing in the next five years? In your experience, what are common cyclical trends that you've noticed that influence allocation strategy?
Daniel Parker: The current cycle has been relatively elongated, ironically at a time when technological trends and other parts of our daily lives seem to be accelerating. The search for increasingly esoteric diversification parallels the search for yield in a world of persistently low interest rates. In addition to encouraging investors to move further out the risk/return curve, sustained low rates have also encouraged investors to search for new facets of diversification and to continue to search for less efficient portions of the market and of the world.
That search does not typically end well, since capital flows can reverse rapidly when the cycle turns. Capital flows in the most esoteric, most diversifying assets will probably reverse more violently than they may in larger asset classes. To the extent that the current cycle is able to continue to grind along, that diversification and the search for esoteric sources of return will persist. As a result of the duration of generous central bank policy, there's now an accumulated inventory of assets purchased over the last several years using low cost leverage, many of which may not have broadly understood full-cycle performance characteristics. Those records will be created during the next recession or sustained market downturn, which is likely to occur within the next five years.