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Why The Rockefeller University Favors Active Management, Diversification | Thomas Lenehan, Deputy Chief Investment Officer | Q&A

by trusted insight posted 1year ago 2022 views
Thomas Lenehan is the Deputy Chief Investment Officer of The Rockefeller University, where he helps manage the University’s $2.3 billion endowment. He started his career as a financial analyst at Goldman Sachs. He slowly climbed the ladder and held various investment positions throughout his career including as a Senior Associate at Stone Point Capital, Principal at FTV Capital, Vice President at Vista Equity Partners, and lastly, Director at Commonfund Capital Inc. Lenehan holds an MBA from Stanford University and a B.S. in business administration from Georgetown University.

In this interview, he discussed how he and CIO Amy Falls built the investment office from scratch; how they are steadily increasing allocation to venture; and his perspective on transitioning from a general partner role to the limited partner side.

Thomas Lenehan was named on Trusted Insight’s Top 30 Endowment Chief Investment Officers.

Trusted Insight: How has the Rockefeller Investment Office evolved since you first joined the organization?

Thomas Lenehan: The University endowment is over $2.3 billion today. In 2010, the Investment Committee made a decision to hire Amy Falls to take over as CIO. She was previously the first CIO at Phillips Academy Andover. Prior to that, she was a 16-year veteran at Morgan Stanley and ultimately became their head of fixed income research.

At the time Amy was hired, the endowment was approximately $1.6 billion. She was asked to turn the portfolio around as performance had atrophied to the bottom quartile of our peer set for several years in a row. It would take some major restructuring to turn things around. 

"We rebuilt the entire team from scratch, starting with junior professionals that had some base level of work experience, but that we could groom and promote from within."

The first thing she did was to hire her own team. I was her first new hire, and Amy brought me on board from the beginning to be her Deputy CIO. She had used a deputy model at Andover, which served her well as it provides redundancy and helps divide the management of the endowment. From then on, we rebuilt the entire team from scratch, starting with junior professionals that had some base level of work experience, but that we could groom and promote from within. The original idea was that they would work at the Office for two or three years and then go off to business school or do something different. Our early analysts did such a great job, and they really liked what they did, that we created a path to promotion so they could stay. Two of our analysts were promoted, and now they're directors. We are still continuing the analyst program and currently have two analysts. One thing we like to do is stagger the analysts in terms of the vintage year of hire. That way they can train and mentor one another and ensure continuity of institutional memory. We have a total of six investment professionals today.

Everybody on the team is a generalist, and takes ownership of the entire portfolio. There is no head of privates or head of publics. Having said that, as the heavy restructuring from the early days has abated, we are evolving the operations whereby team members have certain majors if you will, in order to delve deeper into a particular asset class and fine-tune our manager selection. For example, I tend to spend more of my time on the private side of the portfolio, which is about a third of the total assets. That would include private equity, venture capital, natural resources, real assets, and real estate. Amy focuses more on the marketable side, which accounts for approximately two-thirds of the endowment. That includes public equity, hedged equity, and absolute return managers.

Trusted Insight: Many foundations and endowments lean more towards that generalist structure as they look to evolve to a next-generation endowment leader. Would you agree?

Thomas Lenehan: There are multiple ways to win. I would not advocate that one model works better than the other. It depends on the skill sets and the backgrounds of the people, as well as the culture that the organization is building or promoting. From our perspective, we felt it made sense to have a generalist structure because we're not super huge. I like to say we're small enough and the world is big enough in terms of opportunities that there is nothing that we should feel we have to do. That's liberating in lots of different ways. A nice big hunting ground in which to participate.

What we inherited was a more siloed structure, whereby there was a head of privates and a head of publics, neither of whom really interacted with the other, yet they both reported to the CIO. We were adamant to foster a culture where everyone on the team cares deeply about the performance of the entire portfolio. That's how we get compensated and that's how we keep the team focused and aligned with the University. What it does, I think, is force everybody to think long and hard about the options for that incremental dollar.

Trusted Insight: Can you tell us about Rockefeller’s venture program and its next steps? You have a background in private equity and venture capital space.

Thomas Lenehan: We've been steadily increasing our allocation to that sector of the privates. As it relates to venture, when I got here, we had one very large extremely well-known VC manager that ‘encouraged’ you to invest across their whole platform of funds. They had a China fund, an early-stage fund, a growth fund, even a green fund for clean energy investments. If you invested with them at all, you had to invest in everything across the stack. We also had nine incumbent healthcare venture capital managers, and that was the extent of our venture program.

"There are lots of Rockefeller entities out there, and we wanted to be sure to educate those managers about the unique history and mission of the University."

There were a couple of things that we thought were wrong with this approach. Number one, that huge family of products is fine, but not all those funds are created equal. We had to measure the totality of the relationship to see if, as a whole, it exceeded our hurdle. We came to the conclusion that it did not. We weren't getting enough of the stuff we really wanted, and we were getting too much of the stuff we didn't want. The manager was no longer a top tier franchise, and so we decided to end the relationship after 17 years.

Healthcare VC was over half of our total program. We think that there's an important role for healthcare VC, but it shouldn't be that large an allocation. We also didn’t think we had the right healthcare VC managers. We thought about selling some of these legacy partnerships in the secondary market, but ultimately decided not to do so, as the discounts to NAV were too extreme. Instead, we went about implementing a new-look venture strategy based on three main tenets. First, we decided to engage a fund of funds manager. In the beginning, it was just me and Amy, so we needed help right away. The fund of funds manager could act as an extension of our team, providing instant exposure and expertise until we were able to hire our own team. The second thing we did was we reached out to all the historically top-tier managers in the VC space to introduce ourselves. There are lots of Rockefeller entities out there, and we wanted to be sure to educate those managers about the unique history and mission of the University.

As an institution, we had never met these organizations before. We, therefore, put together a PowerPoint presentation to communicate who we are and what we do for a living. Rockefeller as an institution has 25 Nobel Prize winners all in the field of medicine or chemistry. Our mission has been the same since we were founded in 1901: "Science for the benefit of humanity."

"I was a GP who migrated to the LP side, which was helpful for me. It was a differentiator at the time, as you didn't see a whole of people going that direction."

It's a feel-good kind of a mission that doesn’t discriminate and never goes out of style; one that everybody can get behind and understand it. While we didn’t gain access to all of the top-tier VC managers, we did get some of the most established names, which is terrific. The third thing we did was target various next-generation VC managers that we felt could become top-tier with the seasoning of time.

Trusted Insight: What does it feel like to be so close to that level of research and those types of achievements?

Thomas Lenehan: It's incredibly easy for us to get out of bed in the morning to get to work. There is no additional external motivation needed at all because when we come here, we know that if can add an incremental dollar of value to the endowment, that dollar will directly go towards curing whatever ails the human race. If we perform better, that means we can hire another scientist or another head of lab who can help cure cancer or diabetes or Alzheimer's. It's an incredibly pure mission that applies to everybody in the world. We, therefore, can’t help but be extremely excited to be a part of it.

Trusted Insight: What ideas are you trying to get a better grasp of this tech-enabled world?

Thomas Lenehan: I was a GP who migrated to the LP side, which was helpful for me. It was a differentiator at the time, as you didn't see a whole of people going that direction, from GP to LP. I had a deep network that I could tap into. I also knew what it was like to sit in the shoes of a GP. I knew what it was like to source a deal, manage a process, add value to a portfolio company, and then ultimately to exit an investment. This experience helps me really dig in deeper under the covers and understand what differentiates a firm from the rest of the pack.

In terms of technology, it is the ultimate disruptor that is affecting every industry, including its own. In addition to managers that specialize in technology, we have teams that focus on healthcare, manufacturing, business services, etc. When we diligence any manager, we constantly inquire how technology is affecting their portfolio companies, both as a tailwind and a headwind. How are their portfolio companies utilizing technology to build a barrier to entry? We also ask whether Amazon or Alibaba can ultimately take over this sector. Marc Andreessen once said, “Software is eating the world.” He is absolutely correct. Rapidly-evolving technology is here to stay, with the advent of big data processing and artificial intelligence, and so companies increasingly need to embrace it and not ignore it.

Trusted Insight: Do you have any final thoughts?

Thomas Lenehan: My boss has used the analogy that investing is like managing a garden. It doesn't mean you just plant the seeds, watch them grow, harvest them and then your work is done. Quite the contrary. It requires active management. You've got to rotate the crops, which means some managers will come into the portfolio, some managers will go out of the portfolio. You have to continuously manage and monitor them. You've got to see how they all work together. Some folks will plant flowers along the edge of the crops because they work well together in terms of how they interact with the soil and provide nutrients and such to the other crops. That is diversification.

You also need to adapt your crop selection and practices depending on the weather. Same with tweaking one’s investment strategy and execution based on market conditions. You need a plan, but you also need to be flexible to change that plan as the conditions warrant. If one gets complacent, over time the garden can grow weeds that end up impacting the overall crop yield. This is a general philosophy that we use to help guide our thoughts in terms of not only building the right portfolio for today, but also maintaining a great portfolio in which the journey is truly the destination.

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The list of Top 30 University Endowment Chief Investment Officers can be found here