Richard Chau is the interim chief investment officer at Tulane University, where he has served since 2013. Previously, he was a vice president in Bessemer Trust's Private Equity Funds Group in New York, where he helped manage a multi-billion dollar global private equity portfolio. In this interview, he shares his views on investment in China and the state of private equity markets, and explains how Tulane is building a network of alumni LPs through its analyst program.
Chau was named to Trusted Insight's 2020 Top Institutional Investing Rising Stars.
Trusted Insight: Tell us about your role at Tulane and what your day-to-day responsibilities entail.
Richard Chau: I've been at Tulane for about seven years. I was hired as a director and promoted to managing director just a couple of years later, about five years ago. This past September, our CIO Jeremy Crigler, who started the Tulane endowment office in 2008, retired. Since then I’ve been serving as interim CIO.
When I first joined Tulane, I was tasked with building out our private portfolio. Tulane had very limited private exposure prior to my arrival; my hire was part of a concerted effort to build out that portion of the portfolio. That effort has been much of my focus for the past seven years.
As our private portfolio reached a more mature state, I have been able to spend more time outside of privates to look more holistically at the endowment. Since my transition to the interim CIO role, more of my time is spent throughout the entire endowment. I still plan to be quite involved on the private side: it's a significant part of the portfolio, and it probably accounts for a majority of the time that we spend looking at new investment opportunities, as well as monitoring our existing ones.
"We recruit all of our analysts and interns out of Tulane and have a three-year rotational program."
Trusted Insight: How is your team structured?
Richard Chau: Right now we have six people on the investment team: two analysts and four more senior members who have now worked together for more than five years. I feel very fortunate to have the opportunity to work with such a talented and committed group of people. Since we’re such a small office, it’s important to have a great team that works well together. We've had great continuity on our investment team. Historically, we've split the investment team between publics and privates. However, now that the team has worked together for such a long time, we have the flexibility to work collaboratively across publics and privates.
Four of the six investment professionals on the team started out as analysts in our office. We recruit all of our analysts and interns out of Tulane and have a three-year rotational program. The analysts spend each of those three years working on a different asset class. The goal is for them to develop an understanding of the entire portfolio by the end of the three years. The analyst program has been very successful for us. We're fortunate to have four investment professionals who have worked across the entire endowment as analysts.
We have access to a great pool of talent at Tulane. Our analysts care deeply about the University. We’re able to give them great experience as we train them for the next steps in their careers. We now have a network of Tulane and office alums who are at various LPs: they're at family offices, other endowments, foundations, pensions, retirement funds, fund of funds, and advisors. It's not quite the Yale network yet, but hopefully we’ll get there in time.
We also have a great operations team, and as I look out to the future of our office, we plan to build up our operational capabilities as our endowment grows larger and more sophisticated.
Trusted Insight: You used to work as an investment banker in mergers and acquisitions. How has that experience shaped your views and strategy as an institutional investor?
Richard Chau: I was fortunate to work at a mid-market investment bank that did a lot of work with smaller private companies, as opposed to what the bulge bracket banks do. A lot of the deals I worked on were with companies that ended up being sold to private equity sponsors. This gave me another perspective on private equity managers and a level of diligence that you probably wouldn't normally get as an LP.
The hard and soft skills I was able to take from my banking days have continued to help me as an investor. The hard skills are pretty straightforward: every investment banking analyst and associate is whipped into great Excel shape and forced to become a proficient modeler. In terms of soft skills, it means understanding how to work with a lot of different constituents. At a place like Houlihan Lokey, with small teams and a small firm, you actually get quite a bit of contact with the clients, which means experience trying to manage their expectations while also trying to run the process. I wasn't in banking for very long, but that experience managing different stakeholders is helping me in my role as CIO of the endowment.
Trusted Insight: Prior to becoming interim CIO, you managed private equity portfolios at Tulane, and before that, at the Bessemer Trust. Given your experience in private equity, what opportunities and challenges do you foresee in that asset class?
Richard Chau: Well, with all challenges come opportunities. Private equity has been under a lot of pressure for a while now, mostly due to all the capital that's being raised across all sub-strategies—globally, from venture to growth to buyouts. Anywhere you look, there's too much capital. And whenever there's a lot of capital raised or flooding into any strategy, returns are competed away. A lot of capitalists are going into private equity, pushing prices up and lowering productive returns. We've been trying to navigate this landscape for a while now, and we've done it fairly successfully.
The approach we've taken is breaking things down by strategy and figuring out where the opportunities are from there. The easiest example to consider is the buyout space, where there's no shortage of dry powder, particularly in larger buyouts. We see all the capital going in and ask ourselves, "All right: where are the opportunities?" It's pretty hard to generate good returns on the large end of the market, but we're seeing lots of opportunities on the smaller end: lower mid-market buyout funds are paying more reasonable entry multiples, leverage levels are pretty reasonable, and the opportunity set is huge relative to the number of investors. And they just have so much capital sitting above them that's looking to acquire the types of companies that they're invested in. Now, is there a chance that that capital goes away? Maybe, but it doesn't seem like there's any slowdown in capital-raising.
There's more competition coming into the lower end of the market, but typically successful firms will raise larger funds and outgrow the market. The challenge is finding successful funds that will be disciplined with fundraising. You can find parallels to this dynamic in growth equity investing as well.
"Our typical value play assumes there's going to be a reversion to the mean. But we have to be aware that the mean could be changing as we go forward."
Trusted Insight: How has COVID affected your forecasts and strategies?
Richard Chau: We’re still trying to figure out what a post-COVID world looks like. What’s clear is that all the trends that we were seeing pre-COVID have accelerated. That certainly works out well for most digital trends, and anything related to a remote or work-from-home environment. Valuations in these trends might be a bit ahead of themselves at this point, so there are current challenges to capitalizing on these themes.
At heart, we're value investors, but we have to be careful not to fall into a trap where there's been a real secular shift. Our typical value play assumes there's going to be a reversion to the mean. But we have to be aware that the mean could be changing as we go forward. There are some industries that are hurting right now, and which may not come back. A good example is the cruise line industry. It’s certainly a great value right now—but is it a great opportunity? It could be. I know plenty of people out there who are cruise fanatics. That's why the industry was doing so well pre-COVID. But will it come back? Will there be enough people who are so devoted to it that they're willing to take the risk of ending up on another floating petri dish? I don't know.
Trusted Insight: Twenty percent of Tulane's portfolio is in private equity. For the fiscal year 2019, you posted a 19.4% return on that portfolio. A report on Tulane’s website notes that three of your five new private equity managers were in venture. Could you tell us more about how Tulane’s venture portfolio has developed since you joined?
Richard Chau: Tulane didn’t have much of a venture portfolio prior to my arrival, and most of the top-tier venture firms were experiencing capacity constraints that made it very difficult for a new LP like Tulane to get much of an allocation. That meant we really had to rethink how we wanted to get venture exposure. We had to prove to ourselves that there were going to be opportunities outside of the incumbent blue chip players.
It took some time for us to convince ourselves and our committee that those opportunities exist and we should be looking at more emerging managers who have the potential to outperform. There have been studies done by Cambridge Associates and others showing that there are strong returns being generated outside those top-tier firms. I’m thankful to have a Committee that’s been supportive of our approach and understands the long-term benefits of great venture exposure. Don’t get me wrong, we're still looking to access some top-tier names, but we are also open to complementing them with emerging firms. We've also looked outside the U.S., primarily in China.
"While it's always better to pay less with early stage investing, we’re more concerned about whether the company is going to become a leader."
Trusted Insight: Are you looking to increase your allocation to venture? And if so, how are you going about selecting those managers, keeping in mind that what you're really focused on is value?
Richard Chau: In any given year, we don't really have targets for how many managers we want in venture versus buyouts or growth. It’s more bottom-up and based on the managers who are fundraising that year. We’ve been spending more time on emerging groups that are showing us that they have the potential to outperform and build a lasting franchise.
At Tulane, we’re looking for groups that can go in earlier or can be focused on a sector that allows them to be a feeder to the more established firms. One example is in the ed-tech space. We recently re-upped to an ed-tech venture manager, Owl Ventures. We did their fund one, and we've been with them since. Back when we were doing diligence and talking to some of the bigger Silicon Valley venture firms about ed-tech, most had folks who would look into that space, but no one really had someone dedicated to it. And for good reason: the ed-tech market at that point was relatively small and there were no big exits to point to. It wasn't obvious that you needed to be there. But then we found this group that was focused on it, and realized that there was a big opportunity there—and that if they executed, they could become the leaders in that sector, and every other firm would look to their portfolio to find the best ed-tech opportunities as a result.
Fortunately, that's how it played out. They’re now arguably the leaders in the space and others do look to them. They saw ed-tech evolving: they saw that broadband was being brought to pretty much every school in America, and we were reaching a key inflection point of adoption. So that worked out well, and COVID has only accelerated the trend. Ed-tech is having its time in the sun, and we’re glad to have exposure there.
While it's always better to pay less with early stage investing, we’re more concerned about whether the company is going to become a leader. So while we want our managers to be value sensitive, we understand that it’s not the main factor in early-stage venture. We're much more sensitive to it in the later stage and in the buyout space. We need those managers to pay lower entry multiples, or else the return potential diminishes significantly.
Trusted Insight: What do you look for in the emerging managers you select?
Richard Chau: Well, let me give you a little bit of background on me: my family came to America as refugees from the Pol Pot regime in Cambodia. We were escaping from a genocide and fortunately made it to America. Then, through a lot of hard work and drive and ambition, we had the good fortune to live the American dream. When I look at some of these emerging managers, I really need to see that same hard work, that drive, that ambition, that perseverance—it’s a huge factor in my estimation. Ideally we'd be able to analyze extensive track records, but they don't exist for most of these emerging managers. Or, the track record that exists is not necessarily applicable. So we look at a lot of other factors. And that drive and ambition that characterize the immigrant mentality—it’s something that makes a pretty big difference.
Trusted Insight: Investment in China has emerged as a topic of concern among institutional investors over the past year, given the Trump administration’s sustained criticism of American institutional investment in China. But among the LPs we polled, the majority are not planning to decrease their investments in China. This includes a majority of LPs at college endowments. You have a double major in Economics and Chinese from Williams College. Could you tell us your thoughts on investment in China, and what kind of conversations are happening at Tulane about how to negotiate risk versus reward in that region?
Richard Chau: It's a good question. And it’s going to be one of the topics we address at our next committee meeting, for all those stated reasons.
We have a small but growing portfolio in China. It's slowed down a bit because of COVID, but I think we'll get back on track soon enough. We recently committed capital to a China public equity manager, just a few months ago. And on the private side, we continue to look for more exposure there.
Our committee is like most: they have some hesitations when it comes to China. But I do think there is actually quite a bit of opportunity there. You can see it in the GDP numbers: the growth engine in China has continued onward. Maybe it's not 6 or 7% growth; maybe it's more like 4 or 5%. That's still a whole lot better than the zero to 1% you're seeing around the rest of the world.
With respect to U.S.–China relations and deglobalization, there’s certainly cause for some angst. But it also creates opportunities for domestic firms in China. The nice thing is that China has over a billion people, so while some of their companies have global ambitions, you can still do pretty well being a domestic leader in a country with over a billion people. So I think there's still room to run on the consumer side in China. Having said that, we're also seeing a lot of opportunities on the enterprise side, particularly in technology. Right now, there are no large enterprise leaders in the country yet. There's no Oracle of China; there's no Salesforce of China. But there's opportunity for there to be one and maybe we can be an early investor in one of those companies.
Trusted Insight: What else can you tell us about what’s in the works at Tulane?
Richard Chau: One question I get asked a lot lately is how our work at the endowment reflects the values and the mission of the university.
Historically, we've been focused on returns for the endowment, and that's very important because it’s what will help our endowment grow. But I think we can do that and still ensure we're reflecting the values and the mission of the university. I've been spending more time working with the administrators at the university to really understand what's important and making sure that we can support that mission without conceding returns.
There is a heavy focus on innovation and technology at Tulane. We can support investments in that space, and I don't think we have to take any return concessions there. We’re also working out a way to incorporate diversity, equity, and inclusion principles into our investment strategy. Tulane is a huge supporter of the local New Orleans community. Although we’re an endowment with a global outlook, it's also worthwhile to consider how we can be helpful in the community, whether it’s through direct investments, advising managers and startups in the area, or helping connect entrepreneurs to VCs. Those are some of the initiatives that I'll be thinking about as our office continues to evolve.
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