Edward Grefenstette serves as the President, Chief Executive Officer and Chief Investment Officer of The Dietrich Foundation. Prior to joining in April 2010, he served as Treasurer and Chief Investment Officer of Carnegie Mellon University in Pittsburgh.
In this interview, Ed takes us back to his early days at the Foundation and how he's helped double total assets under management. He also discusses the organization's significant exposure and commitment toward VC in China since 2006 and why today's digital meetings and interactions are far from ideal from an LP standpoint.
Ed Grefenstette was named on Trusted Insight's 2020 Top 30 Foundation Chief Investment Officers.
Trusted Insight: Can you tell us about The Dietrich Foundation and your role there at the organization?
Ed Grefenstette: The Dietrich Foundation is based in Pittsburgh, Pennsylvania, and was formed following the death of Bill Dietrich in 2011. Bill was a truly remarkable industrialist who ran Dietrich Industries, a steel products company. After the company was sold in 1996, he carefully developed a charitable plan to give away all of his wealth through a foundation upon his death. He grew the corpus of what would become the Dietrich Foundation from $170 million in 1996 to about $500 million in 2010, which was when he brought me on board.
When I was CIO at Carnegie Mellon University, Bill was an active trustee and chair of our investment committee. We worked closely together to the point where he asked me to leave CMU and run his foundation after he began battling cancer in 2010. It wasn’t hard to say yes to Bill and I'm very honored to carry the torch for his charitable vision today. Since Bill passed away in 2011, the Dietrich Foundation has given away $175 million and the remaining assets now total just over $1 billion. That asset growth has been entirely from investment returns with no additional inflows. CMU is the largest beneficiary of the Foundation, receiving a little over half of everything we distribute annually.
Trusted Insight: You've been there for over a decade now. What have you tried to implement or do differently during your helm at the organization? How have you helped it evolve?
Ed Grefenstette: Well, Bill Dietrich and I shared the same philosophy and believed that if you’re managing an in-perpetuity pool of capital, you should be as heavily oriented toward private asset strategies as possible. We are probably four standard deviations away from the norm with about 90% of our total assets in buyout, growth equity, and venture capital funds around the world. In that sense, you might say we look more like a global fund of funds managing permanent capital.
The other unusual feature of our portfolio stems from our strong belief that most U.S. institutional investors suffer from excessive home country bias. Bill began making a heavy tilt toward the emerging markets in the late 1990s, when it wasn't quite as widely and conventionally accepted as it is today. Over the last decade, I have expanded our exposures into the emerging and frontier markets mostly through private strategies. Today, we hold about 42% of our total assets in the emerging and frontier markets, with most of that in private equity and VC. Our Greater China exposure alone stands at about 33% of our total portfolio, which is certainly an out-sized allocation. Some would call it crazy, but we have been significantly committed toward VC in China since 2006. That exposure has served us well.
Trusted Insight: Many institutional investors are debating whether to pull back on countries like China or to continue to invest there. What would you say to those that are still debating the direction they should take?
Ed Grefenstette: It's a certainly complicated topic. But, in short, we believe that while the investment risks in China are unquestionably higher than the investment risks in the U.S., those China-related risks are not as high as the market believes they are. In other words, we think the risk-adjusted returns from Chinese VC, for instance, remain very attractive, more than compensating for the incremental geopolitical, regulatory and currency risks. I think most institutional investors view China as a large unknown, a large black hole to which they apply maximum risk. Perhaps they don't have the time, interest, or resources to shine a spotlight into the black hole and properly assess what risks are really there. As a result, most CIOs will look to other, safer geographies and tend to substantially underweight to China in order to protect their portfolio from perceived risks and, frankly, to protect their careers.
And it’s understandable on a certain level. If a CIO were to invest in China and it explodes, it would be very difficult to stand in front of the investment committee and defend the allocation. For us, that creates an opportunity because we think that while the institutional “tourists” will come and go in the Chinese private strategies, the long-term, intrepid investors who are willing to continue to commit and tolerate the volatility will be well-compensated.
Trusted Insight: Are you also playing offense and taking advantage of the public markets? What’s your stance on the current market volatility and uncertainty?
Ed Grefenstette: We often joke in our office that being 90% illiquid protects us from ourselves. By that I mean that if you're highly liquid, the human tendency and temptation is to try to time the markets. As we've seen with extraordinary volatility this year, it's really hard to do that well. We have taken the perspective that we're never going to be smart enough to bottom tick the markets. We would rather pick long-term, thematic opportunities around the world that we think will provide very attractive returns over the next decade or more. We’re convinced that if we can stomach the interim volatility, we will be handsomely rewarded.
Trusted Insight: As an investor, you've seen the ups and downs of the market, but how do you really mitigate such unforeseen risk?
Ed Grefenstette: Well, that's a big and important question with many layers. I would say that our sector and thematic allocation toward innovation and technology has served us well in this pandemic environment. We have zero exposure to oil and gas assets, real estate, private credit or traditional hedge funds. Rather, our total portfolio is about 60% allocated toward IT, healthcare, digital education, and certainly e-commerce in all of its many flavors. Those exposures have done well and enjoyed a tailwind in this extraordinary moment.
During the global financial crisis when I was at CMU, I developed a general disdain for hedge funds when I realized that there is a risk for which you receive no compensation in most hedge funds. That uncompensated risk flows from the behavior of the other investors in the hedge fund. That is, when periods of extreme stress arrive, often hedge funds are forced to liquidate their most attractive assets to fund redemptions. That is not an attractive outcome for the remaining investors in the hedge fund.
As a result, we don't feel we're well-compensated for the illiquidity we must tolerate for being in hedge funds. We would rather stay on the private equity and VC side, where we feel there is better manager alignment with investors and the long-term opportunities are far more attractive.
Trusted Insight: There's been talk on folks implementing technology on the LP investment process. Has that been explored at the Dietrich Foundation as well?
Ed Grefenstette: While we believe deeply in the opportunity for innovation and technology on the investment side for our GPs, as an LP our focus is more on the people. While technology and information tools are certainly important, and we certainly incorporate those into our internal processes, in the end, manager selection is about the people. It's about the alignment and judgment of the individuals and, so far, that doesn't lend itself very well to data-driven selection.
That's why we spend as much time as we do on the road. I've made over 40 trips to China since 2007. I don't see any other way for us to continue to build and nurture a private equity or venture book in China without face-to-face interaction on a regular basis. As Bill Dietrich always said, "Private equity is first, last, and always a relationship business." We believe that to our core. While we use data tools to help us manage information flow and CRM tools to manage relationship contacts, in the end, it's really people that make or break a relationship.
Trusted Insight: These days our in-person communication and contact is limited due to the pandemic and stay at home orders. Does that impact the way you guys operate and your investment process?
Ed Grefenstette: I think the digital interaction and Zoom communications are tolerable, but they're far from ideal. For us, we find enormous value from sitting at a table with managers to closely observe their body language and their interaction and chemistry with their colleagues. Manager selection is hard work. It is very difficult to assess a GP and discern whether they have been merely lucky or truly skillful in their investments to date. To us, lots of human interaction is essential to capture that incremental insight that might make a manager selection special. We can get a lot of things done in this mode of remote communication, but it's just not as effective as having dinner with someone, for instance. I think re-up decisions are easier to make than forging new relationships. Developing new relationships and building trust and rapport and picking up those nuanced insights is all very difficult when you're doing it purely by remote methods.
Trusted Insight: We try to be at the forefront of some of these questions, but is there anything right now that CIOs should be thinking more about, especially with respect to Asia?
Ed Grefenstette: Well, I think the geopolitical tensions are at a very high level right now. You can't invest in Asia and China without tolerating sharp ups and downs in sentiment and we are certainly experiencing a sharp decline of sentiment right now. I think it is logical to explore, as long-term institutional investors, the possibility of a hard decoupling and significant shift in the nature of trade between the U.S. and China going forward. While I don't think it's likely, a hard decoupling of supply chains is conceivable and would have significant and far-reaching implications. Right now, there is still more rhetoric than action, thankfully. But these are the times when you should be carefully re-evaluating your geographic exposures in light of your risk tolerances. Some will likely conclude it is time to de-risk by pulling back from Asia, while the bold may decide it is actually the right time to lean in.
View our full catalog of interviews here.
The full list of 2020 Top 30 Foundation Chief Investment Officers can be found here.
In this interview, Ed takes us back to his early days at the Foundation and how he's helped double total assets under management. He also discusses the organization's significant exposure and commitment toward VC in China since 2006 and why today's digital meetings and interactions are far from ideal from an LP standpoint.
Ed Grefenstette was named on Trusted Insight's 2020 Top 30 Foundation Chief Investment Officers.
Trusted Insight: Can you tell us about The Dietrich Foundation and your role there at the organization?
Ed Grefenstette: The Dietrich Foundation is based in Pittsburgh, Pennsylvania, and was formed following the death of Bill Dietrich in 2011. Bill was a truly remarkable industrialist who ran Dietrich Industries, a steel products company. After the company was sold in 1996, he carefully developed a charitable plan to give away all of his wealth through a foundation upon his death. He grew the corpus of what would become the Dietrich Foundation from $170 million in 1996 to about $500 million in 2010, which was when he brought me on board.
"The Dietrich Foundation has given away $175 million and the remaining assets now total just over $1 billion. That asset growth has been entirely from investment returns with no additional inflows."
When I was CIO at Carnegie Mellon University, Bill was an active trustee and chair of our investment committee. We worked closely together to the point where he asked me to leave CMU and run his foundation after he began battling cancer in 2010. It wasn’t hard to say yes to Bill and I'm very honored to carry the torch for his charitable vision today. Since Bill passed away in 2011, the Dietrich Foundation has given away $175 million and the remaining assets now total just over $1 billion. That asset growth has been entirely from investment returns with no additional inflows. CMU is the largest beneficiary of the Foundation, receiving a little over half of everything we distribute annually.
Trusted Insight: You've been there for over a decade now. What have you tried to implement or do differently during your helm at the organization? How have you helped it evolve?
Ed Grefenstette: Well, Bill Dietrich and I shared the same philosophy and believed that if you’re managing an in-perpetuity pool of capital, you should be as heavily oriented toward private asset strategies as possible. We are probably four standard deviations away from the norm with about 90% of our total assets in buyout, growth equity, and venture capital funds around the world. In that sense, you might say we look more like a global fund of funds managing permanent capital.
"Today, we hold about 42% of our total assets in the emerging and frontier markets, with most of that in private equity and VC. Our Greater China exposure alone stands at about 33% of our total portfolio, which is certainly an out-sized allocation."
The other unusual feature of our portfolio stems from our strong belief that most U.S. institutional investors suffer from excessive home country bias. Bill began making a heavy tilt toward the emerging markets in the late 1990s, when it wasn't quite as widely and conventionally accepted as it is today. Over the last decade, I have expanded our exposures into the emerging and frontier markets mostly through private strategies. Today, we hold about 42% of our total assets in the emerging and frontier markets, with most of that in private equity and VC. Our Greater China exposure alone stands at about 33% of our total portfolio, which is certainly an out-sized allocation. Some would call it crazy, but we have been significantly committed toward VC in China since 2006. That exposure has served us well.
Trusted Insight: Many institutional investors are debating whether to pull back on countries like China or to continue to invest there. What would you say to those that are still debating the direction they should take?
Ed Grefenstette: It's a certainly complicated topic. But, in short, we believe that while the investment risks in China are unquestionably higher than the investment risks in the U.S., those China-related risks are not as high as the market believes they are. In other words, we think the risk-adjusted returns from Chinese VC, for instance, remain very attractive, more than compensating for the incremental geopolitical, regulatory and currency risks. I think most institutional investors view China as a large unknown, a large black hole to which they apply maximum risk. Perhaps they don't have the time, interest, or resources to shine a spotlight into the black hole and properly assess what risks are really there. As a result, most CIOs will look to other, safer geographies and tend to substantially underweight to China in order to protect their portfolio from perceived risks and, frankly, to protect their careers.
"We would rather pick long-term, thematic opportunities around the world that we think will provide very attractive returns over the next decade or more. We’re convinced that if we can stomach the interim volatility, we will be handsomely rewarded."
And it’s understandable on a certain level. If a CIO were to invest in China and it explodes, it would be very difficult to stand in front of the investment committee and defend the allocation. For us, that creates an opportunity because we think that while the institutional “tourists” will come and go in the Chinese private strategies, the long-term, intrepid investors who are willing to continue to commit and tolerate the volatility will be well-compensated.
Trusted Insight: Are you also playing offense and taking advantage of the public markets? What’s your stance on the current market volatility and uncertainty?
Ed Grefenstette: We often joke in our office that being 90% illiquid protects us from ourselves. By that I mean that if you're highly liquid, the human tendency and temptation is to try to time the markets. As we've seen with extraordinary volatility this year, it's really hard to do that well. We have taken the perspective that we're never going to be smart enough to bottom tick the markets. We would rather pick long-term, thematic opportunities around the world that we think will provide very attractive returns over the next decade or more. We’re convinced that if we can stomach the interim volatility, we will be handsomely rewarded.
Trusted Insight: As an investor, you've seen the ups and downs of the market, but how do you really mitigate such unforeseen risk?
Ed Grefenstette: Well, that's a big and important question with many layers. I would say that our sector and thematic allocation toward innovation and technology has served us well in this pandemic environment. We have zero exposure to oil and gas assets, real estate, private credit or traditional hedge funds. Rather, our total portfolio is about 60% allocated toward IT, healthcare, digital education, and certainly e-commerce in all of its many flavors. Those exposures have done well and enjoyed a tailwind in this extraordinary moment.
"While we believe deeply in the opportunity for innovation and technology on the investment side for our GPs, as an LP our focus is more on the people."
During the global financial crisis when I was at CMU, I developed a general disdain for hedge funds when I realized that there is a risk for which you receive no compensation in most hedge funds. That uncompensated risk flows from the behavior of the other investors in the hedge fund. That is, when periods of extreme stress arrive, often hedge funds are forced to liquidate their most attractive assets to fund redemptions. That is not an attractive outcome for the remaining investors in the hedge fund.
As a result, we don't feel we're well-compensated for the illiquidity we must tolerate for being in hedge funds. We would rather stay on the private equity and VC side, where we feel there is better manager alignment with investors and the long-term opportunities are far more attractive.
Trusted Insight: There's been talk on folks implementing technology on the LP investment process. Has that been explored at the Dietrich Foundation as well?
Ed Grefenstette: While we believe deeply in the opportunity for innovation and technology on the investment side for our GPs, as an LP our focus is more on the people. While technology and information tools are certainly important, and we certainly incorporate those into our internal processes, in the end, manager selection is about the people. It's about the alignment and judgment of the individuals and, so far, that doesn't lend itself very well to data-driven selection.
That's why we spend as much time as we do on the road. I've made over 40 trips to China since 2007. I don't see any other way for us to continue to build and nurture a private equity or venture book in China without face-to-face interaction on a regular basis. As Bill Dietrich always said, "Private equity is first, last, and always a relationship business." We believe that to our core. While we use data tools to help us manage information flow and CRM tools to manage relationship contacts, in the end, it's really people that make or break a relationship.
Trusted Insight: These days our in-person communication and contact is limited due to the pandemic and stay at home orders. Does that impact the way you guys operate and your investment process?
Ed Grefenstette: I think the digital interaction and Zoom communications are tolerable, but they're far from ideal. For us, we find enormous value from sitting at a table with managers to closely observe their body language and their interaction and chemistry with their colleagues. Manager selection is hard work. It is very difficult to assess a GP and discern whether they have been merely lucky or truly skillful in their investments to date. To us, lots of human interaction is essential to capture that incremental insight that might make a manager selection special. We can get a lot of things done in this mode of remote communication, but it's just not as effective as having dinner with someone, for instance. I think re-up decisions are easier to make than forging new relationships. Developing new relationships and building trust and rapport and picking up those nuanced insights is all very difficult when you're doing it purely by remote methods.
Trusted Insight: We try to be at the forefront of some of these questions, but is there anything right now that CIOs should be thinking more about, especially with respect to Asia?
Ed Grefenstette: Well, I think the geopolitical tensions are at a very high level right now. You can't invest in Asia and China without tolerating sharp ups and downs in sentiment and we are certainly experiencing a sharp decline of sentiment right now. I think it is logical to explore, as long-term institutional investors, the possibility of a hard decoupling and significant shift in the nature of trade between the U.S. and China going forward. While I don't think it's likely, a hard decoupling of supply chains is conceivable and would have significant and far-reaching implications. Right now, there is still more rhetoric than action, thankfully. But these are the times when you should be carefully re-evaluating your geographic exposures in light of your risk tolerances. Some will likely conclude it is time to de-risk by pulling back from Asia, while the bold may decide it is actually the right time to lean in.
View our full catalog of interviews here.
The full list of 2020 Top 30 Foundation Chief Investment Officers can be found here.