Letter #329: Paula Volent and Malin Norberg (2024)

Rockefeller University CIO and Norges Bank CIO Market Strategies | Allocating in a Volatile World

*KG Note

I am in San Francisco for the next month. If you are around and would like to try and grab a coffee/meal, go for a walk, or play tennis, please reach out (email; twitter) — especially if you’re a founder or at a foundation, endowment, or family office.

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Intro

More on this newsletter here.

Today’s letter is the transcript of a conversation with Paula Volent and Malin Norberg on allocating in a volatile world.

Short Bios

Paula Volent is the CIO of Rockefeller University.

Malin Norberg is the CIO Market Strategies for Norges Bank.

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Transcript

Host: I was hoping that each of you can give us, like, maybe a very quick elevator pitch on how you manage your money so that the audience has a sense for where you're coming from. And then we can dive right in to the program.

Paula Volent: Do you want me to start?

Host: Yes, please.

Paula Volent: Thank you. It's such an honor to be here. And the prior speakers have been really inspirational. I have always been in the endowment space. I started at Yale University, where actually I helped David Swensen write Pioneering Portfolio Management. I then went to Bowdoin College, which when I started was about $425mn and ended at $3bn when I left in 2021. The way I managed is, I was trained by David Swensen, and we can talk about the changes to the Yale model, but I run a diversified portfolio of, and as you said, about two thirds is in alternatives. We have venture capital, private equity, global macro hedge funds, and also we do real estate, real assets. So a very diversified portfolio. The one difference is I worked at Bowdoin College—at Rockefeller, it's a scientific research institution. There's no tuition. So that's different from a university, because our balance sheet, it's a third from endowment, a third from philanthropy and a third from government grants. So I have to have a real focus on liquidity, which I think we'll talk about later. Yeah.

Host: Malin?

Malin Norberg: So we're a very different institution in that we manage money for future Norwegian generations. So that's a big responsibility, but it also gives us a lot of opportunities. So our investment horizons is basically infinite. A lot of people here have been talking about their clients, and we have one client, and that's the Norwegian Minister of Finance. Or 5mn clients, if you count all the Norwegian people. They are the ones who give us our investment mandate and they also give us our benchmark in what we can invest in. So they roughly decide our asset allocation. If we want new asset classes, new additions to our investment universe, they are the ones who are deciding that, in conversation with us. So as it stands, we have roughly 70% of our assets in public equities, about 25% in fixed income—so that's government bonds and corporate bonds—and around 5% in real assets—so real estate and renewable infrastructure.

Host: We've seen and we've heard some of the themes that have been raised earlier today. One of them is companies staying private for longer. And I was hoping to ask both of you what impact that's having on the way you invest and how you find companies and investments to put money in. And, Malin, why don't we start with you for this, given that essentially the public, the listed universe is sort of what you look at in terms of your investment strategy. How is that playing out for your investment strategy when you see companies staying private for longer?

Malin Norberg: So it sounds like I might just be the only one here who are not investing in private markets, but there are a lot of great companies in public markets. So I think what we have to think about is just why are more and more companies choosing to stay private for longer? And I mean, there are probably a few reasons. One is regulation, just reporting requirements. It takes a lot for a company to go public these days. It's also been clear today it's a lot easier for companies to get access to funding. A while ago you probably had to IPO to to get funding, but now there are many different venues you can go to for private company to get funding. And one thing that I'm thinking about is, Is there an advantage for companies to stay private for longer in order to manage to build the company that you want? Can you, with the public markets getting more faster and more short term, is it easier to create value for a company if you stay private for longer? So that's the things that we're thinking about. And what we're seeing is that more value creation is probably happening before a company IPOs, if it IPOs at all. So for us, as a public investor, I mean, we are only getting bigger and bigger, at least with oil prices where they are right now. We are growing. The public markets are getting smaller, so that means we are invested in fewer companies, our investments are more concentrated and there are fewer companies driving our returns.

Host: Paula, did you—it must be having the inverse impact on your ability to—

Paula Volent: Yeah. I've been investing in private markets for a long time and also in hedge funds, which have lockups. And so that's another source of illiquidity. But in the staying private for longer, that is definitely a phenomenon. It used to be 10 year terms, now it's 15. Then there's these continuation vehicles. DPI or money coming out has been very scarce. Although I do see green shoots. I think there are a number of big companies that are poised to—you can see Klarna is going to become public. So there's a number of public companies. I do think that the Trump administration is probably going to be helpful in that the M&A environment might get better. So we'll get better results from liquidity. But liquidity, as I said, is a big issue for us. And as these private funds stay private for longer, it's an issue we have to really think of. I did do a secondary sale right when I got to Rockefeller in 2021, which was very fortunate. I sold about $250mn of private equity, growth equity, and venture for 95% of 2021 December NAV. So that was a good trade. But now, as you said, the secondary market is not interesting for someone to sell because the discounts are too big. The other thing that's happening is there's this huge amount of money going into venture capital and private equity. Still, the pensions, the sovereign wealth funds are trying to get in. And as someone mentioned earlier, you need to get into the top tier funds or you shouldn't do it. However, there's a change. Some of the big top tier funds, Andreessen Horowitz, General Catalyst, Thrive, have raised huge giant funds. And so we're trying to stay away from that. We think there's a change, and we want to invest in the smaller managers and find the next generation of managers. But I do think—Benjamin Franklin said you can't get away from death and taxes, but in an endowment you can.

Host: That's great. So what impact is it having on returns? Malin, if you can sort of address that element of—as you talked about the concentration risk, which we'll talk about in a little bit more detail, but just like on the top line, is it having an impact on returns when you have a smaller universe?

Malin Norberg: So I don't think we're in a position to say if our returns would be better or worse if we were more in private. I think that goes with the cycle. Of course, having access to more different asset classes has a certain diversification effect, as David Swensen would say. So it impacts returns in that way. And I think we'll have to see how this develops. Are we becoming—how big are we becoming in the public markets, especially if this continues, if this trend continues, and more and more will be private?

Host: Paula, Are you seeing an impact on returns, especially as these firms are getting larger and—

Paula Volent: Yeah, I mean, private equity—I have had a great track record in venture capital and private equity. However, there have been a lot of write downs, and I think someone mentioned that a lot of people overpaid for some of the venture things and they're having to grow into that. Also, I think a lot of firms or a lot of entrepreneurs are taking money from these—you have solo VCs, you have a whole secondary market, and people are putting money in maybe too early, so they're over capitalized. But private equity, venture capital has been a drag on our performance over the last three years. However, I think we have really good companies in there, and I think we have great entrepreneurs and creativity in the portfolio. I do think that there is this blurring of the asset classes, and we're thinking our asset allocation, how we think about it. We have a lot of hedge funds who private investments in them, and then we have a lot of public funds that have private investments in them. So it's all getting blurred. And so I do think it's a great opportunity with AI, with some of the new technologies that are coming to still do venture capital and alternatives. We did, 18 months ago, start dipping back into real estate, private real estate. Even though we did office property, everyone hated it, which I think is so good. I like to go into as into areas that people hate. And so I do think that going forward we're going to have good returns. But it has been a drag for the privates.

Host: With venture capital, are you finding that some are you finding enough small, nimble firms?

Paula Volent: Yeah, I've always done a farm team, which I started at Bowdoin, and I've invested in very early launches. I did that with the hedge fund portfolio, and I'm doing that—there's some incredible entrepreneurs, and it's all about sourcing and who the entrepreneurs are trusting to back them. And so I do pre-seed, seed—although it's getting crowded—and I'm identifying—we do do solo VC investors, and I do a small amount, and then I get future capacity rates, and so I put together a portfolio of that. But that's really interesting. But as I said, some of the firms, like an Andreessen Horowitz, are raising huge amounts of money. And I think the—David Swensen, I also worked with Stanley Druckenmiller—the more the larger you get, the harder it is to generate great returns.

Host: That's a good segue into our next topic of discussion, which is risks. And Malin, we talked about the concentration risk, so I think that's a good place to start. How are you dealing with concentration risk, and what do you have to keep in mind while managing a portfolio that—when you have a smaller universe of investments to invest in?

Malin Norberg: So we have a—I wouldn't say it's small yet. It's only the public markets. But we do have a global global investment portfolio, so we do have a lot of opportunities. That said, we have a benchmark that we largely allocates the money to where we invest to, what regions, what companies. And with this big tech companies primarily growing so much in size, that means we will have, like many other funds, will have a lot of money in very few companies. So of course that is a big risk, especially since those companies are more or less part of the same value chain. They are they are related to each other. And so I think that is a risk that we need to be very on top of. What also is a factor in that is that so many people have made so much money being invested in these companies. Usually you make the most money by being contrarian and doing the opposite of everyone else, but in this case, you made the most money by just doing the same thing as everyone else and buying these big tech companies. So if something starts to happen there, I think that could have an impact for the broader markets, not just in those companies.

Host: And Paula, it's—

Paula Volent: Yeah, the biggest risk I face is illiquidity. We still have we have a lot of capital calls coming in. Also, as I said, we don't have tuition at the university. And so part of the portfolio is very liquid, and I manage it. We have a Gold ETF, by the way, that done very well. And then we keep a liquid part of the portfolio, and the first thing I do every week is just sort of look at what the liquidity, what what's going out, what's coming in. As I said, it is some green shoots. We are getting distributions from some of the private. I also rebalance quite a bit. When one of my marketable managers has done really well, I take money off the table, and when they have done poorly, I meet with them, and if I see conviction in the portfolio, I'll add. And that has been a very successful trade.

Host: We talked about secondaries before, and with the—hopefully, like we talked about the M&A outlook and the exit environment will—I think everyone's anticipating that there will be an improvement next year, but this year has been really tough in terms of exits for private equity firms. And we're seeing—in an earlier panel on private credit, we talked about continuation funds. Are you still seeing a lot of that? How are you dealing with those private equity managers and portfolio managers? What's your strategy—

Paula Volent: I’m sort of staying the course. I have divided—I inherited a portfolio, which is hard to do—three years ago. I ran the portfolio at Bowdoin for 21 years, and then I came over to Rockefeller. But I've divided the portfolio into three parts. One, legacy things which we can get rid of. I'm actually in a secondaries sale to sell some private credit funds which we’re actually getting good value on. The second bucket is monitor, or new managers, like some of these emerging managers. I like to hire sort of athletes—great athletes that are aligned, that are going to make money when we make money, and lose money—not asset gatherers. And then the third is high conviction. And someone mentioned that like with Accel, or it used to be Sequoia, if you didn't do their next fund, you wouldn't get into it, so you had to keep going in. I think that's changing a little bit. As I said, these firms are getting larger. But I have those three buckets. And as I said, I keep one whole part of the portfolio pretty liquid. And I do believe in I think it's going to turn around and we'll have really good returns from our venture and private equity portfolio.

Host: Geopolitical risk is the other big risk that we've all talked about today. Tariffs looming. How are how are you both dealing with geopolitical risk in your portfolios? And maybe, Malin, you can take the first stab at that.

Malin Norberg: Yeah. So despite getting our mandate from the Norwegian government, we're not a political investor at all. So we invest in markets and not in—we don't take a political stance. Of course, geopolitical risk is something that we are—it's a big topic. And it's one of the topics where we don't really see we have an advantage in trying to predict what's going to happen. We have a structure of delegated mandates, and it's up to every every portfolio manager to judge how the things that they see, the trends in the world, how they're going, and how that's going to impact their sector, the asset class that they manage. But it's not really something that we take a higher view on in reallocating assets because of.

Host: Paula, you mentioned you were in Hong Kong recently. How are you looking at China risk?

Paula Volent: My investment committee has been very negative on China, very nervous about China, so we've redeemed a lot of our public investments there. I was just in Hong Kong for a week meeting with some of our private managers, and I have to say, I was very skeptical going to Hong Kong. I left a little bit more optimistic on China. I know there is all this geopolitical tension there, but it's a huge part of the supply chain. There's very interesting companies there. And so we'll see what happens. Also in geopolitical risk, I think I mentioned the Chair of my investment committee, who has just stepped down, was Scott Bessent, who will be the treasurer, the new Treasury Secretary. And so he's the one who recruited me to Rockefeller, and I think he's really smart. I think it's a great choice. I know everyone's worried about tariffs and we're trying to think do we need to put inflation assets in the portfolio because of the tariffs, but I also think Scott and Trump are probably going to use the tariffs as a bargaining chip, and it probably will not be as bad. Although in Hong Kong, China is nervous about the additional tariffs coming on. So it was a big part of discussion. But I was much more optimistic on China, and I'm glad I went and spent time there.

Host: We've touched on some of these things through the course of our conversation, but protecting portfolios, and we talked about rebalancing—Malin, you talked about rebalancing, Paula, you talked about liquidity and looking at the liquidity buffers carefully. And we talked about real estate. I mean, so I would like to maybe focus a bit more on the real estate and the real assets part of it. Paula, is that still something that you find—

Paula Volent: Yeah, we have about 10% allocation to real assets, maybe a little bit more. A lot of universities are having a lot of student protests, whether it's about Palestine or ESG. Most of the students—they only take 35 students a year at Rockefeller. They're all Ph.D. and post-doc, and they stay in their labs. There is no protesting that there was at Bowdoin. And so we can do oil and gas. And actually, it's been really interesting because all the endowments and a lot of have moved out and can't do oil and gas. There's incredible opportunities. There's one fund, their last fund was $3bn, they can't even make it to $1bn. But they're seeing incredible assets. We do multifamily. We also do data centers. I think data centers are really interesting, although it's very frothy right now, the pricing, because everyone sees that as a play on AI. But I do think that real assets, broadly, are really interesting. And again, I think the whole office debacle after—in New York, everyone hates office. But I do think people went back to work and are back to work. And I think that there are some interesting assets and it's all about location, location, location. And you do infrastructure as well.

Malin Norberg: Yeah. So the private assets that we do do in real assets, so real estate and renewable infrastructure. And those are, of course, diversifier in our portfolio. So we've seen that in the last few years, they've been going the opposite direction of the rest of our portfolio. And I do agree there are probably opportunities there now. The big problem has been that our real assets team have been trying to deploy money.

So both in renewable infrastructure, prices have been very, very high for a long time, and it's coming down now. In real estate and primarily office, it's been a big gap between buyers and sellers. Those sellers haven't really been wanting to sell at the prices that buyers have been wanting to buy, and I think that's starting to close now. At least we're seeing some some transactions that might unlock of that market.

Paula Volent: And we do opportunistic. We don't do core. Core is just a bond substitute, but we do core. And for instance, we're in one hospitality fund, which is really interesting, and they use historic tax credits and renovate a historic sort of abandoned piece of real estate into really high end boutique hotel hotels. Also in the portfolio, I have allocation to global macro, which has been really diversifying. It's negatively correlated to most of the other portfolio, and it’s been a good driver of returns, although finding a really talented global macro manager is hard. So you have to you have to be in the network to get the allocations to that.

Host: As we sort of come to an end of this, I'd like to sort of ask both of you what what do you see for 2025 in terms of like the biggest upside in terms of investment opportunities.

Paula Volent: Do to want to start?

Malin Norberg: I'd love to. I think there's lots of exciting opportunities. I think the one thing that I would love to see, I mean, it’s—I think it's pretty much a consensus that the U.S. is on a good path, there are lots of things happening there that are constructive for the market. What I would love to see is for Europe to kind of turn things around. Right now there's a lot of political uncertainty, there are challenges with the geopolitical tension in the region. There’s lots of challenges. But I think if they can manage to turn that around, that's something that I would really like to see. It’s very unexpected.

Paula Volent: We're looking at a lot of things. Someone mentioned Brazil and Latin America. We're looking at that, especially with fintech, which is really interesting. We're also doing a lot of work—I do agree that the U.S. is much more interesting than Europe. I think Europe with France and all of the sort of geopolitical or the—whether it's country-based turmoil, I think Europe is less interesting. I do think we are staying away from India, but India could be interesting, although it's very expensive right now. But I do—I’ve been meeting with incredible entrepreneurs who are working on AI. I think there's too much money going into AI venture, and there's going to be a couple of clear winners, but there's going to be a lot of losers, so you need to be really cautious there. And then also we do trading of carbon credits and some commodities, and I think those could be very interesting assets going forward.