The Twenty Minute VCHow LPs Allocate to Venture in 2026: What They Want, What They Don’t | Baylor University CIO
CHAPTERS
- 0:00 – 5:20
Baylor’s endowment mission: navigating higher-ed headwinds and improving upside capture
Morehead frames the investment job as increasingly critical as U.S. student demographics and international enrollment pressure university revenues. Baylor has historically excelled in down markets, and the team has spent the last five years restructuring to participate more in upside without sacrificing resilience.
- •Demographic decline and international student friction make endowment distributions more important
- •Baylor historically outperforms on the downside (risk management strength)
- •Strategic effort to improve performance “on the right side” of outcomes
- •Balancing defense with upside is hard, especially in momentum-led markets
- 5:20 – 7:49
Using convexity without paying a constant “theta bill”: bespoke mandates vs commingled funds
Morehead explains why commingled funds deliver an average risk/return that may not match Baylor’s needs at a given time. Baylor increasingly uses customized “funds of one” or direct GP relationships to shape exposures and position sizes across the total portfolio.
- •Commingled funds optimize for the average LP, not Baylor’s specific risk needs
- •Baylor asks GPs to run the same strategy in a separate account/vehicle
- •Portfolio-aware sizing: avoiding redundant exposure (e.g., already owning enough Nvidia)
- •Customization has improved results over the last 2–3 years
- 7:49 – 11:02
Portfolio construction from a blank sheet: set privates first because liquidity is the constraint
Baylor runs roughly a 45% private / 55% public mix and spends more time on asset allocation than manager picking. Morehead argues you must determine private-market exposure first since it drives liquidity, rebalancing ability, and the risk of being forced to sell in downturns.
- •Current mix around ~45–47% privates and ~53–55% publics
- •Privates “hog-tie” liquidity; hard to move a private book quickly
- •Define the private allocation, box it, and build the rest around it
- •Avoid forced selling at all costs (second only to avoiding fraud)
- 11:02 – 12:38
What belongs in the private book: privates exist to make money (VC, growth, buyout)
Given upcoming distribution needs, Baylor is narrowing the private portfolio to strategies with the highest expected excess returns. Real assets are being de-emphasized while venture, growth/expansion equity, and buyout become the core building blocks.
- •Explicit framing: private markets exist to generate excess dollars for the institution
- •Winding down lower-returning real asset exposure
- •Private focus areas: VC, growth/expansion equity, and buyout
- •Private lockups must be justified by high return potential
- 12:38 – 17:17
Big-name VC vs emerging managers—and why fund duration breaks LP compounding math
Baylor hasn’t had easy access to marquee VC brands, so it often backs newer names while leaning heavily into strong growth equity performance. Morehead criticizes venture fund length inflation (10–12 years becoming 15–18), arguing velocity of capital and compounding can beat higher multiples over longer periods.
- •Access challenge to top-tier VC brands; newer managers fill the gap
- •Growth/expansion equity has produced standout returns for Baylor
- •Longer VC fund lives can reduce capital velocity for LPs
- •Example: three sequential 3x growth funds can beat a single 15x VC fund over 18 years
- 17:17 – 19:36
Why invest in venture at all: laddering, diversification, and the “returns must include time” rule
Morehead says Baylor debates venture’s role frequently and treats it largely as diversification and long-dated return laddering rather than a core learning engine. The office enforces a discipline: discuss returns only alongside the time required to achieve them.
- •Venture provides diversification and staggered payoff timing across the portfolio
- •Office rule: never discuss multiples without time (IRR/velocity mindset)
- •Multiples can be misleading without duration context
- •Venture is justified when it complements shorter-duration private strategies
- 19:36 – 20:48
Managing post-IPO/private-to-public positions and concentration risk
Baylor sometimes sells distributed public shares quickly and sometimes lets them run, depending on conviction, portfolio context, and position size. Morehead is comfortable with episodic concentration because the total endowment is broadly diversified across sectors and assets.
- •Disposition decisions depend on fundamentals, risk, and resulting position size
- •No blanket rule to instantly liquidate distributed shares
- •Concentration is acceptable at the margin within a very diversified total portfolio
- •Endowments often miscompared to the S&P 500 due to broader diversification
- 20:48 – 26:05
Buying the 2026 software drawdown: human behavior edge + manager expertise
Morehead describes leaning into the early-2026 software selloff after sanity-checking real-world buyer behavior and enterprise switching costs. He pairs his behavioral read with detailed manager work to target names least likely to be disrupted by AI, arguing software can become AI’s delivery mechanism in verticals.
- •Decision driven by human behavior: businesses don’t rip out core systems for unproven tools
- •Enterprise demands near-100% correctness; “93% right” isn’t enough for critical workflows
- •Thesis: incumbent software becomes the distribution layer for AI in vertical industries
- •Allocator role: increase capital to managers while interrogating name-by-name AI disruption risk
- 26:05 – 29:14
What teaches more: public markets as the “big leagues,” and skepticism on private-market price discovery
Morehead pushes back on the idea that venture portfolios are a primary learning tool for him; he learns more from public-market managers and reality checks on adoption timelines. He argues public prices, while imperfect, incorporate far more information than private marks set by a small group in a room.
- •Public markets aggregate information from millions of participants
- •Private market prices can be reset by a small number of decision-makers
- •Hype cycles vs implementation reality (example: autonomous driving timelines)
- •Public-side managers provide a more grounded lens on technology and adoption
- 29:14 – 31:21
Can LPs trust private valuations? Conservative marking and psychology of pricing
Morehead emphasizes correct and conservative pricing to avoid psychological errors in decision-making. Baylor pressures managers to avoid inflated marks and cites evidence that their private marks appear more conservative relative to realized exits.
- •Mismarking leads to bad behavior (loss aversion against a wrong reference price)
- •Preference for conservative rather than aggressive private valuations
- •Observed pattern: larger step-up at realization suggests conservative interim marks
- •Valuation discipline supports credibility with university leadership and governance
- 31:21 – 33:33
Why Baylor prefers growth equity: fewer zeros, strong annualization, and better fit for endowment needs
Morehead reiterates comfort with Baylor’s growth equity manager set and highlights why growth can be more reliable than venture: fewer total write-offs and faster compounding. This aligns with Baylor’s required distribution profile and target return hurdles.
- •Growth equity features fewer “zeros,” reducing the burden on winners to cover losses
- •Attractive return/timeline profile (compounding advantage)
- •Manager set capability in growth is a source of confidence
- •Venture exposure is maintained but not scaled simply because tech is large
- 33:33 – 43:11
Liquidity management: 5% distributions, cash as an option, and mechanical buying in drawdowns
Baylor targets ~5% annual distributions and maintains additional “subjective” liquidity to act on opportunities. Morehead outlines a disciplined, staged approach to buying into falling markets in 10% increments to avoid emotional all-in decisions and forced errors.
- •Objective liquidity: ~5% annual distributions for scholarships and operations
- •Subjective liquidity: cash reserved for future high-return opportunities
- •Cash has an opportunity cost; they seek opportunities above that hurdle
- •Mechanical deployment by drawdown bands (20/30/40% etc.) to avoid catching the falling knife emotionally
- 43:11 – 52:55
Team building and LP incentives: hiring undergrads for stability, mission-driven motivation, and benchmarking reality
Morehead explains why Baylor hires heavily from undergrad ranks to build a stable team in Waco, accepting early training costs to reduce turnover risk. He rejects the idea that endowment incentives are “broken,” arguing the job requires mission alignment, and he discusses how Baylor balances peer comparisons with its own priorities.
- •Undergrad hiring improves retention but requires years of heavy training investment
- •Longevity and team stability can compound into better decision-making and returns
- •Endowment work relies on mission motivation more than direct carry-style incentives
- •Peer benchmarking matters, but portfolio changes (e.g., J-curve effects) must be contextualized
- 52:55 – 1:05:17
Manager discipline and materiality: position sizing, strategy drift, and when scale breaks underwriting
Baylor sizes private commitments so underlying company exposure is large enough to matter, and it expects managers to stick to their stated mandate. Morehead discusses why huge venture funds become harder to underwrite (law of large numbers) and why very large endowments may face a ‘needle-moving’ problem.
- •Position sizing starts with desired dollars per underlying company (e.g., ~$3M)
- •Small wins that don’t move the endowment are deprioritized
- •Strategy drift is unacceptable without an explicit conversation; role clarity matters
- •As fund/endowment size grows, it becomes harder to generate material outperformance
- 1:05:17 – 1:16:28
AI infrastructure bottleneck, Europe skepticism, private credit critique, and biotech as the next frontier
In a wide-ranging close, Morehead describes the hidden constraint in the AI data center boom: permitted powered land, with rising community pushback making permits newly scarce and valuable. He’s broadly bearish on Europe due to multiple structural issues, skeptical of private credit’s asymmetrical downside, and increasingly excited about biotech’s potential to cure—not just treat—disease.
- •Data centers: bottleneck shifts from land → power → permitted power; NIMBY pushback drives scarcity
- •Permitting constraints can accelerate power allocation to the projects that clear approvals
- •Europe: cautious due to defense/geopolitical risk, regulation/permitting, and lagging AI; uses hedges/selective longs/shorts
- •Private credit: downside resembles equity without equity upside; prefers equity risk-reward
- •Biotech: high conviction on major scientific impact and diversification vs broader markets
