The Twenty Minute VCHow LPs Allocate to Venture in 2026: What They Want, What They Don’t | Baylor University CIO
EVERY SPOKEN WORD
65 min read · 12,975 words- 0:00 – 1:26
Intro
- DMDavid Morehead
The single reason that privates exist is to make money, period. I'm a little perplexed by the length of some of these funds. It's not clear to me that the GP incentives are aligned with the math that runs endowments.
- HSHarry Stebbings
Now, I'm a venture investor for a living, and something that's frustrated me for a long time is that we don't get to hear from the greatest CIOs who invest in the venture funds that we run. Today, I sit down with one of the best in that business, David Morehead. He's the CIO of Baylor University, and he's one of the most respected CIOs in the business. Baylor's endowment is around $2.6BN. And I'm really proud of this show because it shines a light on a part of the industry that I feel needs a lot more transparency.
- DMDavid Morehead
What we're really after is the velocity of capital, not just returns on capital. There's a rule in our office that you're not allowed to talk about returns without also talking about time. We happen to have about 2.5% of the endowment in Anthropic. I never wanna be all in. Things can always get worse.
- HSHarry Stebbings
Ready to go? [upbeat music] David, I am so excited for this. I have done so much talking over the last 24 hours, it's untrue. Um, so thank you so much for joining me today. This will be a lot of fun.
- DMDavid Morehead
Sure. Happy to be here.
- 1:26 – 8:01
How Baylor Invests a $2.6BN Endowment
- HSHarry Stebbings
Now, I would love to just start with a little bit of, like, an overview of Baylor and how you think about investing today from Baylor as an institution.
- DMDavid Morehead
Right. It's, it's a pretty important job, right? Particularly in the, uh, place that we are with higher ed. Uh, right no- you know, we obviously have fewer high school students in the US, um, you know, kinda coming out of the great financial crisis. And so as number of high school students decline, that's obviously fewer tuition dollars. Uh, the other thing that we have going on, obviously, is that the last couple of years it's been more difficult for international students to come over to the States, appropriate visas, stay, et cetera, all of those things. Those, um, are full-pay students, obviously. And so that kind of compresses higher ed, you know, financial books a different way. And so what that means is that collectively there's a lot, a lot of competition, uh, for domestic students this- uh, these days. And if you just look at the last, like, this incoming class, I guess it would be the class of 2030, there are a lot of schools across the country that did not meet their, um, their targets for, you know, incoming student class. And what that means, of course, is that the revenue has to come from somewhere else. And so in this time and space, and I think realistically for the next 10 or 15 years, distributions that are coming off of endowment funds are going to be increasingly important. And so we manage sort of, like, with that in mind. Now, we've always been good at the downside. So historically, our office, like, first quarter of 2026, I think the S&P was down 4%, we were flat. Um, you know, if you go back over time and you look at the fourth quarter of 2018, the first quarter of 2016, um, 2012, if you look at a lot of these different times, our office in general tends to outperform to the downside. And what we've kinda gone back and looked at is, how could we get better at the upside? Uh, we started this about five years ago, kinda knowing that this high school, you know, student issue was going to kinda rear its head, be a problem. And so we've reorganized things over the last five years to make sure that we're doing, we're doing better to the, on the right side of the distribution.
- HSHarry Stebbings
Is it possible to do both? If you, um-
- DMDavid Morehead
Well, I've had, I've had finance faculty actually laugh at me, right? So when I, when I say, like, what we're trying to do, and I'll let you be a little bit the judge of that. I mean, effectively what we're doing is we run sort of like a value-centric, high-quality book, particularly on the equity side, because it's really, really hard to control sort of, like, the equity beta, right? So, uh, you could buy puts. That's kind of like a money-losing effort, like, over long periods of time. And so we try to do it thematically through factor, um, through factor allocations. But that then means, of course, that to the upside, when you're in a momentum-driven market, a growth-led market, that you're going to trail. And so the issue is, you know, the market's up 70% of the time. If you're gonna trail to the upside, that's gonna be problematic. And what we've tried to do over the last really three to five years is we've tried to increasingly solve that with convexity, and we've tried to do that in a manner such that we're actually not paying a theta bill on, on sort of like a normalized basis.
- HSHarry Stebbings
I have to ask, increasingly solve that with convexity before we move to theta, what do you mean by that?
- DMDavid Morehead
Yeah, so basically what we've done is typically higher ed outsources the investment of the endowment to a whole set of different managers. And so we by nature have a bun- of- we have a bunch of investments in a number of commingled funds. And commingled funds by definition means that there's one GP who's managing the money, and then there's, like, 100 or 1,000 LPs who are receiving the returns on that money. The issue with commingled funds is, of course, at any given point in time, you're receiving the average risk-return profile That that manager is providing in order to keep all of those LPs satisfied. And at any given point in time, Baylor's, uh, risk-return need might vary from what the average LP in that fund, uh, would desire. And so what we've tried to do is kind of go directly to the GP and say, "Hey, this co-mingle thing isn't, like, totally working for us. We need to, like, optimize our risk return profile better. If we give you a bunch of money, would you, would you run the same strategy but do it just for us?" And then we have a look or a call into what's going into the portfolio. So let me give an example. Say we have Nvidia in the, in the portfolio, right? And then the next marginal manager wants to add Nivi- Nvidia to his or her portfolio. Well, we can look at the portfolio. Like, the GP doesn't know that. We can look at our portfolio and be like, "Look, we've got plenty of Nvidia." We actually say, "No, we don't need more Nvidia." Right? Or conversely, let's say that we're, you know, value, high quality, the next marginal manager wants to add Nvidia, and we're like, "We actually don't have any of that, so we'd take the Nvidia that you're offering, but why don't you make it three times as big?" Because that's what we need to, like, back into a more appropriate, more optimized risk return profile for our portfolio. And it's actually worked, like, exceedingly well over the last two, three years.
- HSHarry Stebbings
Can I ask, just taking a step up, when you think-
- DMDavid Morehead
Mm-hmm
- HSHarry Stebbings
... about portfolio construction today, you have a blank canvas. How do you at Baylor think about portfolio construction today? What does that blend look like? Publics, privates, credit, debt, venture P?
- 8:01 – 11:02
How Should an Endowment Build a Portfolio?
- DMDavid Morehead
It's interesting. We actually spend a lot of time talking about this. And in fact, I think we probably spend more time talking about this than we actually do, um, manager selection, which is kind of unique in the space. Um, presently we're around 45% private, 47% private, 53, 55% public. And I think it's really important for if you're starting with a blank sheet and you're going to do privates, you really need to nail down the private side first, right? Because the private side is gonna suck your liquidity and sort of, like, hog tie your ability to allocate between managers or between strategies. And so you really need to figure out what sort of liquidity environment can I live with on the private side and sort of determine what that allocation is going to be. And then I think you just need to sort of, like, box it and set it aside and be like, "This is what's going to be operating here." And you... The reason you have to do that is because this can't change, right? Yeah, I mean, you can do secondaries, you can, you know, tweak it at the margin, but it's really, really hard to move a private book around.
- HSHarry Stebbings
What would your answer be for what sort of liquidity profile you thought you needed when you were considering this?
- DMDavid Morehead
Right. So our allocation range around privates is 35 to 55, which means that we want 55 to be the case when we have a denominator issue, right? When equities have gone down and the public side is smaller than it usually is because of this particular difficulty in the market, that the private side isn't going to kick up so much that we're gonna be forced into selling, right? Like, like, the number one thing to avoid is fraud, and the number two thing to avoid is forced selling, right? That's a disaster. And so, um, so we kind of target 45%.
- HSHarry Stebbings
Mm-hmm.
- DMDavid Morehead
Um, you know, if, if publics race ahead, then it puts some downward pressure on that. And if we get into, you know, a financial crisis, something like that, it would put upward pressure on that. But for example, the last bit in 2022 when tech, you know, kind of slid a bunch, or you could go back a couple years prior to the pandemic, uh, I think that our private side got to, like, 51, 52, but it wasn't so much that it either constrained our ability to allocate, and it certainly wasn't enough that we got into a forced selling situation.
- HSHarry Stebbings
Totally get that. That's super helpful. Can I ask, when you think about then the 45%, say, that we have as the ideal, drilling one layer lower, how do you think about how to split that up between venture, PE, and every other private that we can do?
- 11:02 – 12:38
Why Private Markets Exist to Make Money
- DMDavid Morehead
Right. We've, we've had a different perspective on this over the last, uh, five or six years that really came out of what I was talking about before when we knew that the school was going to have issues as it related to enrollment, right? And it's not just a Baylor thing, but like every school. Um, demographics are, can kind of be a slow-moving train wreck, right? But the, the benefit of s- the slow movement is that we can sit back and look five years out and know what's going to happen. And so we started this five or six years ago, like shortly after the pandemic, and we basically said the single reason that privates exist is to make money, period, end of story. And so anything in the private book that isn't going to lend itself to excess returns, again, we need to create money to create more distributions for the school that's gonna have enrollment, you know, concerns. And so if you're not going to keep up with the highest returns that we can generate out of the private book, we're, we've kind of moved on from that. And so a lot of the real asset stuff in our book is sort of like winding down, not being renewed. And so we're really focusing, to get back to your question, today we're focusing on VC expansion, growth equity capital, and buyout. That's kinda it, right? So if we're going to lock up money, we want the highest
- 12:38 – 13:56
Big-Name VC Funds vs Emerging Managers
- DMDavid Morehead
returns.
- HSHarry Stebbings
How do you think about trying then, if you want VC, you want growth equity, how do you think about trying to get into the big names, the Sequoias, the Benchmarks, the Founders Funds, the, you name those big brands, versus trying to find the young upstart, the little boutique provider that could do a 10X?
- DMDavid Morehead
I will say that, you know, we're coming along a little bit later to the party than some of the Ivy Leagues or Stanford or what have you as it relates to the sort of like VC brand names that you're talking about. And so it hasn't been for lack of trying. It's just like when you knock on the door, they kinda like don't answer, right? So we've kinda had to go, [laughs] we've kinda had to like try to figure that out, uh, differently. What I will say, though, is that, uh, the ladies in our office have had exceptional, absolutely exceptional returns out of like the expansion growth equity category. So we've actually, we've actually had, you know, some questions of like, "Should we just allocate more dollars to that, um, to that sector of the market?" At the margin we have, but I would say, you know, we still do VC. It's still in, in probably newer upstarty names.
- 13:56 – 14:28
Are Venture Funds Simply Too Long?
- HSHarry Stebbings
David, do you like VC?
- DMDavid Morehead
I do.
- HSHarry Stebbings
[laughs]
- DMDavid Morehead
I'm a little, I'm a little perplexed by the length of some of these funds. And, uh, I've gotta be honest, I am not sure, I'm, it's not clear to me that the GP incentives are aligned with the math that runs endowments. And so-
- HSHarry Stebbings
What does that mean?
- 14:28 – 15:43
Why a 15x Venture Return Can Be Worse Than a 3x Growth Return
- DMDavid Morehead
Let's just do a f- for example, right? You know, it's, historically they were like 10, 12 year funds. Now they're like 15, 18 year funds, right? Um, so much to the chagrin of like all LPs, right? But the issue that you run into is that, okay, so you get your money back in 15 or 18 years, and let's just say it was like phenomenal experience and you're up like 15X. You're like, "That's fantastic." But the issue is that it happened over 15 to 18 years. And what, you know, simple math would suggest is that like if you were in a like growth equity fund, um, that was six years in weighted average life and you were up 3X, and then you redeployed into another growth equity fund that was up 3X in six years, and then you did it again, that over the course of 18 years you'd be up 27X, which is better than 15x by like a factor of two. So I understand why people want to hang onto their winners, but the compounding of capital, and I'm trying to create the largest pile of money for students. Students can't pay their tuition with returns.
- 15:43 – 17:08
Why Velocity of Capital Matters More Than Fund Multiple
- DMDavid Morehead
They have to pay with dollars. So I'm expressly interested in creating the largest pile of money, and the largest pile of money is governed by like simple compounding math. And so what we're really after is the velocity of capital, not just returns on capital. Whenever the velocity of capital is going to start to, you know, asymptotically approach like wherever it's going to be, then we wanna be out and move onto the next thing. In other words, like it's really, really hard to do like 3X in six years, right?
- HSHarry Stebbings
It's really hard.
- DMDavid Morehead
It's easier. You have winners now. The company's going okay. Um, it's actually looks better on your marketing if you're up 6X instead of 3X. So like if, if people held onto it for another five years and got like a double, then b- they'd be up 6X instead of 3X. That suggests that the next fund will be raised, et cetera, et cetera. But I actually don't care about any of that, right? Like, that's a business decision, right? That's, that's related to the business, and I'm not optimizing for the best business for the GP. I'm trying to optimize for the biggest pile of money for our students. And so I get that there's a little bit of a disconnect there, but it do- the math issue does kinda drive me nuts.
- 17:08 – 18:45
Why Would an LP Invest in Venture at All?
- HSHarry Stebbings
Can I ask you a blunt question then? [laughs]
- DMDavid Morehead
Yeah.
- HSHarry Stebbings
And I, I love this interview 'cause it's completely not in my interest as a venture investor-
- DMDavid Morehead
[laughs]
- HSHarry Stebbings
... and as someone who interviews-
- DMDavid Morehead
Sorry
- HSHarry Stebbings
... venture investors. No, no, this is why I love it. This, I have the best job in the world. But given the requirements on velocity of cash and the value of compounding, which I very clearly see, do you not have an question internally of, "Well, why do VC at all if we can do growth equity or mid-market and get the 3X in six years?" I get you, David. I'm not doing that for you and, and neither is the best firms.
- DMDavid Morehead
Yeah. That, oh, well, and that is a question that gets batted around a lot in our office. And so, you know, there is something to be said about sort of laddering returns, right? So it's okay, you know, to go, you know, have, have, allocate to s- m- you know, money to some manager and say like, "Those returns are gonna show up like six, seven, 10 years from now. These other returns are gonna show up three to five years from now, and then like kinda on my side, those returns are gonna show up one to three years from now." So we do think about it that way, but I would say that time actually m- there's a rule in our office that you're not allowed to talk about returns without also talking about time. Because it's, it's very common on the private side to just say everything like in, "Well, you're up 2X, 3X, 5X," whatever. But that, uh, that tells you nothing, right? If you're up 5X over 30 years, that's horrible, right? And if you're up 5X in five months, that's, you know, that's amazing, right? I guess that's SpaceX.
- HSHarry Stebbings
Is venture then just a pure diversification play for you, which
- 18:45 – 20:48
Baylor Has 2.5% of Its Endowment in Anthropic
- HSHarry Stebbings
is like it's good-
- DMDavid Morehead
It is for us. Yeah.
- HSHarry Stebbings
Yeah.
- DMDavid Morehead
It is. It's a stage... You know, it, it could be the case that somebody allocates to something that really takes off and, and, and goes quite well. Like for example, we happen to have about 2.5% of the endowment in Anthropic. We have no exposure to SpaceX. We've had no exposure to OpenAI, but about 2.5% of the endowment is in Anthropic.
- HSHarry Stebbings
Well done.
- DMDavid Morehead
I mean, that's not us, right? Like, that's managers.
- HSHarry Stebbings
David, for goodness sake, will you please learn from your managers? Okay. Lesson number one-
- DMDavid Morehead
[laughs]
- HSHarry Stebbings
... of venture capital, okay? Even if it was not you, you take credit and say, "Thank you so much. I remember that one." Yes.
- DMDavid Morehead
That's not really how we roll at Baylor, but-
- HSHarry Stebbings
Well, you know, you could learn-
- DMDavid Morehead
Understood
- HSHarry Stebbings
... you could learn. Can, can I ask you, it's a really diff- And I'm not saying with Anthropic here, but I'm saying with positions that go public, Anthropic obviously will be one. But with positions that go public in the past, how do you think about the, I'm gonna actively manage it as now the holder, versus a common one that I hear, which is, "That's not our job. We just liquidate the minute that we get it because we don't know about this asset."
- DMDavid Morehead
It'll depend on what we think about the name, and it'll also depend about the size of the position once it is public, right? So we've sold, you know, shares before. Um, we've also had shares before. Um, we've also let shares run before. So it kind of depends to us what we're expecting, what the profile of the portfolio looks like, um, and the position and the risk associated with it.
- HSHarry Stebbings
I was talking to Sean before this show, who you mentioned we should chat to. He's brilliant, Sean Barrett. Uh, and he said that you think more like Charlie Munger than anyone he's ever met. That was, that, like, how did it resonate-
- DMDavid Morehead
Only because we're in the middle of the country, I think. [laughs]
- HSHarry Stebbings
[laughs]
- 20:48 – 26:05
Why Baylor Bought the Software Crash
- HSHarry Stebbings
And he said that when software was getting killed early in 2026, you went deep on the situation, wanted to understand every bit of research, and then piled in. Can you, can you talk to me about that, your process there, what you saw that others didn't, and how you thought about that? I'm just fascinated given that.
- DMDavid Morehead
Yeah, we do... I, I would say, like, if, if we had an edge, um, I would say that we're pretty good on human behavior. Um, and so a lot of these things, you know, I, I don't dispute at all. Like, I'm not an engineer. Um, you know, m- much of the stuff that comes out of Silicon Valley is over my head. Um, but I do know how people think, and I do know how people make decisions. And so it's, it's pretty easy in, in this case of, you know, like software is dead. It's all going to zero. Somebody's gonna vibe code this and, you know, whatever. And like, I have friends that run, you know, 3, 500 person, you know, private family businesses, and [laughs] I c- it's easy enough to pick up the phone and call them. We're like, "Hey, say your son-in-law vibe codes something and you're gonna, like, tear out your CRM." And they're like, "Not in a million years," right? It's not their job, right? Like, I have a good friend who runs, like, a vertically integrated, like, potpourri business, right? Like, he knows everything that there is to know about that, but he is not going to tear out key important parts of, you know, what makes his business run behind the scenes on some unproven thing that, you know, I think, I think it was, uh, the CEO of Salesforce, like, I don't know, six or eight months ago said that, like, the best that AI was gonna be is, like, 93% right, which is, like, phenomenal and that might be, like, better than, like, a lot of people. But the issue is software is 100% right, right? So, so [laughs] like if you need your books to, like, match up and whatever, like yeah, that's not gonna happen. So I actually think, as we've kind of, like, thought about it more, I actually think that in some of these vertical industries, that software is actually gonna be the delivery mechanism for AI. That, in other words, for, like, my friend who's in, like, a niche business, um, very, very good at what they do. I think, I think they're the only vertically integrated potpourri, um, maker in the, in the world. I think that what's going to happen is that the trust that's been built up with the software providers is going to translate into, "Hey, could you add AI bits, you know, for me on the back of this software?" And of course, like, you know, the SAS companies aren't stupid. It's not like they're sitting there and like, "Hey, we're worth, you know, $20 or $50 billion. We should let this go to zero."
- HSHarry Stebbings
What's interesting for me is you analyze this situation, and then you decide to act on it. Like, this is very rare for an institution to do normally.
- DMDavid Morehead
And then, like Sean and others have, like, told me that. But, like, I, I, that I don't actually understand, right? Because, like, if it's on sale, right? So software at that point is, like, on sale to the tune of, like, 50, 60% from, like, October of '25. And if you're, if the thesis is-
- HSHarry Stebbings
But, but the-
- DMDavid Morehead
... software's going away, software's going away, it's down 50, 60%, you call businesses and they say, "That's not true," you're like, "I'll own that."
- HSHarry Stebbings
I get you, but it's throwing the baby out with the bathwater. The trouble is, I'm not sure what's the baby and I'm not sure what's the bathwater. And-
- DMDavid Morehead
And that's, and that's why-
- HSHarry Stebbings
With the greatest of respect, I live in technology, and I think-
- DMDavid Morehead
And that's why we have managers like Sean, right? So he's the expert. So I'm like, "I'm gonna give you more money, but I want you to go through your list with me and tell me all the things that are least likely to be interdicted by AI, and then, like, own those." So I'm, I'm making a decision based on human behavior and what, how I know people make decisions, right? And I'm allocating based on that. But I'm relying on the manager to be expert in their individual field and give me the correct perspective and what's going on on the ground.
- HSHarry Stebbings
But what's so interesting is most just delegate to managers and go, "You're the experts." You delegate to them, great, and then you go, "I'm also gonna operate where I have decisions myself, and I'm gonna interject in those markets."
- DMDavid Morehead
But I kinda think that that's our job, right? I mean, like, we are, like, my seat is, like, an allocator seat. My job is to allocate. To go back to the, like, the Buffett or Charlie example, right, like, they also are allocators, right? And they're deciding who gets the incremental dollars. Do they send it to Burlington Northern, or do they send it to, you know, their energy company, right? And depending on what the outlook is, what the CapEx requirements are, et cetera, you know, they get budgets submitted to them, and they may or may not allocate more of their cash pile to those companies.
- 26:05 – 27:19
Why Public Markets Can Teach You More Than Venture
- HSHarry Stebbings
Quite a lot of LPs that I speak to say, "I get the liquidity challenge of venture, and I get the time lags of venture being difficult. But I learn a lot from what happens in my venture portfolios in terms of AI penetration, new technologies, adoption cycles." Is your venture portfolio a learning academy for you or not?
- DMDavid Morehead
Not for me. I would say it goes the other way. It was, I actually learn a lot from the public side managers, right? Be- And the, w- what I find is that there's a lot of this, like, you know, spun up, like, "Oh my gosh," like, "we're gonna have autonomous cars in, like, three years," like, in 2016, right? Yeah, right. Right? Like, all the regulatory stuff that you have to go through so that you don't kill somebody. Yeah, we're 10 years on, and what do we have, like 5,000 cars on the road? Like, please. Right? So, like, I get sort of like the mental imagination that, you know, you can go, like, oh yeah, we could put, you know, we could put something on the moon, and we could mine the moon and whatever. Yeah, okay. Like, get back to me in 30 years.
- HSHarry Stebbings
Okay, but you're not worried then about
- 27:19 – 29:07
Are Public Markets Actually More Rational Than Private Markets?
- HSHarry Stebbings
the casinoization of public markets, which is-
- DMDavid Morehead
No. No.
- HSHarry Stebbings
But we are seeing-
- DMDavid Morehead
The public markets are the big leagues. The private markets-
- HSHarry Stebbings
They're, they're, they're being memed. They're, like, you know-
- DMDavid Morehead
[laughs]
- HSHarry Stebbings
They're, they're being-
- DMDavid Morehead
Whatever. There's, um, there's millions of people making decisions on, on dollars every single day for every single company. You know how things get valued on the private side? Of course you do. Three people get in a room and say, "Hey, I think the value is X." And they're like, "I'll fund it at that." Great, and that resets the whole, uh, price.
- HSHarry Stebbings
But I think public markets in many respects are as irrational as private markets are staying. We saw that. Dude, you saw that. You saw that with the Fed.
- DMDavid Morehead
They, they can, they can be irrational because they're governed by people. The difference is, is that there are tens of millions of people trading on that information, whereas on the private side there's, like, three.
- HSHarry Stebbings
And they decided, those tens of millions of people, that Elon Musk is a premium in, in himself that SpaceX should be a $1.8 trillion business.
- DMDavid Morehead
Yeah. That doesn't mean that they're right. It just means that it incorporates all available information, which does not happen on the private side.
- HSHarry Stebbings
And so what you're saying is that the sheer scale of people voting in this buying decision means that it's a more legitimate price than private side, just so I understand.
- DMDavid Morehead
Correct. Correct. I don't think there's any question about that. I literally have been in these conversations, right, where, like, three guys get together and are like, "Hey, I think it should be this," right? On... Like, on what? Right? [laughs] And they're like, "Well, I'll give you $50 million at that price." Okay, fine.
- 29:07 – 31:20
Can LPs Trust Private Market Valuations?
- DMDavid Morehead
Right? But that's-
- HSHarry Stebbings
On the fact that I tried the product and I liked it, David.
- DMDavid Morehead
[laughs]
- HSHarry Stebbings
Why are you asking me such intellectual questions?
- DMDavid Morehead
Exactly. Right.
- HSHarry Stebbings
Um, do you trust, and I, I don't mean that badly, but, like, do you trust the, the prices coming back from your managers? You know, we, we all have our books, our portfolios-
- DMDavid Morehead
Uh-
- HSHarry Stebbings
... for people listening.
- DMDavid Morehead
We-
- HSHarry Stebbings
And, and we mark them in different ways and explain it to everyone.
- DMDavid Morehead
We do. So, uh, that's one thing that the ladies have done extremely good job of. R- Recall again that I'm coming from the public side. So, you know, when you run trading books, everything has to be priced every day, right? So then ostensibly it's so you make better decisions, right? Because if you have things mismarked, then psychology works against you, right? Like, if you say that this is worth $30 million and it should be worth $10 million, and somebody offers you 20, then because you would ostensibly take a loss from 30 to 20, you're liable not to hit that even though it's a premium to the actual value. And so pricing is just a way to make sure that you are psychologically aligned to the reality of the market. And so one of the things that we really try to do is to make sure that our managers are not pushing- Valuations, right? We want valuations to be conservative rather than aggressive. And, and you can see that in sort of our return data, in sort of like the six months, nine months prior to something being taken out. Uh, our, I think, average gain on that is sort of like 60 to 90%, and I think from a market perspective, it's more like 30 to 50%, which would suggest that our marks, our manager's marks tend to be more conservative than others. So I feel com- you know, like I kind sit on top of this thing, and I kinda have to vouch for, you know, the valuations that we have as it relates to, you know, talking to the regents or administration, and I feel pretty comfortable that on the private side our, our marks are actually more sane than, than the, than
- 31:20 – 33:33
Why Baylor Prefers Growth Equity to Venture
- DMDavid Morehead
on average.
- HSHarry Stebbings
As venture eats more and more of the world with your OpenAIs, your Anthropics, your SpaceX, your biggest companies in the world all being venture-backed companies, do you maybe feel that you need more in venture, more in tech? Does it change how you view the world? Does the mindset change?
- DMDavid Morehead
No, I, I feel pretty comfortable with where we stand. Um, I would say I think our biggest allocation is in growth equity on the private side, and we feel pretty comfortable with our capability and the manager set that we have there. We still do-
- HSHarry Stebbings
Why do you like growth equity? Because of the return to timeline profile?
- DMDavid Morehead
The, the return timeline, there's also few- fewer zeros, right
- HSHarry Stebbings
Mm.
- DMDavid Morehead
And so that kind of goes to the value bit. Of course, if there... I mean, it's just simple math. If there are fewer zeros, then everything else doesn't have to cover for the things that don't work, right? Which w- which is what helps get you to, like I think that, I think that their book is, like, annualizing at, like, 30%, right, on sort of, like, the growth equity s- side. So, um, that obviously meets our, like, 8, 9% bogey, so I don't e- even actually know that I've ever had that question before.
- HSHarry Stebbings
How do you think about, like, mulligan vintages, uh, across venture and PE, mulligan being, like, not very good vintages? You know, a lot of people are talking about kind of '21, '22 for venture-
- DMDavid Morehead
Mm
- HSHarry Stebbings
... and PE being just, like, very bad vintages. We all, we all just kind of went crazy. It was COVID. Sorry, mea culpa. And you've got now Thoma Bravo. Obviously you had Medallia, which is obviously quite a, you know-
- DMDavid Morehead
Right
- HSHarry Stebbings
... well-known return, the keys situation, the-
- DMDavid Morehead
I think that just kind of comes with the territory, right? I mean, like, if, if what you're doing... Basically what we do is we say, "This is the amount that's gonna be in privates." And then we say, "We're gonna allocate to PE expansion capital and VC, and we're gonna do it in these sectors." And then I let the ladies have at it, and they come up with a portfolio, and it ha- the portfolio overall has sort of, like, an expected return hurdle that they need to clear. If they're not clearing it, then that's a problem. If they are clearing it, then that
- 33:33 – 36:13
How Much Liquidity Should an Endowment Keep?
- DMDavid Morehead
works great.
- HSHarry Stebbings
Can I ask you, what are the annual liquidity requirements that, like, obviously as an endowment, you, you mentioned some of the, you know, paying for tuition, really important. Um, what are the annual requirements in terms of liquidity for you?
- DMDavid Morehead
It's on a couple fronts. Like, obviously on the distribution side, that's something that we can't get around, right? And that's about 5%, um, on an annual basis. Um, and so that, you know, on a dollar amount, that keeps going up, which we want it to, right? Like, that is the thing that, you know, pays for scholarships and professorships, et cetera. On the sort of, like, subjective side, so let's call that, like, the objective side of the l- liquidity equation. On the subjective side of the liquidity equation is sort of like what capital do you need to have around to allocate to the next thing that's gonna go up, you know, 20, 30%? So we talk to our newer analysts about this, and we, we say, like, "What do you think the odds are that we find something to, you know, be up 20% sometime in the next four years? Like anything, anywhere." And they're like, "Wow, really high." And we're like, "Great." So then cash is worth 5% a year, apart from what you're gonna earn on cash. So if cash is earning 3.5% plus 5%, so, uh, opportunity cost, you know, cash is worth 8.5%. So if we find things to do that are north of that, then we do them. And if there's a period in the market sort of like '17, '18, '19, where we're not finding things to do in that, in that ballpark, then we let cash, uh, get larger. So we, we kinda came into the pandemic with sort of 15, 16% in cash because we were looking around and we're like, "I don't see something to do." And so our cash balance is sort of indicative of, you know, what we're seeing to do to make money.
- HSHarry Stebbings
Very difficult to keep your head when everyone else is losing theirs. It's a brilliant Rudyard Kipling poem. Um, but it's very difficult to do. When momentum and excitement kicks in-
- DMDavid Morehead
Mm-hmm
- HSHarry Stebbings
... it takes one disciplined mind-
- DMDavid Morehead
Now, interestingly, in this period, this, so in the '17, '18, '19, you know, kind of cycle, we weren't finding other things to do. This time, we actually are finding stuff to do. And so we've actually kept our, uh, cash balances pretty low because we keep finding, you know, 20, 30% annualized things to do. So, um, it's just, and so our cash balances just end up being a function of, like, you know, what the environment
- 36:13 – 37:43
The Biggest Lesson From Losing Money
- DMDavid Morehead
is.
- HSHarry Stebbings
I think one learns a lot from their mistakes if you are reflective. When you look at allocation decisions, what is an allocation mistake that comes to mind first, and, and how do you reflect on it and learn from it?
- DMDavid Morehead
Well, I can't, I can't come up with a specific example right off the top of my head, but I will say this, is that whenever you're trading, you, you for sure are gonna lose money, and sometimes you're gonna lose a lot of money, and sometimes you're gonna lose a lot of money for a long period of time. And the takeaway from that, basically everyone goes through it. Everyone, you know, walks into the seed and thinks like, "That's not gonna happen to me. This seems pretty easy." Sort of invariably, you know, you get kicked in the shins and then hit over the head by a two-by-four. And the takeaway from that is, I never wanna be all in. Things can always get worse, right? So when we're allocating the software in, you know, Feb, March of this year, we're not, like, drawing a line in the sand and we're like, every, [laughs] every available dollar is going into software, right? It's down 50, 60%. Like, who's to say it's not gonna be down 70, 80%, right? And so we sort, we've set it up so that we're methodically and sort of mechanically allocating into difficult markets. And the reason we do that is to try to take the emotion, the psychology out of
- 37:43 – 47:14
How to Buy Into a Falling Market Without Going All In
- DMDavid Morehead
it.
- HSHarry Stebbings
Can I ask, how do you, how do you literally do that? Methodically allocate into markets.
- DMDavid Morehead
Yeah. So I'll, I'll give you a perspective on, like, the overall markets, right? So we basically say, if the, if the market's down 0 to 10%, we don't care, right? We're an infinite live portfolio. You know, 0 to 10% is, like, normal stuff. The way that I approach it with young analysts, I'm like, "If something's on sale for 10%, do you rush out to the store to buy it?" And they're like, "Well, not, no, not really." I'm like, "What about 20%?" And they're like, "Eh, I'd think about it, maybe." "30%?" "Yeah, probably." "40%?" "For sure." Right? And so we think about declines in the market in sort of 10% increments, and we have, uh, liquidity set up in such a way that we could allocate sort of, like, every 10 percentage points down. Uh, we don't really worry about, you know, 0 to 10%. That's, that's normal.
- HSHarry Stebbings
How do you think about catching a falling knife? Let's make this real. I've done that before. I've looked at your Wix or your monday.com, which were down im- im- impressively large amounts. I love the founders. And dude, I, I, I just determined that I couldn't determine baby from bath water and did nothing.
- DMDavid Morehead
Right.
- HSHarry Stebbings
But dude, they had another 10, 20, 30% drop. How do you think about-
- DMDavid Morehead
And that's why we do it methodically and mechanistically, because we- we're never, like, drawing a line in the sand and saying, like, "Down 20? Oh, I'm all in." Right? We're like, down 20, maybe I'm 20% in. Down 30, I'm another 20% in. Down 40, I'm another 20% in, right? So we're doing it in that way. And the reality is, is that we actually never get all the way invested before it rebounds. And so, um, you could say that, you know, we leave money on the table. That's true. Um, but the benefit is, is that we're never in the situation where we're like, "Oh my gosh, I love this so much and it's down and I just can't have any more of it," right? So that's the, that's the scenario that we're trying to avoid. And that just comes w- from, like, perspective, history, and experience of, like, you know, having trading scars all over your body from [laughs] you, you thought that you were right, you thought that you knew where it was gonna go. You put a whole bunch of money to work, and then it went lower, right? It's a terrible place to be.
- HSHarry Stebbings
It is. When you're holding a stock and it's just down and you're not in a good place, how do you determine between the balance of it's gonna come back and I was right and I'm gonna stick to my beliefs, versus fuck it, I just need to sell. Because the utility value of cash again, even if it's a loss, it can be recycled again. How do you think about that?
- DMDavid Morehead
Yeah. A, a lot of that is in the hands of the managers, of course, right? Because we're not, we're not, like, trading individual stocks. But what I do find is we spend a lot of time working with managers, sort of making sure that their psychology and their emotions are in the correct place. So for example, interacting with Sean, you brought it up, uh, software space. You know, first part of this year, I was probably on the phone with Sean every day for four weeks, right? And we're talking through individual names. I'm relaying what I'm hearing in the market, he's relaying what he's hearing in the market. Uh, we were sending each other, like, articles or quotes or, um, you know, news stories at all hours of the day, et cetera. Um, and I, like, constantly ask him, "Okay, you have this name, but if it goes down, like, another 20%, what are you gonna do?" Right? Or, "You have this name and you have another name, and versus each other, which one do you feel better about or has better risk-adjusted, uh, opportunity set here?" And then I'd push him to be more concentrated, and th- that's actually what the portfolio ends up doing. And I think, kind of to your point, that's what ends up happening in most cases in sort of real-life downdrafts, is that portfolios end up getting more concentrated.
- HSHarry Stebbings
Does that make you nervous?
- DMDavid Morehead
No. We own everything under the sun. So does every, like-
- HSHarry Stebbings
[laughs]
- DMDavid Morehead
So does every ENF portfolio, right? So, like, we own everything from, like, sunscreen to helium to, like, tech to, you know- Like, I don't know what, right? Like, we own all sorts of consumer product goods, uh, that you would see in the mall. We own all sorts of business-to-business, you know, software or tech companies that I've never even heard of before, right? Like, we're, we own, like, real estate development project. We own, like, own everything, right? So, like, it's always funny to me when people, like, compare, uh, an endowment portfolio to the S&P 500 or something like that. You're like, we're, like, infinitely more diverse than the S&P 500. It's not even close. If we get a little bit more concentrated on, at the margin, like, that's, that doesn't remotely change anything for us.
- HSHarry Stebbings
What do you see your endowment CIO cohort do that you think is nuts or wild?
- DMDavid Morehead
There's something that we do that not a lot of schools at our size do, and that is we almost hire exclusively from undergraduate ranks. Now, to be clear, the caveat there is schools or endowments our size, right? So we're about 2.7 billion. Um, you know, 14 months ago we were 2.2 billion. Um, couple years before that we were 1.4, right? So in that sort of, like, one, three to three billion kind of range, and I- I've sort of figured out why a lot of people don't do it, so it was a little bit of a, it was a little bit of something that I missed. But the bit is, is, like, if you hire undergrads, and based on where we are, our office is located in Waco. Uh, we're about 100 miles from Dallas. We're 100 miles from Austin. We're right in the middle between the two. Um, it's pretty difficult for us to hire a mid-career professional and, and get them to stay for a long period of time. It'd be really difficult to pull somebody from LA or New York to Waco and s- and say, like, "I need you to be here for 10 years." And so what we've done to try to solve that is hire from undergrad ranks. They clearly have chosen the school, by definition they've chosen the area, et cetera. They've been around. We actually screen pretty hard for that, uh, when we're hiring people. Um, the issue is, is that when you do that for the next five or six years, you're spending a lot of time pouring into that person and helping them kind of, like, level up. Um, and during that period of time while they're leveling up, it's, like, all still on your shoulders. So I now, [laughs] I totally, I kind of, like, forgot that part. Like, I totally got the, you know, we'll have, you know, a stable investment team, and, you know, these people won't go anywhere or whatever. But I kind of forgot the bit of, like, yeah, and for the next five or six years you're, you're gonna be wearing, like, all sorts of hats during that time.
- HSHarry Stebbings
Do you think your colleagues are nuts, then, for not hiring internally, and do you think the musical chairs
- DMDavid Morehead
I think that nuts is not the word that I would use. I, I would say that they are accepting alternative risks, right? And so the alternative risks are, on the, the upside to me is that I have a stable, uh, team, right? So I have worked with Renee for almost 16 years. The next person, uh, that we hired, Jen, she's been here 11 years, right? And, and you can, like, kind of go on down, down the line. That actually accrues as pretty evident across the, uh, across the industry, is it's like longevity begets returns. So I'm benefited on the stability front. The negative for me is that the upfront, you know, bearing of all of that, um, you know, time, I have to, I, there's a period of time where I have to, like, carry, carry the, carry the team. On the flip side, if you hi- hire mid-career professionals, uh, you don't have sort of, like, that upfront cost of, like, having to carry the team, right? 'Cause they're more plug and play. Um, but you sort of wear this risk of turnover and, you know, potentially poorer returns.
- HSHarry Stebbings
David, do you think the incentive structure for LPs is broken? And, uh, let's be specific on LPs, or endowment fund investors. You know, if you look at fund of funds, if I crush it for my fund of funds, they obviously have carry, and they will do very well from that. With traditional endowment fund investing, you know, if, if I do really well for you, it doesn't necessarily translate-
- DMDavid Morehead
Ah
- HSHarry Stebbings
... to a huge
- 47:14 – 48:11
Are LP Incentives Broken?
- HSHarry Stebbings
paycheck. Are we, are we actually, do we have a wrong incentive mechanism?
- DMDavid Morehead
I don't think it's a wrong incentive mechanism. I think that it requires people in the space to be very missional, right? So, like, I wake up every morning, uh, motivated by sending some, you know, sophomore in high school to Baylor that hasn't even thought about college yet, right? Or some, like, seventh or eighth grader who doesn't know if they're going to go to college, and, you know, they're thinking about baseball scores from the prior night, right? Like, me getting out of bed in the morning, going to work, and wanting to crush it is, is entirely due to that, right? So, um, you know, everyone, everyone likes to be able to get their wife something nice or to redo the kitchen in, in their house or go on trips, but, like, that is not the motivating factor for either myself or the people on my team.
- HSHarry Stebbings
Do you worry
- 48:11 – 53:07
Is AI Making Humans Worse at Thinking?
- HSHarry Stebbings
about the impact of AI on education?
- DMDavid Morehead
I worry about the impact of AI on human thinking. Um, so, you know, there, there are a number of studies out, uh, I think that... I, I don't know about their veracity, but, like, they're coming out of MIT and austere places like that, that suggest that students who are using AI for everything that they do actually show less brain function. Right? And this isn't really a surprise. You see the same thing, like, if you just sit in a chair all day, right? That your muscle atrophies. And so I do have concern about, um, the effect of AI on actual human logic thinking. Um, you know, that, that's sort of like an innately human trait. Animals don't think, right? Humans think. But if you abdicate your responsibility for thinking, it's not clear that humans do that either. So I have concerns about that. I think education can figure it out and, you know, use it beneficially, I think. Um, but I think it's more of a human discipline problem.
- HSHarry Stebbings
For a lot of my friends, CIOs of other endowments, sometimes larger, they've been hit with obviously the endowment fund tax, which is really hitting larger-
- DMDavid Morehead
Mm
- HSHarry Stebbings
... organizations. How do you think about that? How do you advise them?
- DMDavid Morehead
I would love to be in their position. [laughs] We are not, uh, because our endowment per student is too small to be subject to that. But I promise you, if I went to the president of Baylor, I've, I've actually had this conversation with Linda. If I go, if I go to Linda and say, like, "There's good news and there's bad news. The bad news is that we're gonna have to pay an endowment tax. The good news is that our endowment is three times bigger than when I last talked to you," she'd be like, "Yeah, and?" So yeah, I don't [laughs] I would love to have to pay the endowment tax because the endowment was bigger.
- HSHarry Stebbings
Do you play a game of comparison? What is it? Comparison is the thief of joy. And you know, I think you said earlier, you know, in down times, you, you obviously are brilliant, and in up times, you know, it more challenging. I think you play a defensive game. Full year 2025, Baylor returned 9.4%.
- DMDavid Morehead
Mm-hmm.
- HSHarry Stebbings
Dartmouth lowest at 10.8. Do you do the comparative side by side, or do you row your own race?
- DMDavid Morehead
We, we do both, which I think is the right way to do it. Um, I w- you know, every school has a different set of priorities, needs, et cetera. Baylor's is currently to get the endowment higher on a, on a per student basis. And so for example, what you're referring to in terms of last year, uh, that was disappointing on a, on sort of like a relative basis, but there were two bits that were going on. One was that we had increased the allocation to privates by, in sort of like annual commitment amount, by about 60, 70% in 2020, 2021 and following. And so returns on, from the private side have been dealing with sort of like a second J curve, if you will. And then the funds of one, and then there's like another asset class that we'd allocated to, those have been like flat and starting to inflect up. And so this fiscal year was the first year that we weren't dealing with the, you know, J curve impact on the private side and the first year that we got returns from both, you know, the fund of one category and this other category. And so we feel very, very good about sort of like, you know, our newest analyst was like, "So basically you guys tried to change the engine while the car was moving." And yeah, that's 100% what we were trying to do. We were trying to put a new bigger engine in the car while it was still going down the highway, and we did it. Uh, we had like a little bit of a lag last year. Um, I think we'll be 18 and a half, 19% this year, uh, without any SpaceX or Cerberus or anything like that. So, um, structurally, I think the next couple of years look pretty good from sort of a tailwind perspective.
- HSHarry Stebbings
Can I ask you, we chatted before about a friend of mine who y- you're, you're gonna be working with. How do you think about position sizing in the positions that you do decide to engage with?
- 53:07 – 55:35
How Big Does a Fund Position Need to Be to Matter?
- DMDavid Morehead
Yeah, so this is an interesting one, and you're s- you're talking specifically on the private side. So we, yeah, so we w- we spent a lot of time on this bec- uh, sort of because of what I had talked about earlier that, like, we own everything under the sun. And one of the things that we had figured out is that, yeah, you know, we have this relationship with GP and we have this, you know, they're, they send us a little note, so and so company got sold. It was like a 7X return. And I'm like, "Okay, great. What does that mean to us?" And they're like, "Well, we'll get back like $400,000." And I'm like, "What? Who cares," right? Like it, it means nothing to the overall endowment. And so one of the things that we've changed in sort of sizing is we start with how much money do we want to have in each underlying company, right? So in other words, if w- if the company's gonna be up 5X, we want that 5X to matter to the overall fund. So basically what we're doing in sort of like expansion, uh, buyout, uh, venture's like a little bit of a different thing because it's like a bigger, it is a bigger company set. But basically what we're saying is we want $3 million to be in each underlying company. And so if they have 10 companies on their platform, that means we'll allocate $30 million.
- HSHarry Stebbings
I get you totally. Or, or another way that I think about it, and you can tell me if I'm wrong, which very possibly could be the case, I'm a low IQ individual after all-
- DMDavid Morehead
[laughs] Right
- HSHarry Stebbings
... um, is, uh, it's a $200 million fund and you commit $20 million to it with the theory that if they say we are 10%, 10% ownership in every company, great. If we're 10% of their fund, our exposure is 1% per company.
- DMDavid Morehead
Yeah, we don't, we don't, we think about it in terms of dollars, right? So we say, we say, how many companies are you gonna have? 8, 10, 12? And then we want two and a half to $3 million in each company. Like, uh, obviously-
- HSHarry Stebbings
Yeah, I get it. I get it
- DMDavid Morehead
... it's up to the manager, you know, et cetera. We're not dictating that, but we're just doing the math from a, from a dollars perspective. So if you have 10 companies, we want $3 million in each company. So if it was up, you know, 5X, we'd get $15 million back. That matters, right? That's, that's enough to matter.
- 55:35 – 1:01:04
Should VCs Stick to the Strategy They Raised On?
- HSHarry Stebbings
Do you want your manager to do what they said they'd do or to play the game on the field? Ventures change more in a year than I've seen in a decade, and actually playing the game on the field, as Bill Gurley says, is the job of a venture investor. That may be different from what I said to you I'd do.
- DMDavid Morehead
Uh, we always want managers to say w- to do what they said that they were gonna do. So, like my, my example is always this. I sort of view my job as like the general manager on a baseball team, right? So I'm gonna hire a third baseman, a shortstop, a second baseman, first baseman, et cetera, for various reasons, like depending on your fielding percentage, your batting average, et cetera. But if I walk out on the field and I have two people on second base, someone's getting fired, right? And it's probably the third baseman who switched to playing second because, like, I have people set up on the field to play particular roles for particular reasons. So, like, if you think, if you're a third baseman and you think you can play second base better than my second baseman, then you should come talk to me. But if I ever walk out on the field and I have two second baseman and no third baseman, the third baseman's getting fired, like full stop, right? Like that, I don't, like I don't care what your returns are. So, like again, we started off by talking about this. We spend much more time on asset allocation and why things are where they are than we do on individual managers.
- HSHarry Stebbings
Okay.
- DMDavid Morehead
So-
- HSHarry Stebbings
Uh, this, this is so interesting for me. So the markets have changed in the time that I've raised from you.
- DMDavid Morehead
Mm-hmm.
- HSHarry Stebbings
I've moved with those markets, and I've done that well, and I'm showing you great numbers. I'm making you money.
- DMDavid Morehead
Mm-hmm.
- HSHarry Stebbings
But my position doesn't-
- DMDavid Morehead
If it doesn't fit what we're trying to accomplish, we won't re-up.
- HSHarry Stebbings
F- fascinating. And so y- uh, that's so interesting. And so you would rather I stayed on second base, do worse financially, than move to third base where you've already got someone else?
- DMDavid Morehead
I would like you to have a conversation with me before you change your stripes, yes.
- HSHarry Stebbings
What would you say in that conversation? Ge- uh, genuinely, it's really interesting for me. So I say, "Hey"-
- DMDavid Morehead
I'd be like, "Why, why do you think that you should be able to do this when we have no data to suggest that you're good at this?"
- HSHarry Stebbings
The early stage-
- DMDavid Morehead
So let, let's, let's move out of VC-
- HSHarry Stebbings
Yeah
- DMDavid Morehead
... and let's, 'cause that's not my space. Let me do something on public equity that's easier.
- HSHarry Stebbings
Sure.
- DMDavid Morehead
There are managers who are like, "We don't know how to time allocations into and out of cash," right? "We're just gonna be fully invested because we don't know, like, if the market's gonna go up, down, or sideways," right? Like, "We're good at picking stocks," right? "So we're gonna keep, you know, basically zero cash. That's what we do." And then there are other managers who are like, "We actually use cash as an allocation methodology, and cash will be from 0 to 15%, depending on what, uh, we see to do," whatever. Both of those track records are subject to comparison to benchmarks, right? Like, we don't change the benchmark depending on, like, if somebody holds cash or doesn't, right? And so if somebody is like, "We're fully invested all the time," and then I wake up some morning and they have 10% in cash, yeah, they're getting fired because, like, I don't wanna be the guinea pig, right? Like, I don't wanna be the person that they're like, "Hey, you have a new idea now, and now you're more of a global macro equity manager, and you think that you can time the markets when you have no prior experience or data to suggest that you can? Yeah, no, you're fired."
- HSHarry Stebbings
Kind of get that, given that example. I think venture's more nuanced. It, it's kinda closer.
- DMDavid Morehead
It always is, right? I'm not talking about, like, lines in the sand around, like, artificially generated category limitations, right? Like, like that's just an artifact that people made up. I'm talking about, like, A, we're gonna do, like in, we're gonna invest in managers w- or we're gonna invest with a manager who is investing in companies where product market fit has already been determined, right? And then that manager is like, "Yeah, that doesn't work anymore."
- HSHarry Stebbings
Yeah.
- DMDavid Morehead
"We're just gonna, like, invest in, you know, two guys in a garage, and we don't know if they'll come up with something or not," right? Those are two very different approaches, right? So yeah, the switch between those, yeah, that's a no, right? If you wanna go, if you wanna go from, you know, B to late A, like, who cares, right? That's the same thing.
- HSHarry Stebbings
So we're actually aligned completely, actually. To, it's interesting, I thought we were misaligned. I 100% agree. Um, I think your example there is kinda like, I always say pre and post data, which is like you either, you either have nothing and we're selling Walt Disney, tell me a story. Some people are great at that.
- DMDavid Morehead
Right.
- HSHarry Stebbings
And you should bet on them for being great at that.
- DMDavid Morehead
Right.
- HSHarry Stebbings
Or you're Jerry Maguire, show me the money-
- DMDavid Morehead
Right
- 1:01:04 – 1:03:54
Do LPs Really Need 3 Funds to Judge a VC?
- HSHarry Stebbings
quality in a manager. Do you think that's kind of bullshit coming from a more macro perspective where you see different asset classes?
- DMDavid Morehead
I don't know. I think we've kinda done that. Um, you know, the issue, the issue with, you know, like one fund, even two funds is, like, you almost don't have enough data to make a decision, right?
- HSHarry Stebbings
You don't.
- DMDavid Morehead
And so yeah, that kinda makes sense because you don't have data to prove it otherwise. We tend to be very good when there's data to be analyzed, and we tend to be less good, "You guys have a vision. I got a dog. Like, give us some money." Like, that, that's really hard for us, so people are good at different things.
- HSHarry Stebbings
If I were to say you had unlimited money today, unlimited constraints, and you had the Harvard balance sheet, what would you do differently?
- DMDavid Morehead
I don't know that I would do anything differently. I think it gets a lot harder for sure at that size and scope. So, like, I have, you know, hats off to Narv and, like, what his team is trying to do. That's, like, really, really hard, and I've actually talked to other CIOs about this, right, because I wanna be prepared for, like, down the road. At what point do you have to change how you invest? Um, that's, you know, very top of mind for us, and that's something that a lot of allocators, um, you know, work on, think through, struggle with.
- HSHarry Stebbings
How do you answer that? Is you, is you spending-
- DMDavid Morehead
Yeah, I mean, like, I've talked to the Notre Dame folks, and they're at 20 billion, and they're kinda like, "You know, we've never... We, we actually thought that we would run into this at 10 billion, at 15 billion. We actually haven't." But I wonder if there's a place between where Notre Dame is at and where Harvard or UTIMCO is at where you actually do have to change how you invest, or you can't invest in, in the same manner, right? Because at some point, at some point, and I think that some of the Ivy Leagues are running into this, at some point, it kinda doesn't matter how good benchmarks' returns are. When you have $40 billion or $60 billion and you can allocate $20 million to a fund, even if you're up, like, a real lot, doesn't move the needle as much as it used to, right?
- HSHarry Stebbings
I mean, when you put that into perspective, if you have a $20 million check in a fund, and I'm sure a benchmark 'cause we can use that with a multiple here, 20 million bucks, and you do a 50X, say it's another eBay fund-
- DMDavid Morehead
Mm-hmm
- HSHarry Stebbings
... which would be amazing. I mean, Jesus, amazing. 50X a fund. That would return a billion dollars, and so to your point of, like, materiality to a fund, yeah, if you're a $40, $50 billion endowment-
- DMDavid Morehead
It's 2%. You know? Like, well-
- HSHarry Stebbings
Well, are you gonna send me a Christmas card thanking me? Like, come on. Give me... [laughs]
- DMDavid Morehead
Yeah.
- 1:03:54 – 1:05:15
Why Huge Venture Funds Get Harder to Underwrite
- DMDavid Morehead
[laughs] I mean, like, a billion dollars is great, but, like, you, like, you see the point, right? Um, and so yeah-
- HSHarry Stebbings
I do
- DMDavid Morehead
... I think, I, I think that that's a little bit of what, like, the a16z kinda thing is, like, tapping into, right? Just the-
- HSHarry Stebbings
Yeah, the platforms win. Like, just d- well, don't do those checks. Just give me-
- DMDavid Morehead
Right
- HSHarry Stebbings
... 300 million bucks.
- DMDavid Morehead
Exactly, right? And so yeah, I mean, there's, those, that's what I mean is, like, at, at certain sizes, maybe you have to play the game a little bit differently, right?
- HSHarry Stebbings
Do you like the large venture platforms, or are you like, "Nah, I don't like the post-a-billion dollar funds. We like small"?
- DMDavid Morehead
I think it just gets harder, right? I think it gets harder to have a return figure over the requisite period of time that, like, actually pays you for the risk that you're taking. So I, I think it's just harder, right? I get, I get how they, I get how they do it. I get why they do it. Um, but I think it j- is the law of large numbers, right? It's just harder.
- HSHarry Stebbings
I've loved this conversation. Been very unusual. [laughs]
- DMDavid Morehead
[laughs]
- HSHarry Stebbings
No, it's true.
- DMDavid Morehead
Maybe it's, maybe it's 'cause it's, we're, we're in Central Texas. I don't know. Still-
- HSHarry Stebbings
No, like, normally everyone in my... and this is, like, just, like, the most, like, idealistic AI-pilled venture investor who's just like, "Everything's just like, we're not gonna have jobs in a year."
- 1:05:15 – 1:09:46
The Hidden Bottleneck in the AI Data Center Boom
- DMDavid Morehead
Yeah, that's literally not true.
- HSHarry Stebbings
"Everyone's gonna be replaced."
- DMDavid Morehead
Right. I mean, like, you're already seeing, I mean, uh, like, you are seeing the pushback on AI at the data center level, right? Because where the data centers are being built is in my neck of the woods, not in Silicon Valley.
- HSHarry Stebbings
And you don't want it.
- DMDavid Morehead
I do because we're invested in it, right?
- HSHarry Stebbings
[laughs]
- DMDavid Morehead
But, like, you're seeing this, you're seeing this sort of nationally, and you're seeing it actually internationally, is that the most valuable thing for a data center used to be power. If we go back, like, five, six years, it used to just be land. And then it was powered land, and now it's actually permitted powered land.
- HSHarry Stebbings
Mm-hmm.
- DMDavid Morehead
And the reason is because people are, like, kind of fed up with it and they're just like, "Not in my backyard," right? And so you are getting sort of this pushback on AI.
- HSHarry Stebbings
I'm s- I don't understand this. Like, why? Like, they're utilizing land. They're a- they're bringing jobs. They're bringing construction. You know what? If you don't want it-
- DMDavid Morehead
And power prices go up and water prices, particularly in arid regions like Texas or Arizona. That's a big issue. So yeah, if the, if the hyperscalers solve the water thing, that would go a long way towards, uh, you know, the average person being more accepting of it, but then the power thing still exists, right? And so we know that, we know that power dispatch is still, you know, supply constrained, and so people's power prices are gonna go up until that gets solved over the next five, six, seven years. So-
- HSHarry Stebbings
David, what, what do you think happens here? As you said, you're an investor in it, and it's a fascinating perspective you have. What, what happens here? I'm very naive
- DMDavid Morehead
What happens with data centers?
- HSHarry Stebbings
Yeah, like do we see a continued, uh, protestation pushback from, yeah
- DMDavid Morehead
Yeah, I think we do. I mean, we're seeing it in real time in our book. Um, the data centers that have power and that have permits are becoming more valuable. So like, like literally we have this situation in our book where our data center sites are up 50% from where they were like six months ago.
- HSHarry Stebbings
Can I ask what percent of data centers do you think will fail to get up and running despite-
- DMDavid Morehead
[sighs]
- HSHarry Stebbings
... having been built? And this could be permitting, it could be power, it could be whatever you want.
- DMDavid Morehead
Yeah, I, I'm not an expert in this in terms of like total, total number that have power, total number that have permits, et cetera. Um, so I'm not gonna be able to give you an answer that is gonna be, you know, sort of satisfy the question. But I will say that enough are not happening that the power companies are coming to those who do have permits and saying, "We can get you power sooner than we thought." That's literally happening.
- HSHarry Stebbings
And just so I understand, the bottleneck on those that aren't is permitting?
- DMDavid Morehead
Mm-hmm.
- HSHarry Stebbings
It's pushback from-
- DMDavid Morehead
Yeah
- HSHarry Stebbings
... locals? What's the, what's the one thing-
- DMDavid Morehead
Yeah
- HSHarry Stebbings
... that will-
- DMDavid Morehead
It's permitting, right
- HSHarry Stebbings
Permitting.
- DMDavid Morehead
Yeah. It is now, and that, that's something that didn't exist six months ago.
- HSHarry Stebbings
And just so I understand, again, I'm dumb as rocks, why is it so difficult to get permits for these?
- 1:09:46 – 1:11:33
Why Baylor Is Bearish on Europe
- HSHarry Stebbings
Are you bullish on Europe-
- DMDavid Morehead
No
- HSHarry Stebbings
... given what you just said there?
- DMDavid Morehead
[laughs] No. No.
- HSHarry Stebbings
Because of the permitting, because of-
- DMDavid Morehead
Yeah
- HSHarry Stebbings
... what?
- DMDavid Morehead
Because of all of it, because the defense structure of it, because of Russia, because of behind on AI, because, because, because.
- HSHarry Stebbings
Would that prevent you allocating towards European managers?
- DMDavid Morehead
No, we have allocated to long-short managers in Europe precisely because I think there are gonna be some peop- some companies that win and some companies that lose. But I will also say that some of our bigger macro hedges are on European indices.
- HSHarry Stebbings
David, I could talk to you all day. I'd love to do a quick fire round.
- DMDavid Morehead
Okay.
- HSHarry Stebbings
So I say a short statement, you give me your immediate thoughts. Number one question-
- DMDavid Morehead
This could be, like, highly dangerous for me.
- HSHarry Stebbings
Oh, don't worry.
- DMDavid Morehead
[laughs]
- HSHarry Stebbings
We've, we've, we've got, we've gone to Chinese permits, so trust me, the quick fire will be like a piece of cake. Uh, what have you changed your mind on in the last 12 months?
- DMDavid Morehead
Uh, software was one, right? So software we kinda leaned into pretty hard. We also took energy off at around the same time, sort of with the advent of the US-Iran war, um, the Strait of Horm- Hormuz bit, bit. Um, when crude kind of went north of 100, we took a lot of our energy length off. I think those are, those are probably the most actionable thing. Uh, we did, uh, we did add to private equity sponsors in sort of like, uh, March, April-ish. So we don't really like private credit, but we do like the private equity sponsors. And so we've, we've, we've, we've allocated more t- in, in that direction.
- 1:11:33 – 1:13:41
Why Private Credit Is Overhyped
- HSHarry Stebbings
What asset class do you think is over-hyped today?
- DMDavid Morehead
I think there are probably a number. Private credit, because it's easy.
- HSHarry Stebbings
Why do you not like private credit? I'm, I'm not in it. I don't understand, so.
- DMDavid Morehead
Yeah, I d- I'm not in it, and I don't understand either. Um-
- HSHarry Stebbings
But is it just shit, shit returns? I remember I had a girlfriend who did private credit, and she told me it was, like, crap returns. And I listened, and I was like, "Yeah, you're right. It is crap returns." [laughs]
- DMDavid Morehead
Well, I think that, I think there's, I think, I think effectively what is happening is that you have credit exposure in companies that looks and acts a lot like equity to the downside, but you don't have upside equity returns. And so I think the risk-reward profile is kinda off, right? So we prefer equity to that.
- HSHarry Stebbings
What other endowment fund do you most respect and admire because of their build-out, and why them?
- DMDavid Morehead
Brown, without question.
- HSHarry Stebbings
Why them?
- DMDavid Morehead
I just have, like, a ton of respect for Jane and the team that they have, um, built there. I mean, it's also the case that their returns are better than ours, um, at least over, you know, the last 10 years. I think, I think our returns might be better than theirs over the last five years. Um, but we've got a lot of wood to chop to, you know, kind of catch up to, to where they're at. They are, are, they are what I would describe as real investors. Um, they'll, they'll do things that, um, take a lot of courage. Um, I'm not saying that they're riskier- Um, but they're thinking through the risk return profile of things and, like, placing. But they've just done an extraordinary, extraordinary job. And not like I know Jane. We, we talk and chat and whatever. I just, utmost respect for that team.
- HSHarry Stebbings
Which fund are you not in that you would most like to be in? We mentioned some of the big names.
- DMDavid Morehead
Probably Benchmark.
- HSHarry Stebbings
Be the same for me. [laughs]
- DMDavid Morehead
Yeah.
- HSHarry Stebbings
Yeah.
- DMDavid Morehead
Yeah. Ton of respect
- 1:13:41 – 1:16:18
Why Biotech Could Be the Next Major Investment Opportunity
- DMDavid Morehead
there.
- HSHarry Stebbings
Final one for you. What are you most excited for in the next few years?
- DMDavid Morehead
Hmm. I do think that, uh, biotech is going to be even more impactful over the next 10 years than it has been over the last 10 or 20 years. So, um, we're spending more time on that. In fact, uh, later this week I'm, I'm headed to a biotech conference, and then again in October. So biotech is something that we're actually spending a lot of time on. Um, we certainly have, like, a lot of biotech exposure, um, but we're wondering if we should have more even. Um, it se- it seemingly is less correlated with, um, certainly the science is less correlated with markets. But what scientists are doing, uh, these days in actually, like, solving diseases as opposed to simply treating symptoms is, is extraordinary. Um, so biotech certainly is something that's, like, kind of high on the list, and that we're spending a bunch of time on. Aside from that, like from a personal perspective, I'm really excited to see, you know, our team, our office build out over the next three years. I- as I've done this, I think that there is really a major inflection point that happens when you're $1 billion going to $5 billion, and we're kind of like right in the middle of that. Um, and so we're dealing with all of the issues around, you know, how do you grow a team? What systems do you set up so that when you're at $5 or $10 billion, like, you can actually keep track of everything? How do you systemat- systematize things so that this is a self-perpetuating office, et cetera, but retain the creativity to continue to do this, the new, new things that you've done in the past to get here? But there's a lot of decision-making that has to go on between $1 and $5 billion, and I didn't really appreciate that until kind of being in the middle of it over these last couple of years. We're sort of like halfway through it, but I, I kind of think in the next two to three years we'll kind of get out to the other side and then be like off and running. Um, so that, that at a personal level, uh, that's, that'd be tops for me.
- HSHarry Stebbings
David, I've so enjoyed this. I, I'm very grateful to you for putting up with my varying questions, naivety in certain cases, but I've loved it. And so thank you so much for joining me.
- DMDavid Morehead
Yeah, no worries. We're down here in Central Texas trying to do a good job, so thanks for having us
Episode duration: 1:16:28
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