In episode 292 of the InsuranceAUM.com podcast hosted by Stewart Foley, Adams Street’s Tobias True, CFA, FRM, Partner, Investment Strategy and Risk Management, discusses how aligning bottom-up investment decisions with top-down portfolio goals is essential for insurers investing in private markets.
Transcript
Stewart: My name’s Stewart Foley, I’ll be your host. Hey, welcome back, and thanks for joining us. We’ve got a great podcast for you today and I’m going to talk about that in just a moment. But first I want to give a big shout out to our co-chairs, John Patton and TC Wilson, who are co-chairing the Insurance Investment Executives annual meeting in July 16th and 17th at the University of Chicago’s Gleacher Center – right downtown in the loop. Just so that everybody knows how the agenda is set and everyone who’s involved in the event wants a speaking slot, and I understand. And so what John and TC have done is they’ve interviewed our executive counsel here at Insurance AUM, which is made up of about 22 CIOs, and they asked them what they wanted to talk about and they went out. They’re going out to our sponsors and they are filling those panel slots with what they believe to be the best folks to talk about the topics selected by the executive council. So should be a great event. Registration is open for that as it is for our May 7th and 8th event on a BF real estate and infrastructure. That one’s just about full for LPs, so if you want to register, please do. But I want to get to today’s podcast, which is a really important topic, and the title is Private Market Portfolio Construction for Insurers. And we’re joined today by Toby True, who’s a Partner on the Investment Strategy and Risk Management Team at Adams Street Partners. Toby, welcome. Thanks for joining us. We look forward to it.
Toby: Thanks very much for having me, Stewart. I look forward to it as well.
Stewart: So we want to start out by getting to know you just a little bit and it would be helpful for our folks to know a little bit about Adams Street in general and then I’d love to know a little bit more about you. Where’d you grow up and what was the first job, not the fancy one.
Toby: Sure. So, I’ll start with Adam Street. So Adam Street Partners is an investment manager within the private markets exclusively. We’ve been investing for over 50 years now and most of our people are located in Chicago, but we’re a global firm. So we invest across, as I mentioned, various strategies all within private markets. So nothing exchange-traded or listed. Everything that is transacted privately and has all of the corresponding challenges and limitations associated with it, which we can get into. But Adam Street overall manages currently $62 billion US in assets under management, and that is across five different strategies. And those five strategies involve providing capital to privately held companies via either fund investing in the form of primary or secondary investments or providing the capital directly to those companies in the form of a direct equity check or a co-investment or a loan within our private credit strategy.
So, my team is the investment strategy risk management team, and the best way to think of our team’s function is we’re the top-down piece of the puzzle. So those other five strategies are all out there sourcing different investment opportunities, making bottom-up decisions, and our team is responsible for taking all of those bottom-up decisions and making sure they fit into the appropriate portfolio constructs for our clients. And it’s in total mentioned $62 billion US and about $10 billion of that is actually specifically managed for the insurance market. So as I’m sure we’ll get into insurance portfolios, have some distinct characteristics and objectives with them and we can talk more about that.
Stewart: Yes, they do. And thank God, because if not, we wouldn’t have a business. So let’s start with you. So where’d you grow up, grow? What was your first job, not the fancy one, and talk to us a little bit about your career journey that is maybe not necessarily obvious by folks checking out your LinkedIn profile.
Toby: Absolutely. So I grew up in Kansas City, Missouri. Actually, I think we’re fellow Missourians if I’m not mistaken.
Stewart: Yes, we are.
Toby: And my first job going back to, I guess it was in middle school at some point, but I had a paper route just your traditional once-a-week. It was a local newspaper. So I had a neighborhood, an area, and I was responsible for delivering those and going around on a somewhat regular basis and asking for optional donations. I think it was called just, it was a free newspaper, but I was tasked with trying to get people to provide some kind of support for it. So it was a good first job and especially helpful in terms of pushing me toward office work instead of being out in the summer. And I think also importantly, the whole skill of trying to ask people who you don’t know for making a monetary contribution to something was pretty daunting, especially for somebody at that age. And I wouldn’t say I’m even particularly good at that now, but it’s an important skill I think to work on and to recognize early because it obviously applies to a lot of different industries and career paths.
So I did that for, I don’t know, a year or two, not very long. But ultimately as far as getting where I am today, I’ve had really three main, I would say, career roles after graduating. I started my career working for Bloomberg in New York. And the role there was really more of a generalist role where I was just helping all kinds of clients who used Bloomberg for something, whether it’s for data or some kind of financial information or news, just helping them with starting with customer support and also just helping build some analytics and helping apply those and to go back and forth with the development team to make things better and more marketable. I thought that was a really good first job just because it gave me good breadth of experience across financial markets. And at the time I was always interested in investments and in markets, but I didn’t really know what the right niche would be for me.
Obviously, there are a lot of different types of skill sets that can fit into that ecosystem. So, I was there for a few years and then my next role was at MSCI Barra, and some listeners may be familiar with Barra, but Barra was really, it was a company that essentially built and produced risk models, quantitative risk models, predominantly for public markets. So, the best way to think of it is a portfolio manager may go out and pick a bunch of stocks to have in a portfolio, and the PM may understand really detailed information bottom up about a lot of those stocks. But the purpose of the risk models was really to provide an overlay on the portfolio to identify commonalities or maybe invisible or less visible sources of risk in the portfolio. So they may uncover a bias or different tilts in the portfolio that a manager could then take into account by rebalancing or by hedging.
So it was a lot of work with data and quantitative finance, but really focused on applying it to the portfolio management process that was, I would say 95% of that was focused on public markets where data is freely available and there’s almost too much data, too frequent data. And so I thought it was interesting again, and it kind of helped me explore that area of risk management and portfolio concepts as they fit within the investment management world. And so after that, I joined Adam Street, which is 13 years ago now. When I joined Adam Street, the role that I’m in today, it was a new role at the time, but it was really focused on trying to take private markets data as best we could and apply the same philosophy that I was using in my prior role to try to take data and use it in the aggregate to identify risk and return characteristics and help deliver insights into how to build more efficient portfolios and help our investors understand what is in the portfolio beyond just the labels and the company names. So that’s where I’m today. It’s been really interesting 13 years at Adam Street. Everything has been continuously changing in the industry. Private markets have always been that part of the industry where the data is more challenging and the information is more limited. But there are a lot of exciting developments today that I think are giving us a lot more possibility in terms of how to apply that.
Stewart: That’s super interesting and helpful. Thank you. So let’s just shift our attention to understanding portfolio construction. And it’s interesting because we’ve done almost 300 podcasts and a lot of times people use the same term, but they mean something slightly different, or potentially very different. So portfolio construction is one of those terms that we hear a lot, but it means something very specific in your world. How would you explain portfolio construction at Adams Street and why is the alignment between bottom-up decisions and client expectations so critical?
Toby: I think you really defined it in the question as far as how we define portfolio construction. It’s really effective portfolio construction is the alignment of the investor’s interests with the characteristics of the underlying investments. So I really picture our team as operating in between a group of people making very good bottom-up investment decisions on companies and funds that can deliver outsized returns. And on the other side, different portfolios all have different needs, different levels of risk tolerance, different objectives, different time horizons, et cetera. And we have to match those two things. So portfolio construction is the process of making the most efficient connections between those two. And so a lot of the portfolios we manage at Adam Street, they’re all different, but I would say some of them have a lot of similarities in the cases of investors that have similar objectives and similar types of profiles and others can be very different and have very unique characteristics. So for us, there are a lot of ways to do that incorrectly and dangerously. And so portfolio construction is really just the process of making sure that the risk and return from the bottom-up side makes its way to the client side in a way that everybody likes.
Stewart: Yeah, it’s interesting. I could see how you could do that through the analytics that I think we’re going to get into in just a moment here. So one of the things that’s just kind of a fact of life is that there’s illiquidity in the private markets and they’re known for their complexity largely due to illiquidity. How does illiquidity uniquely affect the portfolio construction process and what strategy do you use to address the unpredictability of cash flows?
Toby: Sure. So you’ve hit on what I think is maybe the most obvious concept in terms of how private markets are different, but also maybe the most difficult to really solve for. So that’s where we spend a lot of our time. Illiquidity on the surface just means that somebody who makes an investment in something that’s illiquid has to wait a longer amount of time to receive the proceeds from that investment. So we all understand that anyone who’s allocating to private markets is probably comfortable with the fact that they’re allocating capital to something that it’s hard to unwind the next day. It’s an illiquid investment that takes time. So that’s really the first level of illiquidity. But I think the second level is what makes it a lot more challenging, which is that it doesn’t just mean that investors have to wait longer to see distributions or to see returns on their investment, but it also means that the returns themselves are more unpredictable and the patterns, the timing and the path to getting to those ultimate returns, all those things are also unpredictable.
And so that leads to a lot of challenges, obviously not just the longer time horizon, but with something that’s illiquid for an investor who’s building a plan, building a private markets allocation over time, that investor needs to have some kind of expectation for how that plan will evolve over a one year, a three year and a five and even longer, 10 year plus time horizon. So we can look at historical patterns to help us understand and estimate what to expect in terms of the cash flows, but that’s just one expectation. And obviously the future can be very different than the past. So for us, the illiquidity just means that we have to be comfortable with the fact that there’s more uncertainty in the future. And I know insurance investors in particular don’t like that word uncertainty. It’s something that can add some challenges in portfolio construction.
But the good news with private markets is that not only do we have a lot of data that goes back over many market cycles to help inform us as to what patterns we can expect for cash flows and for investment returns, but also the industry is really, it’s very quickly evolving with more data, just becoming more comfortable with broader data, data being reported in a much faster way with less of a lag time than in the past. And so ultimately all of that additional data, despite the fact that investments are still illiquid in private markets, that additional data can help us better calibrate portfolios.
Stewart: It leads me right into my next area, which is harnessing the power of the data and analytics. And based on the background that I’ve read with you, or on you, you’re deeply involved in using analytics to shape investment strategies. Given that private markets have historically had limited data, how does Adam Street leverage your analytics and data trends to build more efficient risk-managed portfolios?
Toby: Sure. So I think we do that in a lot of different ways, really depending on the objectives of the given portfolio that we’re investing for. So maybe I’ll contrast two fairly common examples and that should illustrate our process and how we think about that topic. But on one hand, a lot of our clients are looking to us to simply build a well-diversified portfolio of private markets investments that over a period of time we expect to outperform public markets. There’s not any additional guidance in that case about focusing on any particular sector or any particular region or type of company or any theme beyond just looking for private markets exposure. So in that case, we do rely heavily on data and historical information to help inform us as to how to build a portfolio. Really, there are three pretty primary foundational questions that we’re always trying to answer, and those are first finding the right number of total investments to have in a portfolio.
So too few investments means too much risk, too much concentration, and too much variability in outcomes. Too many investments means a big administrative burden and just kind of a market portfolio that gets a lot harder to be an outperformer because it doesn’t really allow us to concentrate on our best ideas. So that’s the first real challenge we’re trying to solve for. The second principle is looking at the appropriate allocation of different components within the portfolio. And those components can be defined by investment strategy, meaning primary or secondary or co-investments, or they can be defined by subclass, meaning venture capital growth equity, traditional buyout investments, as well as other factors like geography and sector and region. And then the third is trying to identify the timing, the pacing in terms of deploying capital. And typically when we invest to our portfolio, we’re investing over several years, three or four years to avoid taking really too much concentrated market risk at any one point in time.
Also, deploying that capital over a few years gives us some added flexibility because we have the benefit of seeing the initial capital and seeing how that gets invested and how it performs so that in subsequent years we can invest accordingly and make sure the portfolio is following its intended path as best possible. So those are three foundational principles that we follow really in any portfolio that we invest. Now, in other cases, we are building portfolios for different clients who have more specific objectives, and that could be something within the insurance market. It can vary quite a bit, but insurance customers of ours tend to define their risk and return profiles much more specifically because they fulfill a certain role within the overall portfolio. And so some of our clients are looking for investments in a particular sector, maybe it’s hard for them to access that particular sector or they feel like private markets are better suited for it.
In other cases, we’re investing in different portfolios with just either higher or lower risk and return targets depending on the circumstances. So in those cases, what we do is we rely on historical data again to help us develop different scenarios and really test those portfolios and see how they perform not only in the median case but also in more extreme circumstances. And so for us, it’s really helpful to have data that goes back prior to the tech bubble in the 1990s as well as data prior to the oh seven and oh eight global financial crisis and data for all those different years in between to see how different segments of the market performed in those different cases. That doesn’t predict the future necessarily, but it does allow us to build a few different scenarios when we’re trying to build a portfolio for a customer of ours and help really identify the appropriate level of risk and return to that portfolio.
Stewart: That’s super helpful, and I really appreciate the detail in that answer. I mean, I think that really helps people get a good idea of what your process entails. Let’s move to current market dynamics and risks. And the current market environment is nothing if not interesting right now. Rates are higher, evolving, liquidity, strong fundamentals, but some internal geopolitical risk, I think. What’s particularly unique or surprising to you about how private markets are behaving right now?
Toby: I think there’s always an asterisk for people when you mention private markets and current market dynamics. And that asterisk is always that the latest performance information for private markets is always behind the information on public markets by some period of time, call it a few weeks to a couple of months in some cases, depending on where we are in the reporting cycle. So as of today, we’re sitting here in April of 2025 and we have information on private markets, their actual marks in the portfolio through in most cases the fourth quarter of 2024. So that’s obviously information that’s a little bit old. So it’s always challenging to tie the past from a few months ago to the future. But what’s been very interesting is that with private markets of late, we’ve really seen I think two trends that for the last couple of quarters have been pretty evident.
And one of those, I think anyone investing in private markets probably already appreciates this, but there’s been a definite slowdown in liquidity within private markets over the last two, two and a half years especially. So if you go back to 2021, kind of in the wake of all the covid policy and what markets were doing then, there was a lot of liquidity in private markets. And if you looked at just the degree of distributions relative to the value of private markets assets, those distributions were very high in 2021. Interest rates were low, public markets were going up, and so there was a lot of churn. There were a lot of companies that were being sold and capital being returned to investors and new funds being raised. 2022 to present has seen the opposite of that. So liquidity has slowed down, and a lot of times in the past when liquidity has slowed down, it’s been because markets are way down, performance is bad, and market participants are very reluctant to make transactions in the market.
But what’s interesting is that this time the story has been different at least so far, where markets have been either maybe going up or at least maintaining their valuation levels despite liquidity, slowing down. And so at Adams Street, we’ve looked at various portfolios in our total aggregate portfolio in terms of fundamental characteristics, and those are things like just looking at growth rates and company level EBITDA, company level revenue growth, year over year levels of debt to equity and other metrics that we use to track leverage at the company level. And we look at all these again from individual companies, but rolled up in the aggregate Adams Street portfolio. And it’s been interesting because despite liquidity being slower and investors looking at their portfolios and saying, well, I wonder when am I going to get these distributions that my models predicted I would get by. Now, if you look under the hood, a lot of the companies, most of the companies, are fundamentally very healthy.
And so despite the fact that liquidity is slower, we take some comfort in the fact that the companies in the portfolio are still performing well by and large, they’re following their investment plans, they’re profitable, they’re growing. And so for us, that should give most investors some comfort as well that the portfolio is in good shape despite the fact that we’re in a bad part of the liquidity cycle, which again, we’ve seen before and we expect we’ll cycle back the other way at some point as well. So it’s that combination of lower liquidity, but good fundamental health that I think is a pretty unique characteristic of this market.
Stewart: Have you seen illiquidity premiums change as a result?
Toby: I think it’s probably too early to observe that because I think right now we’re just in the phase of we’re experiencing the illiquidity. And so, private markets like other markets tend to go in these cycles of driven by macroeconomic variables and other things where we go from strong liquidity to weaker liquidity and back and forth. I think the capital that is being deployed now is probably coming with maybe a higher expected rate of return slightly just to account for the fact that there’s more unpredictability in when capital will come back. But it’s probably a healthy risk premium, frankly. I think the danger is probably more often in the other scenario where there’s too much liquidity and capital is really under pressure to be put to work more quickly. And when that happens, investors look at strong recent performance and maybe don’t spend as much time making sure they’re underwriting to the right rate of return. So I think we’re seeing a little bit of that, but it’s probably too early to really measure the extent of it at this point.
Stewart: That’s interesting. Thank you. So I read in the notes that you’ve expressed some concern around secondary market and private credit, and I suspect that it has to do with your last answer, but could you elaborate on what specifics you’re monitoring closely and what investors should be mindful of as we negotiate this stage of the cycle?
Toby: Absolutely. I think in terms of the secondary market, Adam Street is a big player in the secondary market. So we not only have a dedicated secondary investment strategy, but we also from time to time are looking at the markets as a potential avenue to sell investments if there’s an appropriate opportunity to do that. But the secondary market, as most people probably know, continues to expand and grow at a pretty good rate as more people participate in it and there are more transactions every year. I think one of the challenges that we’re conscious of in the market today is that there can be different dynamics that drive pricing in the secondary market. So there can be cases where for whatever reason, investors just have more pressure to put capital to work because maybe they’ve raised capital and they need to go buy something and put it to work today.
And likewise, there can be cases where there are funds that have maybe had a pretty strong performance, but they’re behind on the distribution pace that they had modeled out. And so there can be more pressure for those funds to use the secondary market to sell something just to generate liquidity at some cost, some haircut to the current net asset value. So those two competing forces where in some cases you have buyers who have more pressure to buy things, and in other cases you have sellers who may have more pressure to sell things. So it’s very important in our opinion, to just maintain discipline in the secondary market. And there could be cases when things transact for reasons that go beyond just the current market valuation of buyer and seller. So I think it’s important to be aware of that just because again, the secondary market is, it’s constantly expanding, but it’s also, it’s a private market, so it’s very difficult to observe full price transparency on everything that takes place.
So that’s one area is just discipline in the secondary market. I’d say the other area is within private credit. So private credit, again is part of where we operate and where we invest. The whole private credit industry has really grown at a very good rate since really post-global financial crisis. So the challenge with private credit is that industry-wide returns have been very good, and it’s a very popular place to invest. I think the challenge is though, it’s very difficult in an era of good performance broadly to differentiate between different levels of risk that investors are undertaking. So really, the private credit industry has not gone through a full market cycle at this point where we haven’t really observed since the industry has been as mature as it is today, we haven’t observed a full credit cycle where there are defaults and other elevated credit spreads, other factors like that. So when we look at the market today, we see credit spreads are still pretty healthy and private credit returns have been good, but the challenge for investors is how to make sure they’re underwriting to something that where they may have to invest through a different part of the market cycle than what they’ve seen in the past.
Stewart: That’s been super helpful. I mean, what a great education on private markets and portfolio construction for insurers. I mean, you’ve covered a lot of ground, and so I really appreciate your expertise. It helps our audience learn. And one of the things that I’ve been asking lately is when you’re adding members to your team at Adams Street or on your team in particular, are there characteristics that you’re looking for when you speak with someone? Not do you know Python, do you know R or did you go to this school or that school, but characteristics that you see that have worked out well for you over time?
Toby: Sure. I think really the most important trait or characteristic personally that I would look for is just effective communication skills. And that’s probably not a completely novel concept to most people, but it’s something that I think actually gets overlooked a lot of times now because there’s so much of a focus on data and information and ways to be more sophisticated with that data and information. And you just mentioned Python, and there are all kinds of other skills, and we can get into AI and everything. So data skills are important, but the more that data skills become important, I think it actually elevates the importance of being able to communicate at a higher level than the data and really tie together the business purpose for using the data as well as all the different assumptions and the nuances of the data that go into some kind of analysis.
So when we talk with candidates, there’s always a tendency, I think, from the candidates to really highlight those technical skills because those are obviously very in vogue. But for me, I really like asking more open questions and just seeing how the answers are formed because that’ll tell you a lot about how this person will fit as part of the team, somebody who gives very effective, top-down, concise answers to questions like that. It becomes very obvious that they have the technical skills, but it’s just much more important that they can actually communicate it well and demonstrate it. So that’s really what I look for the most, but obviously there’s a lot more to the picture than just one particular trait like that.
Stewart: No, of course. So thank you so much for that. And my final one is a fun one, and that has to do with if you could go to dinner with up to three guests, don’t have to be three, it could be one, two, or three alive or dead, who would it be? Who would you most like to have dinner with alive or dead?
Toby: Yeah, so I would say one person would be Benjamin Franklin. And the reason I mentioned him is just because it’s always fascinated me how 250 years ago, a bunch of people were able to put these documents in process and a government in place that was built to kind of evolve as things change. And so it seems like recently we’re at a point where that’s kind of being pressured a little bit or pushed on. And so I would just be curious to go back and talk to somebody who was involved at the time of designing that whole system and just ask them, what do you think? Is this working out as you thought it might? What’s different than what you might’ve expected? So I think that would be interesting. Then I’d say to pick someone more modern, I’d go back to being from Kansas City and I’ll have to take Patrick Mahomes just as a fan of the Chiefs to talk to him and all kinds of questions to ask him about his career. And I’m sure you’d have a lot of wisdom as somebody who’s had successes and failures and a lot of experiences to talk about from that.
Stewart: There you go.
Toby: I’ll go with those two.
Stewart: Benjamin Franklin and Patrick Mahomes. I love that. I always tell people I go, one of the things about Missouri is you have to know all the facts about Missouri who came from there. So Kansas City has the, and I bet you know this, but Kansas City has the unique characteristic that it is the number two city in the world for the number of fountains behind Paris, and everybody’s astonished at that statistic. But it’s true. I mean, Kansas City is a beautiful city and a lot to be proud of there. The chief certainly toward the top of the list there, but lots of good in Kansas City. Thanks so much for joining us. I really appreciate the education. It’s been great to get to know you and thanks for being on.
Toby: Fantastic. Well, thanks again for having me, Stewart. I enjoyed it.
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