Scott Malpass:

I would add that for me, in terms of personal investment philosophy, I really invested in people. I really, really could try to assess what was enduring about their personality that would allow them to achieve excellence over a long career. We really wanted long-term partners and firms can have a good year, a good few years, maybe a good decade, but getting somebody over multiple decades is very challenging. And so I always set out probably being 26 at the time, I'm thinking out 40 years, and who can I work with over the next 20, 30, 40 years? So I spent a lot of time thinking about people and their personalities and what was enduring about that and their own philosophies that would lead to excellence over a long period of time.

Nancy Lashine:

Hello and thanks for tuning in to Real Estate Capital. I'm your host, Nancy Flashiness of Park Madison Partners. Capital is a lifeblood of the real estate industry, but the decisions on where and how it's allocated are driven by people and personalities. Who are they? What motivates them? What can we learn from their experiences? On this show, we introduce you to some of the real estate industry's most influential thought leaders and decision makers, and we talk about what is important to them, how they make critical decisions, who has influenced them, and a lot more.

Our guest on this episode is Scott Malpass, co-founder and managing partner of Grafton Street Partners, an evergreen perpetual investment fund that invests in public and private opportunities. You may know of Scott from the 32 years he spent as CIO of the University of Notre Dame Endowment. Under Scott's leadership, the Notre Dame Endowment achieved investment performance ranking among the very top of endowments, growing the endowment from $400 million in 1988 to more than $14 billion at his retirement in 2020.

How does he do it? We discussed Scott's investment philosophy at length throughout this episode, but one of the resounding themes you'll hear Scott discuss is investing in people. He's a big believer in actively partnering with founders, entrepreneurs, and fund managers for the long term. He also invests in people as an adjunct professor of finance at Notre Dame's Mendoza College of Business. His partner and co-founder at Grafton Street is one of his former students, as are five of the six other employees at the firm. And of course, we discuss how Scott applied his investment philosophy to real estate and how his approach to the asset class has evolved over 30 plus years.

Our conversation begins with Scott and I discussing the first time we met in the late 1980s, when he was just starting at Notre Dame and I was working my first real estate job at the O'Connor Group.

I am so psyched, Scott, to do this.

Scott Malpass:

Thank you.

Nancy Lashine:

I don't know if you remember, I remember clearly meeting you the first time. I was new in the real estate private equity business. I was working with Jerry O'Connor and I think you were probably just starting at Notre Dame. And we walked down, we were in a beautiful old building on campus and we walked down this hallway. It was pretty dark, and we got to the end of the hallway and we went into really what I think was like a cubby hole and you proudly said, "This is my office." And I was like, "Okay, that's great."

And we proceeded to have a meeting and then the next time I think we met in Chicago and you were introducing us to Bob Wilmouth and-

Scott Malpass:

That's right.

Nancy Lashine:

I think it was an office building or maybe it was a big trading floor. I remember thinking it was like a big trading, some sort of large space. You'll describe what it is. Anyway, and I was with Jerry O'Connor and what I remember was what incredibly incisive thinker Bob was. And Jerry O'Connor, who was my mentor, just couldn't say enough fantastic things about how brilliant he was. And that was the first time we met. And of course, you've gone on to become a superstar and a legend in the endowment business, and I'm really excited. There's so much I want to talk to you about today. So thanks for joining us.

Scott Malpass:

Thank you, Nancy. And I'm so glad you mentioned Bob Wilmouth. I was going to mention him later, but he really was an amazing individual, a great businessman, and being a young CIO, a tremendous mentor to me and somebody I really have cherished his memory and all he did for Notre Dame, so I really appreciate you mentioning him.

Nancy Lashine:

Yeah. Do you remember your first office at Notre Dame?

Scott Malpass:

Oh, yes. I had plaster from the ceiling falling on me in my office. It was underneath the stairs of the main building. Absolutely. Got to start somewhere.

Nancy Lashine:

And you did. So literally, I mean, of course you went from what you were in, I think we were about the same age in our late twenties or mid-twenties, and you were renting a $400 million endowment. When you left over 30 years later it was what, north of $12 billion?

Scott Malpass:

It's about $15 billion. Yeah.

Nancy Lashine:

Wow. So really one of the most incredible runs in the endowment industry. So I'd love to talk with you about a lot of things. So let's start with strategy. When you started out and relatively small endowment, how did you think about the investment strategy?

Scott Malpass:

It's a great question because when I came in, I had been at the Irving Trust Company in New York City working in a little investment consulting group in the custody area. So we had some large pension funds we were the custodian for, and I was just very aware of asset allocation and how they picked managers and what they were doing from an asset allocation standpoint. So I arrived at Notre Dame and it's a pretty plain vanilla portfolio, about 70 30 stocks to bonds all along. Had about 15% international, which actually at that time was toward the higher end.

Nancy Lashine:

It's high, yeah.

Scott Malpass:

In the mid 1980s, late 1980s, but only had 1% alternatives. It was a couple of venture funds in Boston and the old JMB real estate funds out of Chicago. And so I noticed these little private funds, and of course then I had to go out and meet these new managers of mine. And then from there, I just started developing a different framework for asset allocation.

Nancy Lashine:

Did you use Cambridge Associates as your consultant in those days?

Scott Malpass:

We were a client of Cambridge's. We bought their research and participated in all the things that came with that. We occasionally used them for projects. We weren't a full retainer client, but I really admired Jim Bailey particularly, and I would call him for advice and counsel all the time, even over my 32 years. So yeah, we were involved with them in different ways, but they were very helpful.

Nancy Lashine:

Yeah, I thought about them because I remember when we started, I think the first investment that Notre Dame made with us when I was at the O'Connor Group was the retail property trust. And I remember Matt Lincoln at Cambridge saying, "I'm so glad you guys are forming a private REIT because there's only one other one in the market that our clients can invest with, and that's the JMB fund." So that was, I think, how we first got to know.

Scott Malpass:

That's right. That's right. And Matt was terrific. I probably asked him to look at it for us or something, but Matt was absolutely terrific and really helpful in real estate.

Nancy Lashine:

So Notre Dame and Yale are the two seminal models for endowment investing over the last three decades or so. Tell us a little bit about... When I think about David Swensen, who of course wrote a book, and so his philosophy is broadly known. It was three tenets, right? Diversification, intense alignment with managers, and then invest where there are inefficiencies. And in those days, that clearly meant moving more heavily into the private markets. How would you have described Notre Dame's philosophy at that stage?

Scott Malpass:

Yeah, so early on, of course, being a very young CIO, I did a lot of benchmarking. I went out and actually talked to a lot of people. Cambridge was also very helpful in that regard, obviously getting data. But yeah, I was just interested by longer serving CIOs and also managers who managed for endowments. We had some great partners even back then, even before I started diversifying more, we had some really great people who worked for a lot of other endowments, and so I just had a chance to really survey the landscape and realize that the things that the big Ivy League schools were doing, like Harvard and Yale and so forth, those tenants applied. And I came to really appreciate that.

A long-term, capital pool, liquidity, some liquidity, but also a lot of inflow from gifts. So a lot of modeling about what risk we could really assume and still meet our payout every year, and probably we're even more conservative than we were necessary, but we still set out to develop a more diversified fund, more in privates, more in alternative investments, hoping for higher net returns.

I would add that for me, in terms of personal investment philosophy, I really invested in people. I really, really could try to assess what was enduring about their personality that would allow them to achieve excellence over a long career. We really wanted long-term partners and firms can have a good year, a good few years, maybe a good decade, but getting somebody of our multiple decades is very challenging. And so I always set out, probably being 26 at the time, I'm thinking out 40 years, and who can I work with over the next 20, 30, 40 years? So I spent a lot of time thinking about people and their personalities and what was enduring about that and their own philosophies that would lead to excellence over a long period of time.

Nancy Lashine:

So let's double click on that a little bit. What was it about somebody when you met them that made you think, "I've got to know this person even better"? What did they say or do or how were they thinking? What was it?

Scott Malpass:

Yeah, I'll tell you, Nancy, the good one, the really good ones stood out very quickly. They had a very clear mind about what they do and don't do, what they're really good at. They also knew the landscape or the environment in their area cold. They were not afraid to discuss weaknesses or investments that did not turn out well. They were not afraid. They were very reflective about that and how that improved their own investment approach over time.

So I would say just the coherence and clear mindedness of what they're trying to accomplish and what the opportunity set was for them, those things stood out. They had typically also were reasonably personable, charismatic people. I mean, not everyone, but they could really explain what they do and have confidence.

Nancy Lashine:

Can you give an example of someone that just demonstrated that for you?

Scott Malpass:

Oh my gosh, yes. I mean, Steve Mandel at Lone Pine would've been one, the Sequoia partners at the time, including Don Valentine, who was there when I started. But Mike Moritz, Doug Leone, those would be really great examples. Kevin Compton, at Kleiner Perkins. Yeah, those kinds of folks really stood out versus other managers.

Nancy Lashine:

Did that translate when you think about real estate, because obviously we are focused, I focused exclusively on real estate, although love, love the investment field and really appreciate what you've had a chance to spend your life's career on. How does that translate into real estate? Does it mean that you just have to invest in one property type? Do you have to be vertically integrated? What was your experience with that?

Scott Malpass:

Yeah, I got to write a book on my real estate philosophy because-

Nancy Lashine:

Oh, okay.

Scott Malpass:

It evolved so much. As you know, we ended up doing a lot more in private equity than real estate. And part of that was we looked at real estate being illiquid, being a lack of fund. We really looked at it as more of a long-term equity play, not like a bond substitute like a lot of pension funds do. And in that measure, the average real estate fund did not stack up as well to the average private equity fund, let's say. And now the first quartile, the first decile, there was some tremendous real estate funds. And so our goal was always to try to find those. But actually what I ultimately discerned was I think you want to do real estate directly.

Nancy Lashine:

You mean by the buildings not invested in partnerships?

Scott Malpass:

Yes. Yes. And we just weren't big enough to do much of that. I can see why large public state funds do that when you have hundreds of billions of dollars. That makes total sense to me. We ended up buying an individual property though back in 2006, and Chicago was an attempt to start moving that way a little bit. We'll start with one, see how it goes.

Nancy Lashine:

2006 might've been extremely difficult timing.

Scott Malpass:

Actually, the building was a value add. It was an old Daniel Burnham building in Chicago. It was only 70% occupied. It was not being managed very well. We quadrupled the operating income in just a few years, and had got it to 96% occupancy. So it's in South Michigan Avenue. It's a fantastic address. So that actually has worked out pretty well. We still own it. And actually, Notre Dame's academic units in Chicago all took space in there, which was not why we bought it, but it's been a wonderful result of having that property.

Nancy Lashine:

Is there something intrinsic about real estate that you think it makes more sense to own it directly rather than in partnership form? Or has it just been your experience?

Scott Malpass:

I think controlling the outcomes, the management, looking at budgets, being involved in how you improve the facility, improve the building. All those day-to-day real estate things you do when you run a re-manage property. I think it makes you better investors and it allows you to control the outcome, the time of a sale, who you sell to, all those kinds of things. But that requires a lot of staff and a whole different enterprise that we didn't have and we weren't going to build out, but we thought having a couple of properties that would help make us better real estate investors and probably ask better questions of our real estate partners, our funds partners.

Nancy Lashine:

Right, right. Well, it is true, it's really hard, especially in the incredible eras that when you were CIO to compete with the returns of private equity and venture capital because they just did so well.

Scott Malpass:

Yeah, I mean, our private equity IRR was like 26% over 30 years. And venture, that's just bio funds, venture was like 32, and real estate was probably low teens.

Nancy Lashine:

Strong, right.

Scott Malpass:

But just didn't compare to that.

Nancy Lashine:

Right, for the illiquidity, yeah.

Scott Malpass:

For the illiquid bucket, yes.

Nancy Lashine:

Let's talk a little bit about how your philosophy changed over time as the fund grew. Did you just basically do more of the same? Were you able to invest with larger managers or larger cap strategies? How'd you think about that?

Scott Malpass:

I think as we got more experience and grew those periods, we realized that we could probably take more illiquidity. Initially, I'll never forget going back, just to make sure the board was comfortable. I think we initially had a 5% target for private equity, and then it was 10% and then 20%, and ultimately got to over 40%. So just having the confidence to take on more illiquidity, knowing that our flow of donations into the pool was also really taking off. I mean, as you noted, I took over the endowment was like 375 million. We spent over 400 million a year from the endowment now every year. So we're spending more than the entire endowment was when I started.

Nancy Lashine:

I saw that recently as I looked at the annual report. That's crazy.

Scott Malpass:

It's crazy. But I think we got confidence to do more illiquid investments and we started doing some direct investing. I mentioned the run real estate property. We had a relatively small in-house stock portfolio. We were doing a lot more co-investing in real estate and private equity. A lot more co-investing. And actually, if I look back, lessons learned, I think we were probably too conservative even. Even though we were sort of out there in the endowment world and some of these things. I would love to try to do more direct investing on the private side as well. There's so many interesting opportunities out there, but that does require a certain team with experience that knows how to do that. But I think we could have done that over time.

Nancy Lashine:

Well, it's interesting because as time's gone on, and obviously we're in the business of helping investors find attractive investments, there's so much more appetite today for co-investment than there was even five, 10 years ago. And I think part of that is the investment teams are far more sophisticated, so there's more confidence in their ability to do it, but also it's a great way to disintermediate fees. So you know you're going to do 200, 300 basis points better than if you were just invested within the fund.

Scott Malpass:

Exactly. No, exactly. And the structures for doing it just became more conventional and endowment folks became more comfortable with the legal protections, all that kind of stuff.

Nancy Lashine:

Talk a little bit about the culture that you created at Notre Dame. Because again, when I think about the investment team at Notre Dame, what stands out is that people stay forever, and it's really rare to hear somebody leaving Notre Dame and going to another fund. And that's certainly in contrast to what you see in other endowments that have done a great job training people, but then they kind of spawn great CIOs and investment officers all over the country. What is it about the culture that you helped create there that has people stay so long and has obviously created an incredible team?

Scott Malpass:

Nancy honestly, I think it's just an extension of the culture we experienced as students in Notre Dame. As you know, I tend to hire mostly Notre Dame alums. And the reason partly for that is, look, we're in a small city in the Midwest. It's not New York City, it's not Chicago, but yet we have a group of folks who have incredible loyalty to the school and affinity for the Catholic mission of the school. So I think the culture really reflected what we had in our student life, a sense of teamwork, a sense of community and caring for other people. There was no one-upsmanship or I'm vying for the same job and whatever. There wasn't competition that way. Everybody wanted everybody to do well. Everybody was very open with each other. Everybody helped each other. And so we had a strong team.

Any whiff of someone not being a team player or not upholding those kinds of values of the culture, they were done. They were going to get either some sort of conversation or they weren't going to work in Notre Dame. And luckily, we didn't really have that. But I think it really was the sense of community from a faith mission, which quite frankly, that brings in a lot of things that helps you in your career and getting along with people and putting up with things you might not be able to.

Nancy Lashine:

Yeah, it's awfully rare to find that in different environments today. There are very different philosophies and training investment people about. Do you say, "Okay, you're responsible for just this asset class", or did you work hard to have everybody go across asset classes early in their time there or switch? How did you do that?

Scott Malpass:

It evolved. I mean, we've always felt we were sort of generalists trying to uncover interesting investment opportunities wherever we could. And over time, our investment processes reflected that. But as the world got more complicated and a lot more managers and a lot more geographies, we did evolve into having asset class teams.

Ultimately, we ended up with three teams, private equity, public equity, and multi-strategy. Multi-strategy and kind of inflation hedge. And so there were very clear lines of this private equity that's here, public equity meaning any liquid equities globally, whether it was long or long short. And then multi-strategy were multi-strat hedge funds, real estate commodities.

Nancy Lashine:

I noticed you haven't mentioned fixed income.

Scott Malpass:

So it was really.

Nancy Lashine:

Wasn't fixed income, was it?

Scott Malpass:

Wasn't fixed income market and then multi strategy include fixed income. Yeah, we had about 10% fixed income, high grade fixed income for liquidity purposes. Way back, the Cambridge model sort of talked a lot about having long-term compounds, but then you had deflation hedges and inflation hedges, and of course bonds were the deflation hedge in real estate was part of the inflation hedging bucket or what became the real assets bucket. So endowments liked buckets, and as I moved along, I tried to get away from that a bit.

Nancy Lashine:

How did you benchmark those three different groups?

Scott Malpass:

We had appropriate benchmarks that were approved by the board because ultimately it did also, the entire thing was important in terms of compensation. So we had benchmarks for those three areas. And then obviously something that rolled those up into the total fund.

Nancy Lashine:

And how did you benchmark multi-strat?

Scott Malpass:

We had a combination of published hedge fund benchmarks, real estate benchmarks. So we had some combination of, and there was a commodity benchmark weighting of those three, reflecting the weightings in the multi-strategy area in that asset class, for asset classes. And so it wasn't... The benchmarking thing, I tried to simplify as best I could over time. I thought it was a distraction in many ways. You're investing in these assets because you think there's huge potential with the right partners, but you have to have benchmarks. Boards have to have them. Alumni want to see how you're doing. It affects compensation. I tried to, over time, make it as simple as possible. We at one point thought about would one benchmark, one liquid benchmark for the whole pool? Just be whatever that would be. But just as you know, in short term, there can be huge disconnects with benchmarks, and that made that complicated.

Nancy Lashine:

Did you compensate the entire team off the benchmark or just the very senior folks?

Scott Malpass:

It was a large part of the team. Certainly our directors, our investment managers were part of the incentive plan, our senior operations folks. Analysts, associates, would not have been for example.

Nancy Lashine:

No, that's interesting. So talk a little bit about alignment of interest with your managers and how you thought about that and how it evolved as you became more sophisticated as an endowment.

Scott Malpass:

Yeah, we started questioning terms a lot more over time. And in some ways as we were also investing in emerging talent where you had a chance to not dictate the terms, but influence the terms. They wanted, Notre Dame was an LP. They were willing to consider various formulations that would achieve that, including negotiating things like capacity rights that couldn't raise more money over a certain amount, or they had to get our approval. So for me was I wanted to make sure they had kind of a budget based management fee, something reasonable that they could justify. And I wanted transparency on that. And you can remember back in our early days, the management fee really was kind of what it cost to run the fund.

Nancy Lashine:

Yeah, the dollars weren't so big, so as the percentage stayed the same and the denominator got went up, it was just kind of at some point you went, "Whoa."

Scott Malpass:

Yeah. It got so out of whack. But when we started, it really was a budget fee. It made sense and that was how it should work. And we got so far away from that. So we tried to make sure we had that. And then a reasonable incentive, typically with a hurdle of some sort. I didn't want to pay a loss for beta. I wanted to pay a lot for alpha, but not a lot for beta. But we did the best we could there. And certain liquidity terms. Obviously I mentioned some capacity rights, so we definitely got more into the weeds on comp throughout the whole structure and tried to just create better alignment, which is better for everyone long-term. If you're in this game to have a 20, 30, 40 year fund, you're going to think differently about your LPs than someone trying to make a quick hit.

Nancy Lashine:

So one of the things that's certainly changed about the business, and obviously I think about it... Well, there's so many things that have changed, but there's some very large firms. So in the real estate space, for example, many years ago, maybe the top 20 firms raised the top 50% of dollars in any given year. And now maybe it's five firms will raise the top 50%. So you have some very, very large firms. They're also broker for trading.

Scott Malpass:

Yeah. That's true.

Nancy Lashine:

But their numbers are really good. Would you think today you would think about, and I'm asking this because we talked about alignment of interest and it sort of begets the idea of a smaller manager and a smaller fund, but do you think today you might think differently about it just because of the way the industry has evolved?

Scott Malpass:

Well, in real estate, potentially. I wouldn't as much in other areas, but I agree. A group like Blackstone, particularly when John Gray was running the real estate and they got large, but boy, they did terrific. And really their size actually became an advantage through the global financial crisis and so forth.

So there are exceptions, but generally I think if I wrote a book on 10 principles of investing, there's definitely been a pretty strong correlation between size and underperformance. I mean, too big at some point, you just can't perform as well as a smaller fund. And it's just the law of math. I mean, I look more at multiple capital than IRR, and it's hard to earn a 3 or 4X on a 20 30 billion fund, but on a 500 or a billion dollar fund, if you're really good, you have a chance. So yeah, there's some exceptions, but I think the rule still holds pretty much across the board.

Nancy Lashine:

And you mentioned early on that you had 15% international when you were a small fund. How did that evolve over time?

Scott Malpass:

Yeah, it basically doubled over time. We got as high as about 30%, and I think a big delta in there was China. We were very early in China, as you may know, and did really well there going back to the very early two thousands. So that was an increment that really increased international.

And then we did more in Europe in that lower middle market buyout category. We found a decent number of really great European partners, a little bit in other geographies, but not as much. So between China and Western Europe, that's what really got us to doubling over that period.

Nancy Lashine:

And today in 2024, are you still constructive on China?

Scott Malpass:

I am. I'm constructive on, as an investor looking purely at investment opportunities going forward. Obviously very concerned about the geopolitical issues and competition with the US and some of the tactics being employed by the Chinese today.

I actually feel I'm very sad about the situation, quite frankly. I spent a lot of time in China, love the people. My partners in China were fantastic. I love seeing them rise out of poverty and have hundreds of millions of people have a better life, partly because of some of the investment made by foreign investors and how the American consumer funded all these factory workers over time. And they had leaders who I think were trying to provide appropriate reforms in their political system. And that all got thrown out by the current president.

So yeah, I'm very sad about that, but I still feel the entrepreneurial spirit of the Chinese, the sense of innovation, the size of their economy, the scale of their population on consumer base, I still think can make it a very attractive investment opportunity. Speaking of now, valuations are pretty reasonable

Nancy Lashine:

Relative to what they were. Yes.

Scott Malpass:

Yeah. Yeah.

Nancy Lashine:

It's interesting. I also loved China. Went there for the first time in 1985 and spent a lot of time. Convinced two of my three kids to learn Chinese when they were in school here. And one of them majored in Chinese and spent a lot of time over there.

Scott Malpass:

Fantastic.

Nancy Lashine:

But as a real estate investor, it's been really, really difficult. I'm curious, have you done anything internationally in real estate and how do you think about that?

Scott Malpass:

We have, but yeah, in China we found that very, very challenging. I think we did one small investment in Asia and real estate, and it was okay. It was a lot of work for not a lot of return. Certainly did well, we did some work with some of the larger funds in Europe and those did well. But a high percentage of our real estate was domestic for sure.

Nancy Lashine:

You've come through quite a few cycles. I don't know how you count them, but-

Scott Malpass:

Four or five?

Nancy Lashine:

Five, six. Yeah. Okay.

Scott Malpass:

Four or five.

Nancy Lashine:

And after you left Notre Dame, you started Grafton and you're focused on the investing on behalf of high net worth individuals today. So tell us a little bit about how investing for high net worth families is different than your former life.

Scott Malpass:

Yeah, it's a good question. I mean, I was not planning this. I was approached when I stepped out of my role at Notre Dame, COVID was just starting and then you're sort of isolated, retired from Notre Dame. And then I got approached by a large family group that I had been doing a little work with more on the consulting side about maybe managing some of the funds. And I had a couple of other large family groups mentioned the same thing.

So I thought that would be very interesting. I mean, I could put something together. I wanted do all equity, public and private, long only, a real long-term compounding vehicle, getting rid of all the buckets, other liquidity requirements that institutions need, keep it very streamlined and a clear sense of what we wanted to accomplish and could do that with a handful of really smart, entrepreneurial, interesting family groups would be a lot of fun.

And so I called two former students of mine and asked if they'd be my partners, and they both said yes. And they were both at great firms, and I was a little nervous about them quitting. We hadn't raised the money yet. We had an anchor. We had a little bit of an anchor. We still had to raise more.

But so fortunately we were able to do that. And I have now eight former students of mine working with me. It's been a lot of fun. Our LPs are terrific. There's just such interesting people, how the families made their money originally in various industries. They often provide investment ideas and deal flow, particularly out of industries where they have great expertise. It's a great network if you need to do due diligence in an area or a sub area, there's usually one of our LPs knows that area really well. They're also very well-connected in the asset management industry. They know a lot of people. So yeah, just probably a little more engagement. I mean, Notre Dame had one LP, it was the university, it was all the, it was-

Nancy Lashine:

One and many, I'm sure.

Scott Malpass:

One and many, right. But here you have a longer group of clients, and so it's different in that sense reporting. You have to have your fund administrator, your regular reports. So a little different than Notre Dame, but I've enjoyed that. It's different, but I've enjoyed it. I really enjoyed doing a lot more direct investing. Half of our book are direct investments, and that's actually been a lot of fun.

Nancy Lashine:

And are you doing as much in privates?

Scott Malpass:

We're about 60% privates, 40% publics, and about half the privates are direct deals we've sourced directly.

Nancy Lashine:

Amazing.

Scott Malpass:

Yeah, it's been great. It's been great. My team's done a fabulous job. All of our networks have been important in our deal flow and really have enjoyed that.

Nancy Lashine:

Any particular industries or sectors that you're focused on, your directs?

Scott Malpass:

Yeah, I mean, we always say we're sort of focused on companies on the right side of change. So you think about the cloud, internet, FinTech, blockchain, things like that, payment systems, et cetera. So yeah, more new economy type and forward-thinking innovation. That was one of the things I always had at Notre Dame was I always felt I could bet on innovation. That's one of the reasons we had such a large venture portfolio. The amount of new company development and formation is massive in the US and China too. We'll see how that plays out there. But in the US, I mean, that's so entrenched in our culture. I always felt I could bet on that and wanted to find the right people to do that with. And that really continues in what we're doing at Grafton as well.

Nancy Lashine:

So for a private family, how do you think about the appropriate level of diversification and target return?

Scott Malpass:

Well, I should have mentioned earlier, of course they're taxable too and you know that. It's a different, we're certainly not trading. We're definitely thinking very long-term holding periods. We will obviously take profits in companies and reinvest those profits over time. But the tax aspect of something you do have to keep in mind. We don't need the, endowments felt they needed more buckets, more hedging, and I think probably too, I think they probably over diversified. I think that's something like I had 175 managers at Notre Dame. The big university endowments have 150 to 200 managers. In hindsight, that was just too many. We didn't need that many. And I'm not blaming anybody but myself. There were a lot of people we did. We could have passed, but I really liked them.

Nancy Lashine:

No, it's definitely a moment of self-reflection. I feel like it's a dirty little secret of those of us in the investment business that we probably all over diversify because it's a people business and you meet people, you like them, you want to invest with them, you want to be part of it. And also, it's a little bit of a hedge. You never know who's going to be the big winner, and you don't want to have FOMO.

Scott Malpass:

A hundred percent. I a hundred percent agree with that. The psychology of it reflected all of that. And also not wanting to have a year where you had some unusual performance below your peer group, which shouldn't matter, but-

Nancy Lashine:

Well, you did not have to worry about that Mr. Malpass.

Scott Malpass:

We didn't have that. But you're always thinking that way, the risk aspect of it.

Nancy Lashine:

Yeah. Yeah. So you're investing, you would say, with fewer managers today?

Scott Malpass:

Yes. Yeah. So Grafton, we're smaller fund we're about 600 million. But yeah, it's fewer managers, like I said, more in-house, more directs and less buckets, which we're only doing equity. This is a long-term compounding bucket. They're going to have other managers for credit and real estate.

Nancy Lashine:

And how are you thinking about team in this era of people working virtually in Zoom and the post COVID era? Do you still feel like it's important for people to physically be together, or do you learn to be able to communicate with your team via virtual means?

Scott Malpass:

I personally believe in having people together. I think you learn a lot in that, and culturally, it's important. I think for younger staff, it's absolutely critical to have time with senior people. I have two 2020 grads, the COVID class who were Malpass scholars working with me. They didn't spend one day in the office in their two-year analyst program.

Nancy Lashine:

Oh, gosh.

Scott Malpass:

Not one day. They worked for an investment firm in Boston. So that's very unusual. And these are two really bright young people. I'm sure it didn't affect them as much as others, but they even say they really miss that. They couldn't believe that.

But having said that, I've learned to live with remote and be comfortable with it. We have remote staff at Grafton. We have regular calls, and then we're together a week a month. It just requires us all to be together a week a month, which has worked very well. But I definitely had to evolve a bit to deal with remote for sure.

Nancy Lashine:

Yeah, I think we all have. A very few of us have a true choice in the matter if we want to retain the right talent. I know you've, or I believe you've been constructive on crypto, so I'd love to just ask you what your thoughts are, especially given where the markets are right now. What are you thinking about blockchain and crypto?

Scott Malpass:

Yeah, I am constructive, particularly on blockchain. I think that's a technology that has a lot of uses, and honestly, we're just skimming the surface, I mean, of what could happen. Regulatory challenges kind of keep that down a bit, which I think is unfortunate. But over time, it's such a powerful tool. It will continue to evolve.

On crypto, again, being my innovative innovation theme, I believe you got to experiment with things. I think payment systems moving money, moving objects, moving whatever, the security of that, the privacy of that. I think crypto can play a very important role in the global economy and disintermediate entrenched financial institutions that make a lot of fees. There's a lot of middlemen, and we could get away from more of that over time.

But I'm first to admit, we're not close to that globally with the regulatory environment we live in, both in the US and in Europe. But I think it'll evolve. Hey, I remember we remember back in the early nineties when people started talking about the internet and all this stuff, and we thought, "There's no way that could happen" and now of a sudden we're an email.

Nancy Lashine:

Well, and it's certainly consistent with thinking constructively about emerging markets like China and other places where the rule of law is not as powerful, and the idea of being able to have a global currency has a different level of meaning.

Scott Malpass:

I think it's interesting. I can't imagine some form of this is not going to work out and be part of the solution going forward. I don't know exactly which currency or what formulations or how that'll work. I don't think anybody can really at this point, but if you look at the next 10, 15 years, I think you'll see a lot of change in that regard.

Nancy Lashine:

So the last topic I wanted to talk to you about is just how you see investing in this current environment of higher rates. They're really not higher relative to where you started, or I started in the eighties and nineties, and you can certainly make lots of money with interest rates in the 5% and 6% range long term. But how have you evolved your investment thinking just in the last 18 to 24 months as rates have started to rise and inflation has become more of a factor?

Scott Malpass:

I haven't really at all. Like you noted I mean, we lived in environment of higher rates most of our careers. So last third, not as much obviously, but I remember being involved in issuing 7% tax-free AAA bonds in Notre Dame for our stadium renovation at 7% in the mid-nineties. And we thought that was the greatest thing ever happened, 7%. And we had car loans at 11.

So it hasn't really affected me. I think equities are the best long-term inflation hedge. They've proven to be. And so that being where we are does not impact that for me in terms of where interest rates are. If I thought we were going to have rampant inflation or something unusual then I might, but that's not where we are, and I don't think that's where we're headed. So it hasn't changed anything for me.

Nancy Lashine:

Wow, that's a luxury.

Scott Malpass:

Well, you're doing that every day.

Nancy Lashine:

Yeah. Well, with real estate, unfortunately, it has a little bit more of a day-to-day impact just because of current pricing and 50% of most purchases are leveraged. So it definitely impacts returns. I'll just ask you one quick question. If you could have dinner with anybody tomorrow night, dead or alive, who might it be?

Scott Malpass:

Well, a lot of Catholics like me might say the Pope, but I actually have had dinner the Pope. In a group, but I'll tell you what, Bruce Springsteen would be mine. Yeah, Bruce.

Nancy Lashine:

The Boss. Dinner with the Boss.

Scott Malpass:

Off the top of my head, that's what comes to mind, I'm a massive fan. And I saw him in Notre Dame when I was a freshman. I've been in absolutely in love with the whole Boss thing and the E Street Band since then.

Nancy Lashine:

All right, Bruce, if you're listening, we'll go buy. If we can make it happen, we'll buy. That sounds like fun.

Scott Malpass:

That would be fun.

Nancy Lashine:

Scott, it's such a pleasure to see you and reconnect with you, and congratulations on just such an extraordinary career.

Scott Malpass:

Thank you, Nancy. Great to see you. Thanks so much.

Nancy Lashine:

I hope you enjoyed this episode of Real Estate Capital. Before you go, I have a quick favor to ask. We put a lot of thought and effort into this show and making sure we bring you insights from real estate leaders that you don't normally find in the mainstream media. So if you're enjoying this show, please remember to follow it on your favorite podcasting app so you never miss an episode. We'd also love for you to share it with others or give us a review on Apple Podcasts so others can find us. Thanks again for tuning in. For more information about our firm, please visit our website at parkmadisonpartners.com.