LP interview: The Dietrich Foundation

With an 85% allocation to private equity and venture capital, Edward J. Grefenstette, president and CIO of The Dietrich Foundation, estimates that he is three standard deviations from the norm for most foundations and endowments. But this is not the biggest anomaly in his approach. While a typical foundation might have 40% in PE and VC, with China accounting for 10% of the entire portfolio, The Dietrich Foundation has a 30% exposure to the country across all asset classes. Factor in Vietnam, Indonesia, Korea and Singapore, and the Asia-wide allocation rises to 38%.

Grefenstette believes his fellow CIOs are more conservative on China because of a self-preservation instinct: “They view China as a black hole to which they assign maximum risk. They don’t know what’s in there. They don’t take the time or have the necessary resources to shine the flashlight, but they know if they make an investment and it goes sideways or down, their investment committee is going to say, ‘What on earth were you thinking?’ So they understandably assign maximum risk and move on. In our view, that creates an enormous opportunity.”

The Dietrich Foundation appreciates that China presents a higher risk than the US, but not as high as some assign to it. At the same time, Grefenstette feels that, relative to many CIOs, his personal career risk is low, giving him the latitude to pursue certain investments that others might demur. When Grefenstette (now 50) joined the foundation in 2010, founder Bill Dietrich envisioned him staying in the job until the age of 70, made sure the trustees understood this, and crafted the governance documentation to allow Grefenstette the flexibility to operate as a long-term thematic investor.

We always like to see an element of fear in the eyes of GPs because it suggests they are being self-critical and disciplined, and they are worried

“Bill gave me parameters, but he also gave me the ability to make the call,” he explains. "Again and again, he said he wanted us to be bold in the pursuit of multi-year global themes. I still serve at the pleasure of my trustees, so while I hope it's unlikely, I could be gone tomorrow. But so far, so good."

Building a base

This groundwork was laid by Dietrich ahead of his passing in 2011. The successful industrialist – he transformed the family lumber business into the largest supplier of light metal framing to the US construction industry and sold it in 1996 – placed $170 million into a charitable trust, which would convert into a foundation on his death. Dietrich also identified the beneficiaries, prioritizing higher education and his home city of Pittsburgh. Of the $75 million distributed to date, Carnegie Mellon University has received just over half, with the University of Pittsburgh getting 25%.

Between 1996 and 2010, Dietrich grew the trust to $500 million, based solely on investment returns. Total assets under management now stand at $750 million. The first investment in China came in 2006 and capital was deliberately spread across a wide pool of managers in the early years because track records were sparse. Dietrich focused on growth capital and local GPs. “He felt very strongly that the model of a US firm opening a China office was doomed to failure. He thought you had to back local teams with local knowledge and local relationships,” Grefenstette says.

The foundation has backed more than 30 different private equity and venture capital firms in Greater China over the last two decades. Since 2010, steps have been taken to pare down the portfolio to eight core GP relationships and concentrate on venture capital rather than growth equity.

“In 2010, renminbi-denominated funds were taking off and the pre-IPO growth equity strategy had largely run its course. We looked at the venture space and at least at that point there were very few renminbi VC funds. Local renminbi managers didn’t have the skill set, the investor base or the patience, so there was less distortion of VC valuations,” Grefenstette says. “We also felt that home-grown innovation was starting to come into its own in China and we wanted significant exposure to that theme.”

An evolving market

The landscape has now shifted again. Huge amounts of capital have poured into VC in recent years –from US dollar and renminbi funds – contributing to a rise in valuations. For The Dietrich Foundation, this is a time to exhibit care in manager selection. The key considerations are: differentiation, with domain expertise seen as essential so that managers can respond swiftly to opportunities in an increasingly competitive environment; an ability to maintain fund size discipline; and an appreciation of the need to share fund economics throughout the team in order to retain junior and mid-level talent.

Establishing the appropriate key performance indicators (KPIs) is central to this philosophy. “A lot of junior and mid-level PE/VC professionals are focused on deal completion, but that's the wrong KPI. The right KPI is good decisions made – and that could mean working hard through the weekend and telling the partner on Monday that they love the target company but, at the likely valuation, it’s a pass,” Grefenstette explains. "That decision is a success. Yet very few firms compensate their junior people based on good decisions made compared to deals completed; it is hard to incorporate into reviews and compensation, but it's the right thing to do.”

He has made 26 trips to China since 2006 and one or more team members spend about eight weeks a year on the ground in Asia. The foundation has nine staff in total, including five on the investment side. Grefenstette believes they have a strong grasp of China’s fundamentals, not least an appreciation that the country’s seesawing market sentiment doesn’t necessarily reflect the reality. That said, the last characteristic a current or prospective GP should exhibit is complacency.

“We always like to see an element of fear in the eyes of GPs because it suggests they are being self-critical and disciplined, and they are worried,” Grefenstette adds. “When our GPs are not a little bit worried, it makes us very worried.”

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• Topics
• North America
• Greater China
• LPs
• Venture
• Growth
• Fundraising
• USA
• China
• Asia
• Southeast Asia
• The Dietrich Foundation