Institutional Investor is proud to recognize leaders within the allocator community for their outstanding contributions to portfolio development at the second annual AlphaEdge Recognition Dinner. Prior to the event, we sat down with Erik Ogren, CFA, recognized in the category of Next Generation Recognitions.
Erik Ogren, CFA, is Managing Director of Investments at Carnegie Mellon University, the $3.8 billion endowment in Pittsburgh, Pennsylvania. He assumed this role eight years ago, following a diverse career in investing, investment banking, and advisory firms.
Erik's career began after earning his bachelor’s degree from UC San Diego, where he started in lower middle-market lending at American Capital Group. He then transitioned to Deloitte & Touche’s consulting practice focused on structured credits. Following his tenure at Deloitte, he joined the Capital Markets Group within a division of Citigroup, focusing on non-agency structured credits.
After obtaining his MBA in General Management from UC Berkeley, Erik specialized in private markets. He held positions at OCIO firms LP Capital and Cliffwater, where he served as the Head of European Private Equity Investing. Erik joined Carnegie Mellon in July 2016 in his current role where he serves as a generalist.
The following has been edited for length and clarity.
What is the biggest challenge facing the industry today?
I view this issue through the lens of asset allocation and the major headwinds facing our portfolio and those of our academic peers. The venture capital ecosystem is saturated with capital, a situation that is unlikely to change soon. This oversupply of capital means there are too many investors chasing too few quality deals, which will likely result in muted returns for the asset class for years to come.
The real bottleneck in achieving attractive, power-law returns in venture capital is the scarcity of startups capable of reaching escape velocity. It's not the number of VC firms or the amount of capital that's the problem. Historically, only 10 to 14 companies born each year eventually achieve $100 million in annualized recurring revenue at some point in their growth.
The Zero Interest-Rate Policy era led to a tripling of U.S. VC investment between 2016 and 2021. Ultralow rates compressed the perception of time, making the future seem nearer and resulting in the financing of many overly ambitious startups. Due diligence suffered, and valuations of startups with distant profitability prospects were inflated by easy money. The venture capital frenzy cooled after the Federal began raising interest rates in 2022. No good deals were made during the boom years of 2020 and 2021. Poor liquidity and higher interest rates now make long-dated assets less attractive unless they offer compelling growth rates. Although valuations have reset and further declines in NAV values are expected, the real issue is the significant amount of dry powder still in the system that will be deployed into unattractive, risk-adjusted bets overall.
The AI platform shift may produce a few substantial outcomes, but we are likely headed for a capital burn reminiscent of the dotcom bust. The NASDAQ has outperformed the top quartile VC benchmark on every timeline over the past 25 years. Therefore, if you cannot access or identify top decile performers, venture capital is not a viable investment.
Venture capital firms excel at fundraising and crafting compelling narratives. Although I still observe durable rates of innovation and technology becoming a larger part of GDP, there will be more sustaining innovation than disruptive innovation. This means more value will accrue to incumbents. A few startups will innovate in markets where incumbents face an innovator’s dilemma, and some massive companies will emerge. However, these successes may not translate into significant returns for the large funds raised.
A secondary problem for investors is the minimal impact of persistent underperformance on VCs themselves. LPs have created and perpetuated an industry with such structural economic misalignment that VCs can still become wealthy despite underperforming.
What are you most excited about?
I would say our buyout portfolio gets me most excited: CMU’s buyout investment strategy is focused on value-oriented, lower middle-market buyout firms that seek to invest in niche market leaders with significant white space for growth. Performance tends to be driven by operational focus and sometimes also by buying at a discount, creating a margin of safety.
CMU holds the view that the lower middle market offers a wide array of potential targets, more appealing valuation multiples, and significant opportunities for creating value. Lower middle-market funds have a lower correlation to public markets than large-cap funds (0.56 versus 0.72) and have outperformed large-cap funds by an average of 4% IRR. The drivers of activity in the lower middle-market are less dependent on financing, cycle, and valuation.
We look for hungry and stable teams with competitive advantages, strong alignment, and repeatable playbook with operational capabilities. We focus on transaction type expertise, particularly first institutional capital situations, buy-and-build strategies, or complex situations.
We seek to gain exposure to niche market leaders with barriers to entry, fixable flaws/under optimized companies, and growing industry with demand characteristics. We hope this leads to “create” what you can’t “buy,” transformational growth in fragmented markets; strong return on invested capital and free cash flow generation; and improved scale, profitability, diversification, and professionalization resulting in multiple expansion. The end goal is consistent top-quartile returns in all economic environments.
Buyouts have outperformed public markets on a Public Market Equivalent basis in every one of the last 22 years. Top-quartile buyout funds managers have generated stable returns across different cycles and rate regimes. Buyouts offer an asymmetric return profile: In the worst performing five-year period between 1995 and 2022, developed market buyouts still generated a positive return. Less-rate sensitive investment models (earnings transformation, modest purchase multiples, and high free cash flow generation) may outperform in the current rate regime.
Who are your mentors and who made you get into your current job?
Charles Kennedy, our Chief Investment Officer: I’ve worked alongside Chuck for 8 years, and he’s taught me about endowment management, leadership, and governance.
If you weren’t in investment management, what would you be doing?
I can’t imagine doing anything else.
What’s the one thing the industry should do to improve the sector?
Increase LP/GP alignment, particularly economic alignment. Incentives matter. Warren Buffett once said, “Show me the incentive, and I'll show you the outcome.”
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