Cambridge Associates CEO on AI, Crypto, and Private Markets | At Barron's

Hello everyone and welcome to at Baron's. I'm Andy Serwer and welcome to our guest David Drooley, CEO of Cambridge Associates. David, great to see you. Thanks for joining. — So Cambridge Associates has an interesting backstory founded at Harvard. Tell us that story, David. — Yeah. So 53 years ago our two founders were coming out of getting their masters and I think both of them got law degrees while they were doing that. They came out and they said, "Wow, Harvard is not doing well. It's not being run in a really sophisticated way. " So they went and pitched the executives at Harvard, finance execs, that they should be hired to actually work with Harvard to modernize and institutionalize how they invest in down one. That's where Cambridge Associates started. We were never in Cambridge. We were always in Boston. Shortly thereafter other Ivy League schools came on board and hired us to help them as well. So that's kind of the start of Cambridge 53 years ago. Right. I should say Cambridge Associates is an investment firm that's also sort of morphed over the years. Yeah. — Yeah. Initially you were in sort of the advisory business, but then you actually moved into running money. — Yeah, I would almost say initially we were consultants 53 years ago. About 20 years ago we started becoming investors actually. We were hired on outsourced chief investment officer basis to run money on discretion. About 80% of our clients today are relying on us to do all diligence, build portfolios, execute for them. About 35% of that's on discretion. Some of that somebody else has a veto power or approval power. The other thing I would say is we deal with a lot of great endowments and foundations that are doing great stuff in the world and that's where a lot of people know us. But about 40 years ago some of the great families that sit on the college and university boards came to us and said, "We'd like you to help us run our money. " That started our what we call our private client business now we have over 250 private clients. They're doing a lot of great stuff in the world trying to help communities. And we work with retirement and insurance companies as well. And some of those families are they owners of the business because it's a private company and tell us who owns the business at this point. — Yeah. So this is something we're very proud of and I think it's a huge differentiator for Cambridge Associates. We're owned by our partners. So there's roughly 70 partners such as myself in the business. And roughly a little less than 15 client shareholders. We decided a long time ago we wanted to be owned by our employees. One of our founders still owns a small modest stake and our clients. I think why that makes us really differentiated one, we have a very long-term view of the world. The second reason is when we sit in the board room nothing gets talked about if it's not good for clients. I'll tell you my number one goal every year is client performance. I think this is a huge differentiator for Cambridge Associates. And you talked about AUM and AUA which assets under advisement and is that around 616 billion at this point? — enough. Close enough. Right. Okay. And in which part is growing faster? You sort of spoke to that a little bit. Yeah. So our discretionary business is growing faster. It's roughly about 30% of our business. Quite frankly, we're indifferent to what grows. That's driven by the market. Again, 80 something percent of our clients we're actually proactively driving the investment, the diligence, the investments, the portfolio construction. Right. And is that a better business has been or why is that better? — same. It's the same. Our business we like all parts of the business and from a financial attractiveness perspective it's all very good business for us. Right. What we don't do anymore is we don't do a lot project consulting or you know, one-off type things. We want a seat at the table where we're helping drive performance and generate value add. When we generate value add and this is what gets me up every morning, then our clients can go do more good stuff in the world which is tremendously motivating. University and college endowments still a big part of your business? — It's a little less than half. So it's still the largest part of our business. Private clients will think ultra wealthy families that are institutional size or over 35% then the other 20% or so is retirement, insurance and government. You know, one of the classic endowment problems that uh these universities have had recently, I guess not classic but the recent is exposure to privates. And you know, that's just been this huge thing. The Swensen model which you're well acquainted with has been called into question. What is your take on that? Is this a temporary problem or are they going to switch out of privates? Well, in some ways the rules or what they need to spend has changed as you know. Either taxes on the endowments or the foundations are being applied or research grants are going down at the

universities. And if you think about what endowments do, they actually help fill the operating budget that doesn't come from incoming revenues. And so if you take some of those other incoming revenues now down, now the endowments have to meet more of the operating budget or it has to be taken down. So what you've seen is I think the endowment model is very much alive and well and generating returns. What's happening is that the institutions have to incorporate higher levels of cash outflows out of the endowment and what that does to their privates. The headline here, which I think has been misinterpreted, is that the endowments still believe in the endowment model and investing a lot in private equity and venture capital and inefficient parts of the market. It's not that they don't that's why they're reducing that or selling it. It's because they need to adjust for a new economic paradigm as far as the cash flows that need to support their institutions. Right. I mean initially people are pointing their finger at the cycle, but it's also this changing I guess environment from Washington D. C. — That's right. — That has sort of ushered in this change. Has this led to the growth of the secondaries market? It has, but the secondaries market still a fraction of the total market. I think you nailed it. It's changes in government policy. Taxes, lower research grants. The cycle of the market does not help because there's not a lot of distributions coming back. I will tell you we've seen IPOs and deal volume, especially the aggregate deal sizes going up the last couple quarters. So if that's probably close to an end if not at an end. All right. Well, that's a good jumping off point to ask you about your outlook for the balance of 2026 and maybe even to 2027 for the business. For investing. Mhm. Yeah. So when we think about the investment landscape, we think there's a couple key things that have to happen. One, diversification. It sounds easy. It's tough. I'm going to explain what I mean by that. The second is avoiding overcrowded trades. When I say diversification is tough right now, people that are tracking global equity markets or positioning themselves like that have invested in things that are pretty concentrated. So US equities are about 65% of the global equity index. That's literally at an all-time high. It was close to 70 before last year. The US equity market, the top 10 stocks are about 40% of the US market. Again, you have to go back to the 90s to get anything into the 20s. So this is highly unprecedented. You take those two components, those 10 stocks literally make up about 25% of the global equity market. That is concentrated. People need to think about how to diversify. The things we've seen in Venezuela or the Middle East, things break. Diversification is crucial, absolutely crucial here. The crowded trades are overvaluation. That's really large cap equities and specifically large cap US. A lot of people were turning to Europe which was great, but maybe not so great anymore. Is there still hope for Europe? Is Europe a place for outperformance? — We think yes, Europe can have outperformance. Specifically we like places like Latin America. We like small cap managers over large cap managers across the globe. Large caps are expensive. We do think there's interesting things to do, but it's not in the trades that are crowded, the large cap stocks across the globe. — People have been waiting for EM to catch up forever. That's always been a tough one, isn't it? Andy, we could have sat here 15 months ago and you would have pushed me on that as well. We would have told you the same thing. Everyone was telling me 15 months ago, "You're saying that we should diversify out of the dollar or the US cuz it's expensive. That's the place to be and it's exceptional trade. " Actually, in those 15 months the US has been one of the poorest performing major global equity markets. Emerging markets have done great. China's done great. Europe and Japan have done great and the dollar sold off. Granted it's rallied a little bit with the current Middle Eastern situation, but we still think the dollar is in a bear market. We think it is in a secular bear market. That's strong. Well, the Mag 7 has become the Lag 7 as we know. — The Mag 7, there's a crowded trade where everyone told you had to be in that trade 6 months ago. Yeah. 6 months it's down. What are your clients telling you, David, in terms of where they want to be and how responsive are they to what you're pitching them? So well, first I have to back up. We wouldn't We don't pitch them if I can make one point. We what we sell to our clients is partnership. Whereas most of our competitors pre-package product that's good for them and then pitch it to the clients, we don't pre-package product like that. We sit across the table, understand the client, develop the portfolio for them. That said, your client your question has tremendous merit. What they're asking is how do we diversify? Where do we find

pockets of inefficiency where there's cheaper assets? And how are we going to generate the returns we need with valuation so elevated today? Right. Talk to us a little bit more about family office and high net worth and global wealth. Why is that business so good? Isn't it very competitive? Aren't there a lot of people trying to get into that? There are that. Um the difference is for us is we're one of the shops again that doesn't package product. Uh our fees are very transparent. The clients know exactly what they're getting for the price they're getting it. I think we are the largest provider of investment services in working with uh very wealthy families. I think by far we are. We have a very unique value proposition versus banks and other folks. What about technology and AI? How is Cambridge using AI and technology to change the way um you guys do business? Yeah. So, a shop like ours, we're going to have to use technology in significant ways uh to deliver for our clients and to continue to deliver and I say deliver for clients either reporting and data but most importantly investment performance. This is still a judgment game. So, we still think this is AI's a facilitator not taking the decision away from humans. But it can help process information, provide insights that help them with uh with our opinions and our execution of portfolios, putting the portfolios together. The other way it's going to help and I think AI is going to be tremendously beneficial to investment firms, banks, insurance companies is in the handling of data and reporting and analytics. We're already seeing significant impact inside our walls there, which mean clients get information faster. Uh they get information in a uh faster and they get more cuts of the information. Right. Yeah. Are you guys involved in crypto in any way? Have you invested in crypto? — Uh we don't really with one exception. Uh we're big players in venture capital. So, as you know, we go out and hire managers to implement different asset classes for our clients. We've been one of the longest tenured venture capital investors us and our clients for 50 years. We have significant um capital there. Inside of that you have technology that supports crypto, Mhm. so to speak. But we're not directly invested in crypto per se. The good thing about the venture business, David, of course, there's just been tremendous investment. The companies keep getting bigger and bigger but no exits, right? I mean, you spoke to that a little bit. We're seeing exits today. We're seeing them in the US. We're seeing we've seen some big exits in China as well. Yeah, but why should these companies even go public? I mean, you know, there's every Everyone says don't go public. Well, that's a question. There's talks in the US about making it more attractive to go public. Markets outside the US in some cases are better. But in some cases that's the path to exit. That's how people get liquidity or growth equity. Right. And what about the split between private investments and public markets? Where does that play in terms of Cambridge in terms of your assets? And do you hope to get bigger or smaller in private? So, — [clears throat] — we have significant money in private investments. Roughly a third of our assets that we're running for clients is in private investments, private equity, venture capital, growth equity, infrastructure, real estate. So, it is significant. For the most part, we work with clients on a total portfolio basis. So, we're investing where we think there's compelling ideas. I don't think it's going to get significantly bigger than where it is today, but I don't think it's going to get smaller either cuz we're finding great opportunities in the private space. Excluding a few areas where there's crowded trades, which I'm happy to discuss if you like. All right, we'll discuss it. There's areas of the private market, whether it's uh large deals on senior lending on the private credit side where there's a ton of flow of capital, which means return degradation or higher risk uh from not being able to tie down good covenants. There's a ton of money going into super large cap buyouts on private investments uh either through some products that are being the democratization of privates and getting those into the hands of the more retail money. There's too much money going in there to generate good returns. — So, bad thing for retail investors to own those securities? — it's a challenge. I think this is a tough time for those products to be rolled out in assets that are unlikely to generate great returns. What about your exposure to private credit and software companies we've been reading about? — I was just talking to my team about that this morning. Again, due to the fact that we are avoiding these crowded areas, this tends This is just our um

this is our bias. We don't like crowded areas. We're not really in the parts of the market that have been doing a ton of software lending. When I look at our portfolios, we're seriously underweight. Which was a bad news maybe a year ago and not such bad news now. — on private credit. Our returns were very competitive if not better because we're in inefficient parts of the market where we can get higher returns for the level of risk we're taking. And the managers we're deploying capital to are nailing down very good covenants. How would you describe the competitive landscape, David, versus, you know, the firms that you go head-to-head with Yeah. Every day. So, you the competitive landscape on who it is or like Who they are? Who do you compete with and why are you better than them? Okay. So, I think the reason we're better than them is consistent. But there's it's a little bit different in the different parts of our book. So, on the endowment and foundation side, we are the de facto standard when you get right down to it. We're the big player in that market. The competitors tend to be the boutiques or the pension guys that are trying to cross the fence because their defined benefit pension business is shrinking. On pension and insurance, it's your traditional pension advisers. Uh you know who they are. They're the big three or four that are out there. Um and then on the private clients, I think very fragmented market. It's the banks. It's multi-family offices. It's us. In each case, what gives what makes us I think unique is we have the scale and breadth across the globe with 300 senior investors that are ready to do the work. Average industry uh time experience 20 years. So, they have the experience to do the judgment and the work. But then we've put in that in place with investment teams that partner with each asset owner to create bespoke portfolios for those asset owners. So, it's not a prepackaged product. We're creating what they need specifically to execute on their mission and their mandate. And then we've stripped out uh possibly some of the conflicts that come from being a public company that's driven more by growth than client returns or that has a lot of product to sell, which we don't. You've been CEO what for about 10 years now? — Yeah, 10 years. All right. — Yeah. And so, what are you looking to do for the firm taking the firm to a place say over the next 5 years? What's your strategy? The strategy I think is to continue to execute well on what we've done and which is partnership for clients, partnership with clients that are doing good in the world when we make them money. But it does mean staying out in front of finding great investment ideas or new investment ideas to put in their portfolio. Now, there's a few things that I'm focused on to increase that partnership. One is being closer to the clients where they are. So, I just opened the office uh we in Dubai last year. Milan this year cuz we want to be close to where our clients are and the investment ideas. Um you know, and I want to be audacious. My goal is to generate $20 billion in value add for our clients over the next 6 years. Can you imagine if we create that 20 million in value add, how much more extra good they can do in the world? I'm really motivated by it and our team is, too. And final quick question, David. You're a Texan, but you live in Boston. How does that work? Are you a Red Sox fan? I am a Red Sox fan, but I'm claiming dual citizenship at this point. — Really? Does that work? You support teams in both places? — sports teams in both places. Fortunately, they don't ever usually meet in the championship game, so it's all right. I cheer for the one that's on a winning streak. Fair enough. David Druley, CEO of Cambridge Associates. Thank you so much for joining us. — Thank you. This is at Barron's. I'm Andy Serwer. We'll catch you next time.