Scott Chan
speaker
125 appearances
1 recordings
1 series
first heard Mar 2025
last heard Mar 2025
Scott Chan’s voice in public audio — every appearance, attributed to the second.
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we were able to gain economics in those funds as well. In this case, we had a revenue sharing arrangement. So if you think about every part of the return distribution, you know, because it was direct lending, we're penciling out, well, we're getting on low teens on our investment.
And as that fund grew, because we're sharing the revenue, as long as the returns were positive, we're going to generate, you know, 3% to 8% additional IRRs given the economics that we're sharing by anchoring the funds with them.
And so if you think about it from that perspective, yeah, we had the operational risk of how do we structure this, the legal costs of making sure we had the right vehicles and structures. But at the end, we have the potential of adding 3% to 8% IRRs on top of the IRRs that we expect. And that could be a considerable amount of value for CalSTRS.
That is the case. And again, it's one of the keys, and you'll see this in our numbers, that we're not taking additional market risk and generating, I think, uncorrelated alpha on top of that. And again, I recognize that it brings some additional operational risks. We've spent a lot of time mitigating that with our expert staff and and increasing resources.
In the time we were accelerating the cloud model, think back in 2017, we had a run rate of 106 cloud model transactions. In 2023, we had a run rate of 425 cloud model transactions. So we've really accelerated that. What has that done to return on risk? Well, If you think about the cost savings, we estimate greater than $2 billion in cost savings over the last six years.
And I love that because I think every successful corporation or business, they should have that mentality of like, how can I deliver a streamlined, more cost-effective business like a Costco? Delivering value to the clients. We're delivering those costs right to the teachers, bottom line. On the flip side, you don't want to be penny wise and pound foolish.
Every time we are doing the collaborative model, we have to think about it from the perspective of would we just be better off as an LP and a fund for folks with a competitive advantage? Would we have a sourcing advantage with them? Can we add additional value to it? And if you look back, we've had one of the strongest periods of alpha generation.
If you look back five or six years, we have over 10 billion in value added returns over our benchmarks. You can say maybe 20% of that was cost savings and maybe 80% of that is a structural alpha that we're talking about, but also the expertise of the team and being able to select better risk reward for the fund.
If you think about the alpha 63 basis points over the last five years, that's on top of, if you looked at 10 years, we were 48 basis points. And so you can continue to see this upward trajectory. We estimate we're in the bottom quartile for costs in our peer group. So we're very cost effective. We're the bottom quartile of risk, but we're in the upper part of the return spectrum.
That's a great question. It's two sides of the same coin here. One thing that we've talked about is we just have a very long-term horizon. You're labeling me as contrarian. I think thinking long-term gives you the capability. to be contrarian because most of what you're seeing in the short term is noise, right? So that's number one.
Number two, I think the way you make money with a high degree of probability is bottom-up transaction by transaction, deal by deal. And so our science gives us the capability to build an expert team across markets. And I think what we've done, which is not typical for an organization of our size, is create a nimble and dynamic decision-making structure at the division level, right?
That's something that's unique. The second thing is scale economics, right? Some of the transactions we can negotiate from a collaborative model perspective is the scale. So if we're going to be a significant size, it just aids us in being able to negotiate better win-wins with our partners. Given our size, our ecosystem continues to grow.
And so more and more in the future, as we connect our own ecosystem together, we can create even more advantages. A simple example recently that I give you is we became one of the top life sciences, real estate developers in the country. We have a big footprint in Cambridge Crossing, for example.
And we connected private equity debt in the sense that within some of the real estate embedded, we can offer some of the space to venture capitalists. And so we can gain equity interest in that. But at the same time, we have this robust return just on the economics of the real estate itself. Connecting the ecosystem, how can we do that? But then there's significant challenges, right?
I mean, the market has to be a certain size for us to even play in it. So we're going to X out a lot of the world just because it's not scalable enough for us. And there's not much we can do about that. Our check sizes are going to be, you know, very minimum $100 million, but most likely more in the $500 million range. Otherwise, that's got to be a pretty significant market issue.
But I would say that probably the largest challenge is us coordinating our approach across divisions. If you think about coordinating across so many different divisions at scale dynamically, if you underline dynamically, that's hard to do. That's very, very hard to do. And so there are a number of challenges that we've identified that I think are difficult.
We talk five years from now, I'd say, Dave, those are some of our competitive advantages now. But I think shifting allocation, the relative value amongst should we be, you know, I'll give you another example. In our diversifying space, fixed income is generating a lot more returns than it had over the last decade, right?
I remember a time during the zero interest rates, we were forecasting sub 2% returns in fixed income. It turned out 1.7% over kind of the last five years. But if you look forward, that's 6%, 7% now with interest rates where they are, and they're most likely to remain higher for longer. So we have to get better and better at how do we shift capital from divisions based on better risk reward
And I think the other element is really capitalizing and managing the risk and the opportunities of what I would call mega themes. It's across all geographies. It's across all asset classes, sectors, and companies. It has a huge TAM. And we're seeing that convergence right now in AI and power on the infrastructure side.
You've likely seen the headlines of $80 billion from Microsoft and $75 billion from Google. And so...
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