“Ruchit conducts aerobic due diligence. He has conscientiously cultivated a network of diverse voices that he uses to source strategies, test assumptions, and fully plumb the risks and benefits of prospective investments. He is exceptionally smart, personable, and excels at negotiating creative terms that cement participatory relationships with especially attractive partners. One such partner lightheartedly told me he considered adding a key man provision to ensure continued access to Ruchit.”
— Paul Ballard, CEO and CIO, Texas Treasury
One of Ruchit Shah’s greatest strengths is his creative approach to investing and partnering with different managers as a part of the Texas Treasury Safekeeping Trust Company. He’s a deal tactician who explores mutually beneficial partnerships when approaching different managers for deal arrangements. He oversees $10.5 billion in assets across all asset classes, including public markets, hedge funds, private equity, private credit, and real assets.
He also used his innovative ideas to expand his professional tenure by co-founding 3 Day Startup, an organization focused on helping university students start technology companies and helping universities build entrepreneurial communities through a new model of entrepreneurial education. Student alumni of 3 Day Startup have founded over 130 companies that have collectively raised over $180 million.
Shah’s expertise also includes working as a Special Counsel at the Lieutenant Governor of Texas’ office and as an attorney at Baker Botts LLP. He holds a J.D., with Honors from the University of Texas School of Law and a bachelor’s degree from the University of Texas at Austin.
CIO: What makes 2019 an interesting investing climate? How are you handling it?
Shah: 2019 is a continuation of a series of events the vast majority of us thought would never happen—interest rates remaining near historic lows, stock market near all-time highs, the 10th year of the economic expansion in the United States, and yet another year of divergence (market, political, and economic) between the United States and the rest of the world.
Having our collective expectations confounded (yet again) makes us confront the way we’ve been doing things as institutional investors—should we maintain our confidence in alternatives, embrace illiquidity, and continue to pursue complexity premia in place of ordinary equity beta?
In response, I’m trying to avoid being dogmatic. I’m reminding myself that we are all paid to believe that markets are priced incorrectly—so I’m continuously asking “why might markets be priced just right” as a counterweight to my own biases. I’m asking everyone we do business with this question as well, as I think it’s incumbent upon all of us to be intellectually flexible in the face of uncertainty.
Perhaps equally importantly, I’m trying not to learn too much from recent history and especially recent market performance as we can’t simply count on the perpetuation of the status quo.
CIO: After this year, what are the largest opportunities and the largest threats you see on the horizon?
Shah: Not surprisingly, some of the largest opportunities are really just derivatives of the largest threats on the horizon. The US investment grade credit market has over $2.5 trillion of debt rated BBB, which is just one notch above junk. More importantly, approximately 30% of this debt is in cyclical sectors (energy, consumer, etc.). Potential downgrades in the IG universe are a very important factor for future opportunities in credit investing.
The IG challenges are on the highest quality part of the credit spectrum. But of course, there are problems lurking in the non-investment grade part of the market too—specifically direct lending. We’ve spent a lot of time trying to understand how best to reach the distressed opportunities in this market. Interestingly, while lots of distressed dry powder awaits for weaknesses in high yield, syndicated bank loans, and even investment–grade bonds, there doesn’t seem to be much capital being raised that is qualified and ready to respond to distress in the direct lending market.
I worry about inflation, probably precisely because it is something that we haven’t really seen in the past decade. I’m not sure what will cause it but I suspect that a combination of trade wars and fiscal stimulus (supported by right-wing and left-wing populists alike) could contribute. Inflation, and potentially even stagflation, is something that seems almost laughably unlikely but it is a big risk to virtually all portfolios.
CIO: How did you arrive at your current position? And why did you choose this part of the financial services industry?
Shah: My path has been pretty non-traditional. You could say that I started on the “clean-up” side of the financial services industry—as a lawyer litigating cases arising out of the 2008 financial crisis. I worked as part of a team of lawyers representing the court-appointed receiver in the second-largest Ponzi scheme in US history. Our job was to deconstruct the scheme, follow the trail to find the money, and then recover on behalf of the victims of this approximately $8 billion fraud. In addition to that case, I also worked on commercial litigation resulting from failed investments of various kinds.
In retrospect, I have realized that financial crises, as terrible as they are, can be a time of rapid learning because the effects of fraud, bad underwriting (on specific investments), and bad luck all come to bear in one fell swoop. As a commercial litigator at a large international law firm, virtually every case I worked on had one or more of those elements. It ended up being a great training ground for life as an investor.
After practicing law, I advised the lieutenant governor of Texas on energy and economic development policy. In addition to being a great seat from which to learn about how public policy can impact investments—TXU/EFIH bankruptcy, and more recently the PG&E debacle—it was also how I came to know Texas Treasury. Over the years, we formed a mutual respect and they asked me to join the team in 2014, which I gladly accepted.
I chose institutional investing because it rewards a wide lens, long-term, and partnership-oriented view of the world. Plus, where else can you work on venture co-investments in the morning and a mine finance fund in the afternoon? Our competitive advantage as institutional investors is the ability to go deep, and quickly, combined with a lens so wide that we can hopefully make great relative value judgments across asset classes, geographies, and strategies.
CIO: What was the most important strategic allocation of your career?
Shah: We have completed a couple of GP stakes transactions that I am particularly proud of, including backing a new-launch European credit fund. It was emblematic of a strength that can also be a weakness at times—I hate saying no to interesting ideas simply because there isn’t space for them in the portfolio at the time. Much of the time, this results in a pipeline of investments that is potentially too long and too unwieldy, but being prepared allows us to be very opportunistic. That is precisely what happened in this particular GP stakes situation—we were very informed and ready to act, which allowed us to get favorable (but fair) economic terms that will pay financial benefits to our beneficiaries for many years to come.
CIO: Tips for money managers who want to work with you, especially what not to do.
Shah: Come ready to bare your soul, your investing career, and your hopes and dreams for your investing future. We are in the long-term partnership business and that can’t happen without complete candor and trust. Also, please don’t ask me to sign an NDA to see your marketing deck.
CIO: Biggest goof a money manager has made with you?
Shah: Copying and pasting a trade description in their quarterly letters from another manager’s quarterly letter. To be fair, I’m not sure who copied who. But, it was still pretty bad…
CIO: Who in the financial world would you like to have lunch with and why?
Shah: Hank Paulson. His experience in “dealing” with China while at Goldman Sachs and then as Treasury secretary are something I want to learn from as we consider more investments in the soon-to-be largest economy in the world. My hope is that he could help me improve our framework for investing in China. Can someone help me grab lunch with Hank Paulson? That would be great…
CIO: What are changes you’d like to see the institutional investing community make in 10 years?
Shah: I’d like to see more diversity in our industry—diversity of backgrounds, of approaches, and of ideas. Every industry at maturity has conventional wisdom. Left to itself, conventional wisdom becomes dogma and in time a block to innovation itself. Welcoming outsiders is the sure–fire way to make sure the industry continues to innovate and improve. Plus, it’s just the right thing to do.
CIO: What are your hobbies not correlated to work?
Shah: Spending time with my wife and our 1-year–old daughter is definitely my biggest hobby. Other than that, I really enjoy traveling and swimming. The first half of my life was spent living in India, Saudi Arabia, and all across the United States, while the second half has been spent in Austin, Texas. We traveled a lot when I was a kid and that desire to explore has never left me. As for swimming, it is just a great way for me to unplug. I wish I could tell you I was an Ironman or something truly awesome like that but alas I just swim for fun and exercise!
