20VC: How LPs Allocate to Venture in 2026: What They Want,…

Full Title

20VC: How LPs Allocate to Venture in 2026: What They Want, What They Do Not Want | Why Fund Multiple Does Not Matter Without a Timeline | Why Velocity of Cashback is the Most Important Thing with David Morehead, CIO @ Baylor

Summary

David Morehead, CIO of Baylor University's endowment, discusses how LPs allocate capital to venture and private markets, emphasizing the importance of velocity of capital over pure returns.

The conversation highlights Baylor's investment philosophy, focusing on risk-adjusted returns, direct GP relationships, and a disciplined approach to market volatility.

Key Points

Baylor's endowment is increasingly crucial for the university's financial health due to declining tuition revenue, driving a focus on generating distributions.
The institution prioritizes the velocity of capital and time alongside returns, meaning they value how quickly capital is returned and compounded.
Baylor seeks to optimize its risk-return profile by engaging directly with GPs to tailor fund strategies, rather than relying solely on commingled funds.
The endowment maintains a balance between public and private investments, currently around 45% private, with a strategy to first nail down the private side to manage liquidity.
Private investments are focused on venture capital, expansion equity, and buyouts, divesting from real assets that do not promise excess returns.
Morehead expresses skepticism about extended fund lengths in venture capital, arguing that shorter fund cycles with quicker capital deployment and return lead to better compounding for LPs.
The CIO believes the pure returns from venture may not always justify the long time horizons and capital lock-up, especially compared to growth equity with faster cycles.
Baylor utilizes a methodical, mechanical approach to investing during market downturns, allocating capital in increments as assets become cheaper to mitigate emotional decision-making.
The endowment views its venture portfolio as a learning mechanism for understanding AI penetration and adoption cycles, but primarily learns from public market managers.
Baylor believes public markets are more rational than private markets due to the sheer volume of decision-makers involved, even if both can exhibit irrationality.
Valuations of private assets are scrutinized, with a preference for conservative marks to ensure psychological alignment with market realities.
The CIO emphasizes that while venture capital is important for future growth, the focus on velocity of cash and compounding means it must deliver superior returns to justify its inclusion.
A significant allocation to growth equity is favored due to its attractive return timeline and fewer zero outcomes compared to early-stage VC.
Morehead highlights the importance of human behavior and decision-making in investment analysis, particularly when assessing market sentiment and company adoption of new technologies.
The endowment's approach to managing public listings of private companies is flexible, depending on the company's performance and position size.
Baylor prioritizes building a stable, long-term investment team by hiring from undergraduate ranks, despite the initial investment required for development.
The CIO views the incentive structure for LPs as not broken, but requiring individuals to be mission-driven to achieve institutional goals.
Concerns are raised about AI's impact on human thinking and critical reasoning skills, rather than its direct impact on education systems.
The endowment focuses on its own growth and performance rather than directly comparing itself to other institutions, though relative performance is monitored.
Baylor is strategically increasing its focus on biotech due to its potential for significant impact and lower correlation to market fluctuations.
The growth phase from $1 billion to $5 billion in endowment size presents unique challenges in scaling teams and systems while maintaining creativity.
The importance of a permit for data center sites is highlighted, driven by increasing local opposition to new developments, making permitted sites more valuable.
Private credit is viewed as overhyped due to its risk-reward profile, which is seen as having equity-like downside risk without comparable equity upside.
Brown University's endowment is highly respected for its long-term, courageous investment decisions and consistent performance.
Benchmark is named as a venture fund that Baylor would most like to be invested in, acknowledging its strong track record.

Conclusion

LPs prioritize the velocity of capital and time alongside returns, emphasizing how quickly capital is deployed and returned to enable compounding.

Direct engagement with GPs allows LPs to optimize risk-return profiles and tailor investment strategies, moving beyond the limitations of commingled funds.

A disciplined, methodical approach to market volatility and a focus on long-term team stability are crucial for successful endowment management.