Listen on: Youtube, Apple Podcasts, Spotify
Podcast10x sponsors this episode
Podcast10x is my podcasting agency that helps VCs start & run a podcast end-to-end. We only require a 30-minute/week time commitment from our clients while we handle everything from production to publishing.
About the guest:
Nolan is the Chief Investment Officer at FEG, an asset allocation firm managing over $90 billion in assets and advisory, with $20+ billion in assets under management. With over 20 years of experience growing from associate to CIO, Nolan offers a rare institutional perspective on capital allocation, venture investing, and navigating market cycles.
The Four Key Risks Framework
When working with institutional clients, FEG evaluates four critical risks to build the right investment strategy:
1. Enterprise Risk - Understanding the institution's unique characteristics (spending rates, debt covenants, real estate holdings)
2. Market Risk - Gauging maximum acceptable drawdown tolerance (can they withstand a 20-30% portfolio decline?)
3. Illiquidity Risk - Determining how much capital can be locked up in private equity, venture capital, and other illiquid assets
4. Maverick Risk - Assessing willingness to diverge from peer benchmarks in pursuit of long-term returns
"If we can get everyone coalesced and aligned on those four key risks and stick with that plan, we've had pretty good success getting folks where they need to be."
Risk Appetite Hierarchy: Who Takes the Most Risk?
Nolan ranked institutional investors by risk appetite:
Family Offices - Highest risk appetite
University Endowments - Early adopters of alternatives, comfortable with illiquidity
Nonprofits (foundations, community foundations)
Pension Plans & Healthcare Systems - Most conservative due to balance sheet constraints and shorter-term needs
This ranking correlates directly with liquidity needs and time horizons.
The Evolving Asset Allocation Landscape
Institutional portfolios have expanded significantly over the past two decades. FEG categorizes investments into five buckets:
Public Equity - Still the largest allocation for most institutions
Private Equity - Including venture capital, leveraged buyouts, and growth equity (increasingly significant)
Fixed Income - Both public bonds and rapidly growing private credit/direct lending
Real Assets - Public REITs, infrastructure, commodities, plus private real estate, metals & mining, renewables
Diversifying Strategies - Hedge funds and uncorrelated private assets like litigation finance, pharmaceutical royalties
The trend? A steady increase in alternatives, but successful institutions make incremental changes rather than dramatic shifts based on market conditions.
The AI Investment Reality Check
Is This 1999 All Over Again?
Nolan's working thesis: We're closer to 1997 than 1999 - more room to run, but signs to watch:
What's missing from bubble territory: Traditional bubble signs aren't fully present yet. Much AI investment has been funded by free cash flow from hyperscalers (though debt is starting to appear). Management teams of Mag 7 companies are net buyers, not sellers, of their stock.
The ubiquity problem: AI is everywhere in institutional portfolios - venture capital, leveraged buyouts, public equities (hyperscalers), real assets (data centers, utilities, natural gas). This creates hidden concentration risk.
Business model questions: AI-native companies are growing faster than any startups in history (zero to $100M revenue), but concerns remain about revenue stickiness and operating margins (possibly 30-40% vs. 70-80% for traditional SaaS).
"Every institutional investor needs to be spending a lot of time on AI because it's everywhere... but your whole portfolio can't just be a bet on AI."
The Venture Capital State of Play
What's Changed:
Fund size explosion: Top-tier firms have evolved from $200-300M funds to multi-billion dollar "supermarkets" offering every stage and sector
Capital concentration: Vast majority of recent capital raises focus on AI companies
Distribution drought: Many LPs aren't seeing distributions, causing their venture allocations to balloon and slowing new commitments
Private for longer: Extended exit timelines are the new normal
Stage Preference Dynamics:
Smaller portfolios tend toward early-stage for higher return potential and smaller check sizes ($5-15M)
Larger pools of capital gravitate to growth stage for better risk-reward and ability to write $30-50M checks
The Constant: Finding managers with strong entrepreneur relationships who can access the best deals remains paramount. It's still a power law game requiring a few home runs.
Beyond AI: The Biotech Opportunity
While everyone focuses on AI, Nolan highlights biotechnology and life sciences as an underappreciated sector:
Overcapitalized in 2020-2021 through SPACs
Rough market for 4-5 years
Now reinvigorating with the collision of biotech and AI for R&D
Less crowded than AI but compelling innovation potential
The Private Credit Debate
Institutions are bifurcating into two camps on private credit:
Camp 1 - Allocators (10-15% portfolios): Value consistent returns, steady cash flow, and higher yields than public markets. Willing to accept 8-12% returns for predictability.
Camp 2 - Non-Allocators (0%): Believe illiquidity budget should focus on higher-returning asset classes like venture and private equity. "The juice isn't worth the squeeze" for 8-12% locked-up returns.
On average, institutions hold 3-5% in private credit, but this masks the polarization.
Geographic Opportunities
While the US remains dominant (epicenter of innovation), promising international markets include:
India - Interesting on both public and private sides
Japan - Emerging from decades of stagnation with activist investing and new LBO opportunities
Europe - Selective opportunities, particularly in defense stocks
The consensus: Look globally but expect majority US allocation given where innovation concentrates.
The Forgotten Friend: Diversification
In an "everything rally" year where all asset classes moved up and right, Nolan warns against forgetting diversification:
Allocations to equities, private equity, and venture have all grown
Many portfolios are on the edge of a third consecutive 20%+ public equity return year
Hedge funds, though less "cool," can deliver 8-12% returns without equity risk or AI concentration
"Don't forget about diversification. I think that's the one area some folks may have forgotten about a little bit. It is your friend, and it helps weather out some of those bumpier spots in the road."
2026 Outlook: Modest Optimism with Caution
Expected: Lower returns than the exceptional 2023-2025 period (more normal levels)
Hopeful for: Market broadening beyond Mag 7 concentration and reopening of capital markets with more exit activity
Watching for: Classic bubble warning signs like increased debt financing and management teams becoming net issuers
Strategy: Stick to the plan, adjust incrementally as markets throw curveballs, and cast a wide net across asset classes
Advice for Fund Managers Raising Capital
For emerging managers struggling in today's fundraising environment:
Do your homework - Understand which investors buy your type of strategy (emerging vs. established, early vs. late stage)
Start early and off-cycle - Build relationships before the fundraise closes. Last-minute pitches don't work.
Articulate your edge - Clearly and simply communicate your competitive advantage and right to win
Be patient - LPs need distributions before making new commitments. Exit activity in 2026 could unlock capital flow.
The Bottom Line
Success in institutional investing comes down to discipline: understand your risks, build a sound long-term strategy, make incremental adjustments rather than dramatic shifts, maintain genuine diversification even when everything seems to work, and stay humble about making big macro calls.
In a market where AI dominates headlines and portfolios, the real edge may come from remembering timeless investing principles while staying intellectually curious about emerging opportunities.
Listen to the full episode to get all the insights.
Recent uploads on VC10X
Engineering Liquidity in DeepTech (45 min)
Why OpenAI finally gave in to ads? (4 mins)
Gamification of Consumer Apps (43 min)
LP Roundtable 2025/26 (58 min)