Allocators Anonymous

Suffering from Success

On Tuesday of this week, it was announced that a provision in the recently approved New York state budget would eliminate aid to private colleges and universities with endowments of at least $750M.

The provision cut $18M in total funding from 16 different schools in New York:

• NYU (-$4.7M)

• Columbia (-$3.25M)

• Cornell (-$1.8M)

• Fordham (-$1.3M)

• St. John’s (-$1.2M)

The slash to funding is timely considering the public’s growing perception of college as a business model rather than a learning model. College endowments saw a 7.7% gain in 2023 and assets allegedly grew to $839B.

Let’s take a blast to the past and look at how college endowments evolved into institutional investors.

Swensen Taught Me

In 1980, David Swensen graduated from Yale with a PhD in Economics and went on to work at Salomon Brothers.

Just 5 years later, he returned to his alma mater where he assumed he would be taking a teaching job… But to his shock, he was asked to lead endowment investing activity - a $1B+ pool of capital at the time.

Swensen’s lack of investing experience allowed him to tackle endowment investing from a new angle. He adopted a longer-term investing horizon than comparable endowment managers, and increased exposure to riskier assets that had higher upside:

• Hedge Funds / Absolute Return Strategies

• Venture Capital

• Private Equity

Swensen’s recipe became known as the “Yale Model”; an absolute deviation from the standard 60-40 stocks and bonds portfolios his peers championed.

Yale’s investment office outperformed its peers by a respectable margin from Swensen’s inception up to the present: the fund averaged 12.4% IRR over the past three decades.

Arguably as impressive is the long line of proteges Swensen coached to the highest ranks of finance.

• Andrew Golden: Head of Princeton’s Endowment. Worked alongside Swensen as a senior associate. Appointed President of PRINCO (Princeton University Investment Co.) in 1996 and led Princeton to the highest endowment to student ratio in the country.

• Robert Wallace: Head of Stanford’s Endowment. Worked under Swensen for five years before running a family office. Appointed CEO of Stanford Management Company in 2015.

• Seth Alexander: Head of MIT’s Endowment. Worked under Swensen for 10 years, eventually reaching the Director level at Yale’s Investment Office. President of the MIT endowment starting in 2006, and has grown assets from $10B to $23B since then.

• Paula Volent: former CIO of Bowdoin’s Endowment. Worked with Swensen before leaving for Bowdoin. Grew assets from $465M to $2.4B in her 20 year tenure and outperformed Swensen in the 2015 year.

• Zhang Lei: CEO of Hillhouse Capital. Another Swensen student, Zhang received $20M in funding from his mentor to launch the investment firm Hillhouse Capital. Zhang is now worth $3B and manages $70B+ at the firm.

Deep Pockets

Today, Yale maintains its status as the premier allocator among U.S. colleges, ranking #2 in both total endowment size and endowment capital per student.

Here’s a snapshot of asset allocation at Yale in 2020:

• Venture Capital - 22.6%

• Absolute Return Strategies - 21.6%

• Private Equity / LBOs - 15.8%

• Cash and Fixed Income - 13.7%

• Foreign Equities - 11.4%

• Real Estate - 8.6%

• Natural Resources - 3.9%

• Domestic Equities - 2.3%
  

The appetite for private market managers is no longer limited to the small school in New Haven

In 2023, Buyouts Insider reported that colleges, on average, allocated 30% of their portfolios to venture capital and private equity.

Swensen adopted a strategy that embraced the private markets and paved the way for other endowments to follow suit

In a similar fashion, individuals have started to shift their investing preferences over the past decade. As more people seek alternatives to supplement their portfolios, mainstreet aims to create a community providing curated access to the private markets.

Headlines

• Rubrik’s IPO prices above expected range and stock gains 16% in first day of trading. CNBC article here

• Norwest Venture Partners raises $3B for 17th vehicle. TechCrunch article here

• Sequoia committed to investing in Elon Musk’s xAI startup. FT article here

• Mining company Anglo-American has been approached by BHP about a ~$39B merger. BBC article here

• Six NFL teams took quarterbacks in the first round, tying a record. These picks commanded $175M in contract value. FOS article here

mainstreet media

Check out the newest pod featuring light phone CEO, Kaiwei Tang.

Kai touched on a number of subjects, from partnering with Kendrick Lamar on a limited edition light phone to working on Motorola Razor design in the early 2000s.

Listen to the episode here.