Yale University Investments office

Yale University Investments Office

Case Highlights

Yale Endowment fund was established in 1818 through the support of alumni and members of the broader community. The Investment Office’s main functions include evaluating, selecting, monitoring, and overseeing external investment advisers. Mr. Swensen, the fund’s Chief Investment Officer, built the capabilities of the office by recruiting and developing a very high quality internal staff. Yale’s senior leadership encouraged unconventional stances and contrarian views, fostering unique insights into specific investments. The endowment fund’s focus revolved around equity investments, which constituted a substantial portion of the fund’s assets. Compared to other endowment funds, Yale experienced above average returns, which were largely driven by its increased exposure to private equity and real assets.

Investment Philosophy

One of Yale’s key differentiating factors is its unique investment philosophy, which is built on five key points:

1. Strong interest in equities
2. Diversified portfolio
3. Investments in less efficient markets
4. Most of the investment managed by external managers
5. Critical importance given to explicit and implicit incentive for outside managers

Issues Identified

Despite Yale’s superior performance over the last couple of decades, Mr. Swensen was still faced with a number of key issues related to the private equity component of the endowment fund. The main issues were:

1. Is PE still attractive?
2. Is the growing pool into PE sustainable?
3. How to allocate new PE commitments?
4. What should be the mix between established & new PE funds?
5. How to address decreasing portfolio liquidity & valuation issues?
6. How should Yale’s investment office think about risk?

Analysis & Recommendations

We believe that private equity remains an attractive asset class in spite of the increasing in-flows of capital into the industry. This asset class continues to offer a wide variety of benefits, generating greater absolute returns while improving the endowment’s overall diversification. Based on our findings, we believe that Yale should invest a greater portion of its private equity assets into international markets, specifically those in South East Asia, Sub-Saharan Africa, and Latin America (ex-Brazil). Within North American markets, we believe the focus should be within healthcare services and manufacturing. In terms of selecting PE fund managers, we believe that established managers with proven track records should be selected for domestic VC and buyout funds. However, given that emerging markets are substantially different, managers in these locations should be smaller with local experience. In addition, Yale should continue to use smaller real estate fund managers with fee structures that are aligned with that of the endowment. Although there is a growing portion of illiquid assets in the portfolio, given that Yale is a sophisticated investor, it has advanced models to value these assets.