yale university investment office case study

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Yale Investments Office: November 2020

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Josh Lerner

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Yale University Investments Office: November 2020

• Yale University Investments Office: November 2020  By: Josh Lerner

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Yale University Investments Office

Yale University Investments Office ^ 296040

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Publication Date: December 02, 1995

Source: Harvard Business School

Yale University's investment office was responsible for managing its endowment, which totaled nearly $4 billion in June 1995. Yale had developed a rather different approach to endowment management, including substantial investments in "less efficient" equity markets such as private equity, real estate, and "absolute return" investments. The investment office was now considering devoting even more of their assets to these markets.

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Yale University Investments Office: February 2015 – Case Solution

David Swensen and the Yale University Investments Office staff are faced with the challenge of deciding whether to continue allocating a greater part of the endowment of the university to illiquid investments-hedge funds, private equity, real estate considering the recent market turmoil. This case study analysis discusses the advantages and disadvantages of a different asset allocation strategy. It also tackles some ways of classifying different assets.

​Josh Lerner Harvard Business Review ( 815124-PDF-ENG ) April 07, 2015

Case questions answered:

• What do you think of Swensen, head of Yale University Investments Office, overall investment philosophy? How has the strategy performed?
• How has the Yale University Investments Office selected, compensated, and controlled the public market, real estate, oil-and-gas, and private equity fund managers? What explains the differences in their strategy? Are these differences disturbing?
• How has the Investment Office decided when to make public market, real estate, oil- and gas, and private equity investments? What explains the differences in their strategy? Are these differences disturbing?
• How is PE changing? What implications does this have for Yale? What should David Swensen do?

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Yale University Investments Office: February 2015 Case Answers

Question 1: what do you think of swensen, head of yale university investments office, overall investment philosophy how has the strategy performed.

The overall investment policy of David Swensen, head of Yale University Investments Office, is based on five key principles: firstly, Swenson firmly believes in equities since they, in contrast to bonds, are less sensitive to higher levels of inflation which in turn would endanger the finances of the university, whose major cash outflows are personnel expenses.

Moreover, instead of attempting to profit from short-run market fluctuations, Swenson’s policy suggests that a certain asset class should only receive an under- or over-proportional share in case substantial evidence for a misevaluation of that asset class exists. In addition, Swenson’s strategy suggests primarily targeting less efficient markets with incomplete information.

Furthermore, Swenson’s philosophy puts a high emphasis on building relationships with external managers, who, in turn, receive a high degree of decision-making power with regard to almost all the asset classes in which the endowment was active.

Lastly, Swenson highly values the alignment of incentives of the Yale University Investments Office and the aforementioned external managers in order to ensure a common objective. These five principles, in combination, have made Swenson’s investment policy an unconventional one.

At the same time, this strategy has allowed Yale’s endowment to earn abnormal returns (Yale’s annualized returns exceeded those of domestic stocks and bonds) and to thereby outperform its peers (over the last decade, the endowment was ranked first among all colleges and universities) and receive a highly favorable rating. This, in turn, shows the strength of Swenson’s strategy.

Question 2: How has the Investments Office selected, compensated, and controlled the public market, real estate, oil-and-gas, and private equity fund managers? What explains the differences in their strategy? Are these differences disturbing?

The abovementioned outside managers are selected by the Yale University Investments Office by means of a lengthy assessment process focusing on their reputation, track records, and capabilities.

Moreover, the investment office has a strong preference for those managers focusing on value-based investing and who have specialized expertise in a certain region or asset class.

In addition to this extensive selection procedure, the key to success for the Investment Office is the build-up of relationships with managers as well as the aforementioned alignment of interests.

This, in turn, is achieved by, on the one hand, preferring managers willing to co-invest and, on the other hand, linking the managers’ compensations to the performance of the investments that they initiate.

Hence, through this alignment of interests and extensive selection procedure employed by Yale University, the behavior of managers is…

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Yale University Investments Office Harvard Case Solution & Analysis

Home >> Management Case Studies >> Yale University Investments Office

Yale University Investments Office

Introduction

The report presents a case about Yale University Investments, which was considerably been established in order to manage the operations of the university. Later on, the university’s investments office enjoyed tremendous success over the past few years and their returns continuously increased.

Yale adopted an unconventional approach to manage its endowments. Yale had made significant investments in less efficient equity markets such as private equity, real estate and absolute return investment rather than keeping its substantial share in domestic equity and shares. The university enjoyed tremendous returns from this conventional approach but the financial crises in 2008 tend the university to change its business model so as to cope with latest changes.

The university’s investments office was considering to allocate most of the university’s endowments to illiquid investments; private equity, real estate and hedge funds in order to appropriately respond to the current market changes. The report contains details of the strategies adopted by the managers to manage the domestic and international private equity investments. Further, it also includes the changes in the private equity market where on university shall not consider to allocate to private equity investments.

• 1.      How has the Investment Office selected, compensated and controlled private equity fund managers? What explains the differences between their strategies in private equity with that in other asset classes (e.g., real estate)?

Managers are the core assets in the investments office because they were given considerable autonomy to invest in securities, which achieved immense returns and increased the worth of the organization. The managers were chosen carefully after a lengthy and critical analysis of their abilities, comparative advantages, performance records, and reputations. In addition, they were responsible for developing close and mutually beneficial relationships with other managers and to co-ordinate with each other so as to achieve remarkable results.

The university is more concerned about the compensation provided to managers because it is substantially affected due to the typical relationship between client and manager i.e; managers typically prospered where the assets under management grew large, this was not because they performed well for their clients, so investments office tried to build strong relationships and fee structures with their external managers to align the managers’ interests with Yale’s corporate objective.

External managers are controlled by the investment committee where day-to-day activities of the external managers are evaluated, selected and monitored. Basically, it was a mutual co-ordination between external managers and investments office and this relationship was established so as to achieve incredible results.

Further, external advisors also played a critical role in the entire policy making process where they were responsible for giving recommendations on both the investment policy and spending policy for the endowment. It mainly included how the money should be invested and how much of it could be spent in any given year. The Investments Office met regularly with the other financial departments in the university in order to co-ordinate overall liquidity needs.

In private equity market external investment advisers are given considerable authority to implement their strategies as they saw fit with relatively little interference from Yale. The Investments Office’s staff develops close and mutually beneficial relationships with external managers so as to co-ordinate effectively for making worthwhile investments. Further, the real estate portfolio of Yale was reviewed by their real estate managers and the university had exercised a wide range of control and continuously reviewd the investment decision of the real estate managers. Additionally, they had pared its portfolio to focus on those managers with whom the staff was most comfortable in terms of people and execution.

• 2.       How has the Investment Office made international private equity investments? What explains the differences between the performance of their international and domestic private equity investments?

In order to facilitate effective investments, Yale adopted five principles. Firstly, the organization strongly believeed in equities, whether publicly traded or private. They considered that the equities area claim on a real stream of income as opposed to a contractual sequence of nominal cash flows.

The second principle was diversification; Yale believed that the risk could be more effectively reduced by limiting aggregate exposure to any single asset class, rather than by attempting to time markets. They believed that those views were usually reflected in market prices. Further, the investment team believed that emerging markets was a successful way of obtaining great returns because emerging markets presented tremendous opportunities due to both their greater inefficiencies and their dynamic as well as growing economies.

The third principle was to seek opportunities in less efficient markets. Over the past few years, Yale found that the difference in performance between U.S. fixed-income managers in the 25th and 75th percentiles was only 0.6% per year, and the comparable difference in performance for U.S. large-capitalization stock portfolio managers in the 25th and 75th percentiles was 4.5% per annum. This gap widened in less liquid assets:, which was 4.9% for hedge funds, 12.4% for venture capital, 16.0% for buyout funds, and 24.8% for real estate. This suggested that incremental ...................

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Investment office at Yale University, was responsible for the management of its contribution, which amounted to almost $ 4 billion in June 1995. Yale University has developed a slightly different approach to the management of the fund, including a significant investment in a "less effective" stock markets, such as private equity funds, real estate, and "absolute return" investment. Investment Office is considering to devote more of its assets in these markets. "Hide by Josh Lerner, Jay O. Light Source: Harvard Business School 26 pages. Publication Date: Dec 02, 1995. Prod. #: 296040-PDF-ENG

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Yale University Investments Office: February 2011

By: Josh Lerner, Ann Leamon

David Swensen and the Investments Office staff must decide whether to continue to allocate the bulk of the university's endowment to illiquid investments-hedge funds, private equity, real…

• Length: 28 page(s)
• Publication Date: Oct 18, 2011
• Discipline: Entrepreneurship
• Product #: 812062-PDF-ENG

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David Swensen and the Investments Office staff must decide whether to continue to allocate the bulk of the university's endowment to illiquid investments-hedge funds, private equity, real estate-given the impact of the recent market turmoil. The case explores the risks and benefits of a different asset allocation strategy and also considers how to classify some of the different assets. It highlights the issues around allocations across different subclasses, e.g., between venture capital, hedge funds, and real assets.

Learning Objectives

To introduce students to asset allocation anti fund choice from an LP's perspective.

Oct 18, 2011 (Revised: Mar 26, 2013)

Discipline:

Entrepreneurship

Industries:

Real estate industry

Harvard Business School

812062-PDF-ENG

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