All I ask is the chance to prove that money can’t make me happy.
— Spike Milligan
Something caught our eye last week as we leafed through a recent Harvard Business School case study, “Modern Endowment Management: Paula Volent and the Bowdoin Endowment.”
The investment team has kept almost no cash or fixed income on hand for over fourteen years. Three-quarters of the portfolio runs on private equity and hedge fund moxie, the rest in stocks.
That’s not how most ultra-high-net-worth (UHNW) family offices do it. In our experience, these offices hold substantial amounts of cash and bonds, adding stocks and real estate for the long haul. Why such a divergence?
According to the HBS study, Bowdoin’s allocation to bonds and cash shrank from 18 percent in year 2000 to essentially zero by 2008 and apparently there hasn’t been a dime added to liquidity since.
Granted, it certainly hasn’t hurt Bowdoin’s performance. Ms. Volent and her team led our ten-year performance rankings in our last endowment report.
Furthermore, the school has sizable reserves. We looked up the College’s financial statements, which listed cash and equivalents of about $80 million against operating expenses of $176 million as of June 30, 2020. So the bursar made sure there was cash in the kitty. And, for the Ivys and elites, Bowdoin included, there are hefty credit lines and wealthy donors to lean on in a pinch.
Bowdoin is not alone, of course. Many large university chief investment officers have managed their endowments for years with a cash-is-trash attitude.
And, as most CIOs have learned the hard way, it’s a brave investment manager indeed who breaks from the herd.
Marks to make-believe
As we wrote last December, endowment returns for 2021 approached the realm of fantasy. Institutional investors delivered once-in-a-lifetime performance, from about 25 percent at the most tentative public pensions to 65 percent at Washington University, St Louis.
Bowdoin, for example, posted an astonishing 57.4 percent return.
We opted not to do our usual performance study last year because we felt the private market marks were too far off the mean – and reality – to fairly assess skill. Given this year’s collapsing valuations, we think we made the right call.
However impressive those investment returns eventually turn out to be once marks convert to hard cash, we can’t help but recall what my first-year finance professor (Robert S. Hamada) at The University of Chicago emphasized in class.
He said that exceptional money managers seem to have the touch. And we can theorize, not always correctly, about how they do it. But most of them have a run bracketed by a certain period or a set of conditions, and then they are gone.
Families think differently
Family offices have been around for centuries and weathered every conceivable storm. They prefer not to fly so close to the sun.
From the major-domos in ancient Rome to Rockefeller and Microsoft heirs, cash has always been king. Liquidity meant power and the means to act in good times and bad.
Maybe it’s also because family founders are usually operators who run businesses and in business, running out of cash is original sin.
The latest UBS Global Family Office Report 2022 breaks out UHNW family asset allocations and their preference for liquidity. The bank polled two-hundred-twenty-one single family offices with total wealth of almost half a trillion dollars and average assets under management of over two billion dollars.
UBS found that large family offices hold substantial cash and fixed income, about a quarter of their wealth all told. Families seldom bet the house.
There have been a few spectacular exceptions of course, Bill Hwang’s Archegos Capital Management for one; the Hunt brothers Herbert and Nelson’s run on the world’s silver supply for another. What were they thinking?
Fortunately the youngest of the three Hunt brothers, Lamar, kept his head and his money and, among other honors, became a Culver Academies Athletic Hall of Fame Inductee in 2006. Funny thing about high school, I couldn’t wait to graduate and yet, most of my closest friends come from our Culver days.
But I digress.Read More »
Sam Gallo and Endowment of the Year winner, the University System of Maryland Foundation
Each year Institutional Investor Magazine hosts a Hedge Fund Industry Awards dinner. This year’s gala was held on April 27th and celebrated superior portfolio construction and manager selection.
Among the notables, the event featured two outstanding investment heads we just happened to have recruited in the past.
Jon Glidden, director of pensions at Delta Airlines received II’s Allocator Lifetime Achievement Award and Sam Gallo, chief investment officer at the University System of Maryland Foundation accepted II’s endowment of the year honor.
Our warmest congratulations to both winners.
We managed to catch up with Mr. Gallo during a recent conference in Charleston, SC and asked him how he built an elite, award-winning investment program, what to look for in a successful CIO candidate, and what fresh challenges lay ahead.
The Endowment Elite, A conversation with Sam Gallo
Skorina: Sam, it was almost eleven years ago that I first called you about the University System of Maryland Foundation (USMF) CIO position and look where you are now.
First, you received an endowment of the year award from Institutional Investor, then you celebrated ten years as the university’s chief investment officer. Congratulations!
You don’t have the usual up-through-the-nonprofit-ranks background of a typical endowment CIO, would you take a moment to give us your highlights.
[Note: The USMF consists of twenty-plus schools with combined total assets of about $2.2bn.]
Gallo: Thank you for the kind words, Charles. Briefly. I began my career as a valuation modeler, pivoted to trader and portfolio manager, then moved to several investment and operational consulting roles, and finally on to my current position as an endowment CIO.
The last, of course, is thanks to your call so long ago.
Skorina: Your mission when you joined USMF in 2012 was to invest smartly for the future, build a team and investment strategy, and develop a commercially oriented white-glove client service model. Ten years later you receive the Endowment of the Year award from Institutional Investor.
Let’s dive right in and ask the money question, how did you do it?
Gallo: That’s a big one Charles and complex, but here goes. The key to success for any nonprofit fund begins with the Board and Investment Committee.
Boards want and expect a “world-class investment program.” But to achieve this goal, they must be willing to provide the resources and governance structure to flourish.
What boards put into it, is what boards get out of it. It’s that simple.
Think Profit Center
Skorina: Ok. But what does that mean? If a foundation, endowment, or pension fund wants an elite program, what does it take to build one?
Gallo: Let’s start by talking about our golden rule, which is, all decisions are linked and have consequences, so think and plan ahead. Be smart, be strategic. It matters.
Boards and administrations trip up when they view their investment offices as cost-centers. We are not cost centers. We make money for our schools.
Investment offices should be viewed as what they really are, essential profit-generating business divisions of the larger institution.
These offices should be nurtured, resourced, and report directly to the CEO, just like any other critically important revenue generating division.
Six Signposts on the Road to RichesRead More »
Honey, We’re Rich!
Say what, dear reader? You have just been blessed with a humongous liquidity event?
After decades of work and a bit of luck you “suddenly” have millions, perhaps even tens or hundreds of millions of dollars in investible wealth after selling your business or going public.
You are now officially rich, and it feels great.
But wait. What’s that? Obscure family members you never knew existed are beseeching you for “loans”; allegedly good causes from Missoula to Mozambique are demanding donations; sketchy financial “advisors” are bombing your email and phones with “once-in-a-lifetime opportunities.”
First Things First
We’ve recruited family office investment heads and advised on selecting wealth-management firms. But it works both ways. We listen very carefully to our clients and learn a lot from them.
Here is some advice from clients who have been through it.
- The very first thing. Hire a tough, experienced lawyer who is used to dealing with wealth managers, brokers, and solicitors. (Not just the firm who helped you with routine legal chores on the way up.) It will be money well spent and you won’t regret it. You will need a real pro to run interference for you against the sharks.
- The very next thing. Hire a reliable and reputable accountant who understands the complexities of wealth-management. You will need financial controls and a voice of caution. Dollars can slip away fast without an experienced check on your newly-rich exuberance.
- Take your time. No sudden moves. Think about how to organize your affairs, your objectives, impact on family-members and upcoming generations.
- Establish a realistic spending rate. And stick to it. One rashly-purchased yacht, jet, or hobby-ranch can punch a surprisingly big hole in your seemingly-unsinkable new fortune.
Fortune and FateRead More »
Why build a family investment office? Because, as one chief investment officer at a large family office told me recently, “bad stuff happens.”
He mentioned that when the head of the family and business founder was thinking about hiring internal investment talent, the founder asked other family leaders he knew why they had hired a CIO.
They all said that having investment expertise inhouse and a portion of the assets in a diversified portfolio separate from the main business helped them when the unexpected struck.
In the last twenty-five years we’ve weathered a slew of financial storms including the 1997 Asian financial crisis, the 1998 Russian collapse, the 2000 Dot-com bubble, the Twin Tower attacks, and the 2007–2008 and February 2020 crashes. Remember those? And for the last two years Covid. And now there’s the appalling Russian assault on Ukraine.
And yet, in every crisis there’s opportunity. In 2020, according to the Credit Suisse 2021 Global Wealth Report, total wealth in North America rose by US 12.4 trillion. And probably more in 2021.
Looking at the ultra-high-net-worth segment, Boston Consulting Group counts 20,600 UHNW individuals in the US with personal wealth over $100 million, totaling about $5.8 trillion in investable assets.
Meanwhile, depending on the source, the number of US family investment offices grew from 3,000 to well over 5,000 during the last decade.
Personally, we have received more family office chief investment officer inquiries in the last two years than we’ve had in the ten prior.
Why?Read More »
Occasionally we publish commentary from other sources. This short piece from PitchBook on venture capital’s skyrocketing valuations is a timely follow up to our last note on investment returns 2021.
As Mary Cahill, former Emory University CIO, commented in a recent Fundfire post, “Gains on paper are not the same as money in the bank.”
Speaking of investment returns, the last two years under Covid have been strange days indeed. Half the population can’t make rent, while the other half – anyone with assets – runs the table.
One year ago, in FY2020, university endowment returns averaged 1.8 percent. This year our back-of-the-envelope calculations suggest an average in the low thirties.
It’s anybody’s guess what next year will bring, but we’ll leave you dear readers with these words of investment wisdom from a master of the craft.
“Go for a business that any idiot can run – because sooner or later any idiot probably is going to be running it.”
― Peter Lynch
Best wishes for the Holidays and a great 2022.
— Charles Skorina
PitchBook, December 4, 2021
Has 2021’s ramp-up in IPO activity been a rush to the exits prior to a change in the market cycle?
Is it just the new normal?
Time will tell, but one thing is certain: US VC-backed IPOs have broken all kinds of records this year, unlocking more than $500 billion of liquid value.
The median company valuation at IPO is nearly 60% greater than its last private valuation. However, our VC IPO index has shown relative underperformance against the S&P 500 since the beginning of 2021.
Long-term performance still shows above-market returns, but inflationary pressure and the increased expectations of interest rate hikes in the coming year have introduced more volatility in the market for these freshly public companies.
These swings have been especially potent in the software space, which represents nearly 50% of the total weight of the IPO index, as the lofty valuation multiples placed on those companies have received a reality check in the face of rising discount rates.
While the majority of the underperformance came earlier in the year, it remains top of mind given the signs of increased market uncertainty—which have been amplified by fresh pandemic-related concerns.
This represents a significant threat to the sustainability of the IPO volumes we’ve seen over the last couple of years, as negative price performance or just general uncertainty will discourage IPO plans for certain startups, especially if they have access to other financing and liquidity options.
We will maintain vigilant coverage of this space as we expect IPOs and their performance to be a leading indicator on the health of the VC industry, as public markets have facilitated the majority of exit value over the last two years.
For more data and analysis, click to download our free Index of Venture-Backed IPOs.
Feel free to reach out with any feedback or questions, or if you would like to discuss the research.
Cameron Stanfill, CFA, Lead Analyst, Venture Capital
PitchBook research (part of Morningstar) reports on private equity and venture capital. We always enjoy the read.
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