Yale University Investments Office July 2000.

Yale University Investments Office: July 2000.

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)?

In general, managers were chosen carefully, and are given considerable autonomy to

implement their strategies as they saw fit, with relatively little interference by Yale. These

managers were chosen very carefully, however, after a lengthy and probing analysis of their

abilities, their comparative advantages, their performance records, and their reputations. The

Investments Office staff was responsible for developing close and mutually beneficial

relationships with each of these external managers. They prided themselves on knowing their

managers very well, on listening carefully to their ongoing advice, and on helping to guide

them, if and when appropriate, on various policy matters.

Yale philosophy focused critically on the explicit and implicit incentives facing outside

managers. In Swensen’s view, most of the asset management business had poorly aligned

incentives built into typical client-manager relationships. For instance, managers typically

prospered if their assets under management grew very large, not necessarily if they just

performed well for their clients. The Investments Office tried to structure innovative

relationships and fee structures with various external managers so as to better align the

managers’ interests with Yale’s, insofar as that was possible.

Swensen believes that, as private equity markets are less efficient than stocks markets and can

get better performance, they can increment return by selecting superior managers in nonpublic markets (3% vs. 15% premium).

Over its nearly 25 years of investing, Yale had developed a deep understanding of the process

and strong relationships with key managers, which served as an important competitive

advantage.

Nevertheless, while...