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    Yale Endowment - PE Week 2

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    Srivats Suresh Kumar
    Swenson's private equity strategy for his endowment fund could backfire due to changes in the industry and overheating of the market. While private equity exposure should be maintained, the document recommends investing more in emerging markets rather than developed ones. Emerging markets offer greater growth potential and may not be as affected by the boom-bust cycle indicating a coming decline in developed markets. Maintaining relationships with fund managers could allow leveraging their talent to yield high returns through diligent emerging market investments over the long 5-10 year lock-up periods.

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    Yale Endowment - PE Week 2

    Uploaded by

    Srivats Suresh Kumar
    233 views2 pages
    Swenson's private equity strategy for his endowment fund could backfire due to changes in the industry and overheating of the market. While private equity exposure should be maintained, the document recommends investing more in emerging markets rather than developed ones. Emerging markets offer greater growth potential and may not be as affected by the boom-bust cycle indicating a coming decline in developed markets. Maintaining relationships with fund managers could allow leveraging their talent to yield high returns through diligent emerging market investments over the long 5-10 year lock-up periods.

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    Yale Endowment_PE Week 2

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    Swenson's private equity strategy for his endowment fund could backfire due to changes in the industry and overheating of the market. While private equity exposure should be maintained, the document recommends investing more in emerging markets rather than developed ones. Emerging markets offer greater growth potential and may not be as affected by the boom-bust cycle indicating a coming decline in developed markets. Maintaining relationships with fund managers could allow leveraging their talent to yield high returns through diligent emerging market investments over the long 5-10 year lock-up periods.

    Copyright:

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    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    233 views2 pages

    Yale Endowment - PE Week 2

    Uploaded by

    Srivats Suresh Kumar
    Swenson's private equity strategy for his endowment fund could backfire due to changes in the industry and overheating of the market. While private equity exposure should be maintained, the document recommends investing more in emerging markets rather than developed ones. Emerging markets offer greater growth potential and may not be as affected by the boom-bust cycle indicating a coming decline in developed markets. Maintaining relationships with fund managers could allow leveraging their talent to yield high returns through diligent emerging market investments over the long 5-10 year lock-up periods.

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    of 2

    1.

    The private equity industry is changing, as shown by:

    a. The focus of most funds as of 2006 was to create multibillion dollar


    buy out funds whose aim was to make safe and low risk (and low
    return) investments so that raising of follow on funds was easy. This
    drove the pupose of the fund away from ‘adding value’ thru
    innovation. Furthermore, this activity saw massive manager
    defections to start similar funds of their own and hence entailed a
    ‘manager risk’.

    b. Funds were positioning themselves as asset managers, and


    therefore had low hurdle rates and looked for invesmtents which
    were much safer than the routine private equity targets.

    c. The increasing availability of capital in the industry was also a point


    of concern. This compounded the demand for good funds by limited
    partners and access to the best funds was nearly absent. The
    market was essentially heating up.

    Swenson’s strategy could backfire in 2 ways:

    a. He does not get the return he wants as funds’ way of working is


    changing into something similar to modern day asset managers

    b. An overheated market could reduce returns and drive up management


    fees and other transaction costs, effectively defeating the argument for
    investing in private equity in the first place.

    2. We believe that Swenson should maintain the endowment’s exposure to


    private equity, but look to invest in emerging markets rather than in
    developed ones. This has the following rationale:

    a. As with any boom-bust cycle, the rampant availability of capital and


    middle men fees all indicate a coming decline in the market, while
    the same cannot be said of emerging markets. Swenson should
    leverage his relationship with his PE fund managers and divert more
    of his asset allocation to emerging markets.

    b. Swensons’ PE fund managers have so far shown great talent in


    adding value to buy-out targets and have shown prudence in
    investing. We believe this behaviour does not ‘go with the flow’ and
    can yield high returns if pursued in the same diligent manner.

    c. Since any PE investment is an essential lock out of capital for 5-10


    years, emerging markets and their growth potential can deliver
    massive returns to the endowment.

    In posterity, given that the worst financial crisis of recent times was to hit
    in less than 2 years from the time of this case, one can argue than less
    exposure to risky assets was prudent, but we disagree as this pull out
    would entail friction in the endowments’ relationship with its asset
    managers, and could preclude Swenson from future fund raising.

    Now, in 2011, our recommendation for the strategy would not change, and
    we continue to recommend that Swenson increase his exposure to PE as a
    whole and PE in emerging markets in particular.

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