If you’re a fund manager in private equity or venture capital, your alma mater might call on you to serve on their investment committee.
Our findings on networks also highlight complexities of investing in some types of assets. We find that connections to investment professionals (networks) matter especially for allocations to private equity and venture capital. This is consistent with networks helping facilitate ways to overcome restrictions or barriers to investing in funds that might otherwise be difficult or impossible to access.
Finally, beyond effects on allocation, we document that more expertise is associated with better performance for an endowment’s portfolio. The improved investment performance comes through a number of channels: capturing higher returns that can accompany alternative assets in general, greater ability to select or have access to high performing managers, and being able to use direct funds rather than funds of funds which impose an extra layer of fees.
Our results suggest that endowments directly benefit from having experts in alternative investments serving on university boards. The potential benefits seem highest in areas such as private equity and venture capital.
Having a Chief Investment Officer with relationships in private equity and venture capital also influences endowment performance.
The results also reveal interesting patterns in the effect of networks and the presence of a CIO on allocations. While the size of the network and the presence of a CIO are significantly positively related to allocations to venture capital and private equity, this is not the case for hedge funds. The size of the investment team seems to matter most for venture capital allocations. These patterns across hedge funds, venture capital, and private equity are consistent with the relative difficulty of managing and accessing these alternative asset classes. Recent trends in hedge fund investing show that allocations to hedge funds have increased across all endowments reflecting easier (and possibly cheaper) access to hedge fund managers. In contrast, private equity investments involve managing capital calls, substantial illiquidity, and assessing management teams who invest in real assets (companies). Venture capital shares the complexity of private equity with the added challenges of the increased riskiness related to new businesses and sometimes restricted access to high performing funds. Our results suggest that having a CIO and board networks is more important in navigating and accessing the more complex arrangements with private equity and venture capital funds, as compared to hedge fund investing.
It took years to build and maintain those fund manager relationships at these endowments. Building a similar network for your portfolio will take time.
Post by Marcelino Pantoja