David Swensen on the Ideal Fund Manager

When looking for a peculiar trait in a fund manager, it helps to also have it yourself.

Swensen likes to talk about how he looks for money managers who have “a screw loose.” In terms of self-interest, the rational thing to do if you run a hedge fund or private equity firm is concentrate on raising as much money as possible and grow rich off the fees. The managers Swensen wants are driven by a different ambition. They want to beat their competitors’ returns, whether or not that translates into maximum personal enrichment. The ideal Swensen manager looks a lot like Swensen, who passed up Wall Street lucre to ensure that the university he loves is rich beyond the dreams of avarice.

How David Swensen Made Yale Fabulously Rich, Bloomberg

Over three decades, Swensen backed new fund managers that have returned billions to the school.

Supplementing Swensen’s native abilities, however, is a money manager network built up over decades and bolstered by loyal Yalies. William Helman, a general partner at Greylock Partners, says that when the top VC firm decided to open to a few new clients in the 1990s it sought out Yale in part because of an alumni connection at the firm. Yale’s $2.7 million bet on Greylock-backed LinkedIn Corp. generated an $84.4 million gain when the company went public in 2011. Swensen seeded Yale alum and former investment-office staffer Lei Zhang with $20 million to start Hillhouse Capital Management in 2005, which has backed tech startups such as JD.com in China. Hillhouse earned $2 billion for the university.

There are clues in Yale tax documents about other winning bets, including Boston hedge fund Bracebridge Capital, which Swensen seeded decades ago, and a $274 million stake in New York-based health-care investor Baker Brothers Advisors that quadrupled over a decade. All in all, about 60% of Yale’s portfolio is allocated to alternative investments such as private equity, hedge funds, and venture capital. And Swensen has been more willing than most CIOs to take the risk of riding his best bets even as they swell to a large share of the endowment.

Early on, few firms dealt in the sort of assets Swensen was interested in, so he had to help create them—becoming, in essence, a venture capitalist of venture capitalists. “Dave absolutely put us in business,” says Joel Cutler, one of the founders of VC firm General Catalyst. Getting in early has other benefits: Swensen can exercise more influence over younger, unproven firms and negotiate down the management fees that he abhors.

It pays to be early if you have the power to “anoint” a fund.

Harkness Tower surrounded by trees at Yale campus.
Twitter @yalealumnimag

Post by Marcelino Pantoja