YALE UNIVERSITY INVESTMENTS

OFFICE : AUGUST 2006

 SELECTION, COMPENSATION AND CONTROL OF FUND MANAGERS

• The managers were chosen carefully after a lengthy and critical analysis of their abilities, comparative advantages,
performance records, and reputations

• They were given considerable autonomy to invest in securities, which achieved immense returns and increased the worth of
the organization

• They were responsible for developing close and mutually beneficial relationships with other managers and to co-ordinate with
each other so as to achieve remarkable results

• The university is more concerned about the compensation provided to managers, managers typically prospered where the
assets under management grew large

• Investments office tried to build strong relationships and fee structures with their external managers to align the managers’
interests with Yale’s corporate objective

• External managers are controlled by the investment committee where day-to-day activities of the external managers are
evaluated, selected and monitored

• It was a mutual co-ordination between external managers and investments office and this relationship was established so as
to achieve incredible results
 SELECTION, COMPENSATION AND CONTROL OF FUND MANAGERS

• External advisors also played a critical role in the entire policy making process where they were responsible for giving
recommendations on both the investment policy and spending policy for the endowment

• The Investments Office met regularly with the other financial departments in the university in order to co-ordinate overall
liquidity needs

• In private equity market external investment advisers are given considerable authority to implement their strategies as they
saw fit with relatively little interference from Yale

• The Investments Office’s staff develops close and mutually beneficial relationships with external managers so as to co-
ordinate effectively for making worthwhile investments

• The real estate portfolio of Yale was reviewed by their real estate managers and the university had exercised a wide range of
control and continuously reviewed the investment decision of the real estate managers

• They had pared its portfolio to focus on those managers with whom the staff was most comfortable in terms of people and
execution
 DECISION TO MAKE PRIVATE EQUITY INVESTMENT

• Investment decision consistent with overall investment strategy, with premium on long term relationship with few premium
firms

• Look for “Value-Added” approach from PE funds rather than firms that sought to generate bulk returns using financial
engineering

• Value added investor can generate incremental returns independent of how the broader markets were performing

• Selects the firms in which the incentive were properly aligned, reluctant to invest in PE funds associated with large financial
institutions

• Cautious with investing in multibillion dollar funds, who pursue low risk, low return transactions in order to ensure their
ability to raise follow on fund rather following innovative strategy to generate higher returns

• Yale has greater exposure to PE relative to other universities, with larger fraction of its holding concentrated in the funds of
top flight firms.

• The composition of private equity investment has changed over time with proportion of portfolio in traditional venture
capital has declined from 46% in June 1990 to 25% in June 2006
 INTERNATIONAL PRIVATE EQUITY INVESTMENTS

• Initial strategy concentrated on UK and France, recently started exploring developing markets

• A cautious planning process, more attention to markets where fewer funds were competing for deals, suggesting a possibility
of attractive valuation

• Avoided large funds devoted to buyout in Europe and Asia(compensation and conflict of interest problem), difficult to
evaluate foreign private equity organizations

• Very large new global private equity firms, sponsored by established US firms, were an alternatives, but lack of experience and
proven track record was a problem

• Overall foreign private equity investment were risky proposition, with highly uneven returns

• Recently invested in Chinese funds as a long term contrarian bet, as evaluation and selection of manager was a challenge
 Changes in Private Equity Industry

• Emerging markets provide an opportunity for fund managers and endowment funds to earn superior return on their
investment

• The scale on which private equity group operate has increased and there are concern on buyout side of the funds where
multibillion dollar funds has become a norm

• Another major change is new classes of investors active in the industry, overseas institutions and pension funds have an
appetite for private equity

• The sudden influx of capital suggests that there will be intense price competition in industry in the near future

• Deploying capital was increasingly getting challenging, as there was the intense demand for these funds from limited partners

• Swensen’s private equity strategy could go wrong, because they now had to compete with other LBO firms who had lowered
their return hurdles

• There’s high risk associated with illiquid assets so Yale could potentially lose a lot of money if the industry were to fail
SHOULD DAVID SWENSEN SHIFT HIS PRIVATE EQUITY STRATEGY?