Endowed With Risk
How does someone put $425 million of a university's hard-earned endowment into hedge funds, corporate buyout partnerships and real estate?
Very slowly and carefully.
That's how Lawrence Kochard is approaching his job two years after Georgetown University hired him as chief investment officer of its $850 million endowment. The university has set a goal of investing 50 percent of the fund's assets in these "alternative investments" -- which generally means anything other than conservative investment-grade bonds and traditional positions in stocks. When Kochard was hired, Georgetown didn't have any alternative investments.
Kochard's task isn't unique. Endowments across the public and private spectrum of universities and foundations have been pouring money into hedge-fund and private-equity partnerships to boost returns, trying to mimic the multibillion-dollar investment successes of the huge endowments at Yale and Harvard universities. Such investment vehicles have been producing unprecedented returns in recent years.
Private equity firms -- such as venture capital and corporate buyout funds that specialize in five-to-seven year investments in private companies -- are expected to raise a record $300 billion this year, up from about $260 billion last year, according to research firm Private Equity Intelligence. A good portion of that fund growth comes from endowments.
But daring investments inevitably come with substantial risk. And Kochard knows he may be getting in on the tail end of a boom, when the investments funds are overheated and over-funded.
"We are concerned that a lot of people are doing the same thing," said Kochard, who is also a business professor at the school. "We are looking, have made some commitments, but we're doing it slowly."
There's a lot at stake for Georgetown and many other mid-sized private colleges with small endowments compared with those of Harvard ($26 billion) or Yale ($16 billion). To compete for students, colleges have to invest heavily in scholarships, faculty salaries and facilities, but fundraising and tuition increases alone won't get them there. A rich endowment will.
Also, Kochard and other endowment officers say, showing that an endowment has invested well can be a selling point in "development," as colleges call their fundraising, especially when it comes to impressing well-heeled executives looking for a place to plunk down some of their career earnings. "Returns and development are closely linked," Kochard said.
Kochard said Georgetown's endowment earned about a 10 percent return last year, well below what endowments like Harvard (21 percent) or Yale (16 percent) earned with help from their aggressive and well-established programs of alternative investments.
At George Washington University , chief investment officer Donald W. Lindsey had a one-year head start on Kochard, and it has made a big difference. He was hired by GW in April 2003 and immediately began identifying alternative investments in which to place some of the university's endowment. When he arrived, the endowment was about $500 million, most of it in traditional stocks and bonds.
Three years later, Lindsey said, it is about $925 million. Some of those returns came from the rising value of the university's prime real estate holdings in Foggy Bottom, but much of it came from alternative investments. Last year, GW's endowment grew about 12 percent, according to the National Association of College and University Business Officers.