AMA - What Can We Learn From The Yale Endowment?

The Yale endowment is  considered as one the best institutional investors. In 2018 it earned a 12.3% return, beating the average endowment return in 2018 at 8.2%.  For 2019 they are allocating 49% to illiquid / alternative assets (VC, leveraged buyouts, real estate, natural resources). I'm somewhat surprised to see that real estate only takes up 19% of their alternative assets and not more. Their real estate return in the last 10 years was also an anemic 2.7%. In contrast, they've had a lot of success with venture capital (165% in last 20 years.  Given Yale's endowment at a whopping $29.4B, how and what can the everyday investors learn from them and the super rich? 

It’s true that they’ve grown the endowment from about $6.6B to 29.4B in the past 20 years. That’s impressive considering that the endowment is the single greatest source of cash for the university programs. Tuition is second.  

First of all, there are numerous ways to make money. 

I have some first hand visibility into the Yale endowment and where they invest. The Yale Endowment is a major investor in a private equity firm called Golden Gate Capital. They were the firm that was funding my buy-out of IBM’s microprocessor division in 2004.  From my exposure to family offices, and other “old money” over the past while, I can share what I’ve learned. I believe that their goals are different from the average investor. 

First of all, they are more concerned with preservation of capital than rate of return. They also employ sophisticated consultants to evaluate their investment decisions. 

The line between late stage venture capital and private equity is quite blurry. I don’t believe Yale is investing in early stage startups. These are late stage startups where the capital requirements are larger. These businesses are proven and need funds to scale up. This is not that different in the world of private equity. Generally speaking, private equity firms make low risk bets on re-engineering businesses and executing business turn-arounds. 

David Swensen is the chief investment officer at the Yale Endowment. He outlines his investment philosophy in his book entitled Pioneering Portfolio Management. In that book he divides the portfolio into five or six roughly equal parts and investing each in a different asset class. Central in the Yale Model is broad diversification and an equity orientation, avoiding asset classes with low expected returns such as fixed income and commodities. 

He also maintains a low cash position. He maintains a low exposure to traditional wall street equity investments, and a high exposure to alternative investments that are not readily marketed. That’s why he’s investing directly in funds like those of the Golden Gate Capital Group. These firms have some of the most sophisticated money managers involved. For example, they routinely use the services of Bain Consulting. This is the consulting division of Mitt Romney’s Bain Capital Group. I can say from first hand experience that these folks 

It’s no surprise that Bain consulting recruits heavily each year at Yale University. They have developed a way of looking at the investment world that is different from most. They realize that these are businesses that need to be run, and they know how to run successful businesses. 

In your question you mentioned that the real estate performance of the Yale Endowment was surprisingly low. But remember that the measurement notes in the article you referenced is over a 10 year period. Note that the fund would have experienced significant losses from 2008-2012, and these deficits would have started to be recovered only starting in 2012.