In July 2019, Bruce Miller, CEO of Investure, LLC (Investure), an outsourced chief investment office (OCIO), is preparing a proposal for Franklin and Marshall (F&M), a small liberal arts college located in Lancaster, Pennsylvania, with an endowment of $350 million. F&M recently began a search to find a new endowment manager in hopes of improving its investment returns and access to alternative assets (AA), such as private equity (PE) and hedge funds. Investure offers outsourced investment-management services to endowments and foundations (E&Fs) with assets less than $2 billion and is one of several companies competing to win the mandate to manage F&M’s assets. Investure’s approach is to pool the assets of “like-minded” institutions and significantly increase their allocations to PE. Miller and his team are preparing to meet with the F&M board’s investment committee to describe Investure’s services and approach to investment management.
This case is designed to introduce students to AA and the distinctions among PE, hedge funds, and private capital within this asset class. It focuses primarily on why PE is a difficult asset class to manage and describes several channels available to small endowments like F&M to access PE. The case introduces students to the core vocabulary of PE investing and limited partnership agreements. To make the concepts and terms more concrete, it provides a simple exercise that asks the students to calculate the expected internal rate of return (IRR) on an investment made through a traditional limited partnership (primary fund commitment) and a fund of funds and compare those to Investure’s approach. Students must evaluate and discuss the feasibility and attractiveness of each alternative to F&M. In doing so, the case creates an opportunity for students to discuss the current trends and issues many E&Fs confront as they attempt to increase allocations to PE.
The case is appropriate for use in an introductory or early class in courses focusing on PE, venture capital (VC), and entrepreneurial finance, as well as in specialized courses for fund trustees interested in AA.
The case can be used for the following purposes:
1. To introduce students to AA and how they differ from public equities and fixed income.
2. To introduce students to the core vocabulary of PE investing and limited partnership agreements.
3. To introduce the channels of access to PE investment and evaluate the advantages and disadvantages of each.
4. To analyze the returns to limited partners who choose to pursue PE investment under a traditional limited partnership and a fund of funds and compare those to Investure’s OCIO model.
5. To familiarize students with the current trends and issues motivating the growth in outsourcing of endowment management.