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Yale University Investments Office February 2015 Case Solution

Solution Id Length Case Author Case Publisher
2433 1557 Words (6 Pages) Josh Lerner Harvard Business School : 812062
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The case focuses on the investment office of the Yale University – which was given the responsibility for the acute management of the endowment fund of the university. The endowment fund was approximately $4 billion in 1995, and had grown substantially over a decade to have reached almost $24 billion in 2014. This growth was a result of the unique and non-traditional approach implemented by the investments office leadership during this period towards endowment management. This approach included diversity as well as investment in less efficient equity markets which included, for example, prove equity, real estate, and hedge investments. With a change in the market dynamics and the financial sector, the case centers on the decision of the investments office towards allocating higher funds and capital in these markets. 

Following questions are answered in this case study solution

  1. What do you think of Swensen, head of Yale University Investments Office, overall investment philosophy? How has the strategy performed?

  2. How has the Yale University Investments Office selected, compensated, and controlled the public market, real estate, oil-and-gas, and private equity fund managers? What explains the differences in their strategy? Are these differences disturbing?

  3. How has the Investment Office decided when to make public market, real estate, oil- and gas, and private equity investments? What explains the differences in their strategy? Are these differences disturbing?

  4. How is PE changing? What implications does this have for Yale? What should David Swensen do?

Case Analysis for Yale University Investments Office February 2015 Case Solution

1. What do you think of Swensen, head of Yale University Investments Office, overall investment philosophy? How has the strategy performed?

The investment philosophy for Yale was based on publicly traded as well as private equities for developing real income streams and revenue sources, compared to the traditional contractual sequences that led to nominal cash flows only – such as bonds. Swensen believed in taking risks where appropriate and this led the university to reap handsome rewards. Secondly, Swensen ensured that investments were diversified, and not exposed to a single asset class only. This allowed the investment office to mitigate the risk directly instead of focusing on timing the markets. More interestingly, Swensen decided to look for opportunities for investment in less efficient and less popular markets. These included private equity, real estate, and natural resources as well as hedge funds. These investments were made for higher potential rewards. As a result, Swensen depended more on outside managers for most of its investments, except those that were indexed, or more regular in nature. Swensen empowered the external managers to strategize as they deemed fit, with little interference from Yale – allowing higher autonomy which in turn led to increased commitment and improved results. To ensure this, Swensen also developed a critical incentive program for external managers – focusing on internal as well as external rewards and incentives to ensure high motivation, and improved performance.

Swensen’s investment philosophy was unconventional and different. Despite this, the strategy had performed considerably well – and had allowed Yale to develop internally as well as externally. Swensen had managed to steer the endowment fund at Yale from a mere $1 billion to almost $24 billion by 2014 through this philosophy - which in turn had allowed the university to not only expand its student base, and recruit a more expert faculty base, but also to allow financial support for infrastructural development in the form of the construction of new residential colleges.

2. How has the Yale University Investments Office selected, compensated, and controlled the public market, real estate, oil-and-gas, and private equity fund managers? What explains the differences in their strategy? Are these differences disturbing?

Outside, or external managers were chosen by Yale for increased autonomy as well as increased promised returns with little interference from the university. The external managers were selected after a careful assessment and analysis of their capabilities and skills as well as previous performance records and reputation. The staff from the university’s investment office ensured to build a close relation with ease external managers to help grow the endowment fund. However, Yale had different tactics and strategies for managing the public market, real estate, oil-and-gas, and private equity fund managers. 

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