November 17, 2014
Interviewed by: Tom Franco
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Princeton’s Approach to Endowment Investing

Jim Millar of Princeton University Investment Company discusses how the school invests its $21B endowment, including its $5-6B private equity allocation. Millar highlights their investment strategy, the merits of being a large endowment, how alumni networks can aid investment decisions, and why a concentrated roster of GPs works best.

Jim Millar of Princeton University Investment Company discusses how the school invests its $21B endowment, including its $5-6B private equity allocation. Millar highlights their investment strategy, the merits of being a large endowment, how alumni networks can aid investment decisions, and why a concentrated roster of GPs works best.

Princeton’s Approach to Endowment Investing
With Jim Millar of Princeton University Investment Co.

Dan Feder, Washington University Investment Management Co.Hello, I’m Dan Feder and I’m here with Tom Franco. With us this afternoon is Jim Millar, Managing Director at Princeton University’s Endowment. The topic of discussion this afternoon is private equity and how Princeton approaches private equity venture capital. Why don’t we just get right into it?

Jim Millar, Princeton University Investment Co.: Okay.

Feder: Jim, could you talk a bit about Princeton’s endowment, give us a bit of background and also an overview of the private equity venture programs at Princeton?

Millar: Sure. Princeton has a $21-billion endowment and the function of the endowment is to provide operating resources for the university over the long-term. Today, it provides about 50% of the annual operating—important things like financial-aid research and things like that. At the investment office, our job is to invest that. The idea and the goal is to invest it so we can spend roughly 5% of it per year on the operating income and make enough on top of that to keep up with inflation.

The principal is that 20 years from now, the endowment is worth the equivalent of what $21 billion then can buy in the same purchasing power. We have to keep up with inflation essentially. But we have to keep up with what’s known as the higher-education price index (HEPI) index, which tends to be a bit more than inflation. Our target is about 10% plus per year, which is why private equity is an important component because it is one of the strongest performance asset classes in the endowment.

Feder: How important is having a concentrated roster of managers in doing exactly that?

Millar: We think it’s really important for a couple of reasons. One is that our goal for the private equity portfolio within Princeton is to have top-quartile returns, the highest returns we can. When we look at it, from a return point of view, that’s difficult to do without a concentrated roster. You’ve got to make some big bets and concentrated bets, which have the risk of—if your bets go wrong, they’re going to pull you down in a big way.

Having large numbers sometimes—the diversity of that is illusionary in a way. One, we think that taking concentrated bets is a way we can increase the return. But to the point you’re getting to, it also enables us to be a better partner. We can just spend more time with a general partner. We try to meet and talk with our general partners more often than just the annual meeting.

When we’re in their headquarters area for another meeting, we try to stop in and see them, just to see what’s going on, to have some of these conversations about what we see going on, some inputs we might have for them. It’s difficult to do that if you have too many partnership relationships. Relative to the endowment world, we have a large staff of 20 investment professionals, six to seven of whom spend some time in private equity. So, we have a group of people that can spend some time on this. Some endowments that are even in the $1-billion range, which is a large endowment, just don’t have the resources to do that.

Feder: Princeton’s been a high-performing endowment for a number of years and consistently and certainly having a great CIO is a big part of that. At $21 billion, you have a scale and a level of staffing that enables you to do things, go places, and behave in ways that others can’t. What are some of the advantages of being a large endowment in getting to the sorts of opportunities that really can elevate the performance of the overall portfolio?

Millar: It’s a good question because we like to refer to ourselves as “Goldilocks size”—not too big, not too small. We are large at $21 billion. We target a quarter of the endowment as private equity, so a sizable chunk. This is a $5 to $6 billion portfolio. But it’s not so large that we need to deploy hundreds of millions of dollars into each fund. So, how do we utilize that? One that we talked about is the staffing. We can actually have a staff so that we can apply the resources.

We do not tend to use outside resources to help us with diligence or research. We do that internally. Two, with the staff, about one-third of the endowment and one-third of the private equity portfolio is outside North America. In private equity, that’s predominantly in Europe and Asia, with Asia being China and India. We don’t have offices there in Europe or in Asia, which means we go there. But with six or seven people doing it, in some parts of the year when the annual meeting scene is going on, we have somebody in London and in Hong Kong and in San Francisco and in New York and we’re able to do that because we have a staff to cover it.

Feder: One of the things a major university or a great college has going for it as an endowment investor must be the networks the university or college has around the world. I’d be interested to hear how you go about harnessing information and those networks to really advance the investment program.

Millar: It is a huge advantage that we have over groups that don’t have that network, because we do have a worldwide network of alumni. We have a worldwide network of our managers in general. When we talk about the Princeton University investment company network, we’re talking about all those together. So, we utilize the Princeton alumni network. We have the majority of the board of directors of the Princeton University Investment Company are alumni, some of which are trustees. Then, we have the trustees. Those are usually our first go-to.

We’re looking at something in, let’s say, Sweden—we try to find somebody that has some experience that knows the group or knows somebody that knows the group. Usually there’s a 100% hit rate. The question is how valuable is that information? Probably even a bigger source of the network is the existing managers we have, where we have a very close working relationship with them.

Typically, they know these managers better than an alumnus that might just be in the area because they’re working in the area. If it’s a new buyout manager, they usually have worked with these people before in co-investments. So they can give us a very good read on what their strengths and weaknesses are and what their reputation is in the market. It’s something we utilize a lot.

Feder: Are you able to use that use of networks across asset classes? Meaning: are you able to use those on-the-ground relationships to diligence or source ideas?

Millar: Absolutely.

Feder: In other areas?

Millar: It’s the other thing. The way we manage the Princeton endowment—as I mentioned, we have seven people that spent some time on PE. I spend the majority of my time on the PE because I head the asset group. But I’m also involved in all the other asset classes. We have two general meetings a week: one is what we call the non-marketables, which is private equity and real assets primarily. Then, we have the marketables meetings. I’m in both of those meetings every week. All the managing directors are, so that we know what’s going on in the other areas. When we’ve looked particularly overseas at new PE managers, some of our non-PE managers are our best sources of information because even in a place like China, which is very big population-wise, the investment network there is relatively small compared to the U.S.

So, we’re going to know some of our public portfolio managers who actually know who some of these people are. That’s extremely valuable to us.

Tom Franco, CD&RYou make really a compelling case for the competitive advantages of a large-endowment platform. Talk about the smaller endowment and how they ought to think about the asset class. How should they play?

Millar: To me, it’s an important asset class to have in your endowment because of the return potential it brings. But my recommendation would be that they focus on the managers and try to have a concentrated portfolio. In other words, one challenge you have as a smaller endowment, if you’re going to allocate 5%, 10% or even as much as 15% to private equity, it’s still not a big number. A lot of people look at it and say, “I need to have it spread across at least so many managers so it’s diverse enough.”

My recommendation would actually be the other way. If I were doing that time, I would try to pick out five buyout managers and allocate the limited resource into those five, or even three. The risk is if you’re wrong on one of the three, it’s really going to hurt your returns. But that actually forces a better decision and, in the buyout world, I think that’s possible. There is access to the top managers out there, or many of them. In the venture world, it’s more challenging for smaller endowments because the venture funds are smaller, which means there’s less room around the table.

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