Developing Meaningful Relationships with the Endowment and Foundation Community
Among the LP community, endowments and foundations (“E&F’s”), are widely considered to be thought leaders. E&F’s earned this reputation by being early adopters of private equity and alternatives in general, which means as an investor type they often will have the longest track records and most experience investing. As the private equity industry matured, E&F’s were the first movers into the emerging markets and were often the first dollars into more esoteric strategies. In many instances, this thought leadership has translated into spectacular performance, but there is also significant risk associated with this approach. E&F’s had significantly greater exposure than other institutions during the Global Financial Crisis (“GFC”) and therefore they suffered some of the most spectacular losses of those investing in alternatives. Many of the well-regarded universities and foundations remained undaunted in the face of this adversity, holding firm to their long-term investing perspective and their commitment to alternatives. As a result of their considerable alternatives exposure and the breadth of their sponsor relationships, many E&F’s were slower to bounce back than other investors. In 2016, most E&F’s are back on their feet and are as desirable a partner to the sponsor community as they have ever been. The qualities that have made E&F investors attractive historically remain the same today. First, the boards of E&F’s are replete with some of the most well-respected names in finance, which makes their validation and brand association particularly appealing. Second, E&F’s have resources and reach that can provide them with special access and to unique investment opportunities that other groups never see. Finally, the tax-exempt status that these groups enjoy allows them to consider a broader set of investments without the restrictions of tax considerations. In many ways, E&F’s are uniquely suited for the structure and time considerations of private equity, which makes them almost the ideal partners for financial sponsors: smart, well-connected and long-term oriented.
Given the hit to their performance (on average E&F’s lost approximately 23% during the GFC), building relationships with this community today is considerably different. Key themes that are now becoming of greater focus for the E&F community include alignment. Given their long-term orientation, E&F’s are increasingly looking to see greater than average (2% GP commitment) alignment from their sponsor relationships with some GPs committing upwards of 5% of the target fund size. The E&F universe also has sub-communities where there are leaders and followers, so it’s important to know which is which. Increasingly, E&F’s seek each other’s counsel and take comfort in a greater number of their peers participating alongside them. In our own marketing approach, we take special care to the sequencing of meetings within this constituency. In terms of strategy, many E&F’s find the plain vanilla buyout fund to be less interesting because that market feels overbought. Differentiated, sector-focused approaches will still earn their attention, but increasingly structured equity, private credit, royalties and bespoke secondary offerings appear to take center stage. They are also becoming more “brand” aware and have been increasingly looking to support their best relationships in new investment strategies, which was less the case pre-GFC.
When we speak of endowments specifically, they have two main objectives when investing the capital that they receive through donors: (i) they want to achieve a return that exceeds their annual draw-downs – typically 4 to 5% – while also accounting for inflation; and (ii) consistently outperform the S&P while beating out their peer group every year. Sixpoint has spent considerable time discussing investments and placing capital with the E&F community and finds their reputation as thought leaders to be firmly intact, making the appetite for their dollars to be as strong as it has ever been.
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