Saturday, May 19, 2012

Texas Tech's PEU Investing of Carr Funds

Texas Tech University's Long Term Investment Fund Policy speaks eight times of private equity underwriters (PEU's).  The policy details how Tech's LTIF mimics PEU's: The university added a Schedule C to clarify matters:

Alternative Investments Policy

Alternative investments provide added diversification and thereby reduce the risk of the portfolio, without sacrificing expected returns. To mitigate risks unique to alternative investments, the principles contained in this document reflect suggested best practices and are intended to serve as the basis for the due diligence process. For simplicity, alternative investments are segmented into two broad categories: private equity funds; and hedge funds.
Alternative assets increase the risk of a portfolio, otherwise what needs mitigation?  Note the focus on expected returns.

However, before the PEU or Hedgie gets their share of investment funds, Texas Tech's LTIF PEU has to shave 0.5% off the top:

The TTU system will assess and retain an investment management fee at the annual rate of up to 0.5% of the average market value of each endowment for those entities utilizing the services of the TTUS Office of Institutional Advancement or the Angelo State University Development Office.
Take Angelo State's Carr Foundation with $96 million in assets, as reported by ASU's website.   The 0.5% TTU management fee equals $480,000.  That's before any PEU or Hedge Fund management fees:  TTU's Asset Class descriptions (pages 16 and 17) conceivably encompass PEU's across all three classes.

a. Equity:
(1) Equity represents residual ownership of public and private companies after obligations to debt holders have been satisfied. Over longer periods of time, the higher risk of equity ownership should result in higher expected returns relative to cash, bonds and other securities with more senior claims in the capital structure.
(2) Investment strategies: U.S. Equity, Developed Market International Equity, Emerging Markets Equity, Private Equity, and Hedge Funds
b. Credit:
(1) Credit and fixed-income instruments are securities issued by governments, government-related entities and public and private companies that generally contain contractual obligations from the issuer to make interest and principal repayments to investors over the duration of the negotiated term agreement.
(2) Investment strategies: Cash, Cash Equivalents, Government Debt, Debt Issued by Government Agencies, Investment Grade Debt, Below Investment Grade Debt, Private Placement Debt, Hedge Funds, and Distressed Debt.

c. Real Assets:
(1) Real assets are investments in tangible/physical assets such as commodities, real estate and other investments that generally display a positive correlation to the rate of inflation, including gold and inflation-linked bonds.
(2) Investment strategies: Commodities, Commodities-related, Private Real Estate, Real Estate Investment Trusts, Infrastructure, Inflation-linked bonds, Gold, Hedge Funds, and Agriculture.

Texas Tech's Long Term Investment Fund clearly wants a piece of PEU action.  Under Private Equity Fund Manager Selection (page 22), the policy states under "Terms:"

Fees generated by the fund (deal fees) should flow through to the limited partners – a minimum of 50% is expected.
TTU wants a cut of PEU deal fees on top of their 0.5% annual management fee.  That's PEU like, as is their categorization of investment types (page 17):

a. Constrained. The long-only purchase of a commingled fund or security (such as a stock, bond, commodity or currency) with the expectation that the asset will rise in value over the holding period. Investments of this type would generally display higher levels of market risk (beta), utilize less leverage and offer more near-term liquidity.

b. Non-Constrained. Non-constrained investment strategies are generally implemented through a hedge fund structure, which allows managers to not only buy securities long, but to also borrow securities and sell them short if the managers believe that the securities are over-valued. In addition, non-constrained investment managers can utilize derivative securities to protect against or profit from market declines and volatility. Non-constrained investment managers may also use tactical strategies, such as allocating capital between traditional asset classes (stocks/bonds/ cash) or allocating capital between regions/countries/industries for profit. Other non-constrained investment strategies will invest in interest rates, currencies, commodities and various market indices to profit from relative value opportunities. Investments of this type would generally display lower levels of market risk (beta), utilize leverage to varying degrees, be less correlated to traditional asset classes, and require investors to lock-up capital for periods ranging from monthly to several years.

c. Private. Private investments represent a broad spectrum of investment activity, with investments in non-public securities, lack of liquidity, unpredictable cash flows, longer investment horizons and wide dispersion of returns being the most common characteristics. Typically, lock-ups can be 5 to 10 years in duration.
Welcome Texas Tech PEU to PEU Report.  I've long said PEU love is a bipartisan affair. Who knew academics would remain asleep as university foundations and endowments roll the PEU dice?  It's been going on since 2005.

Texas Tech's Board of Regents recently revisited its target asset allocation.

No risk, no reward! However, it seems odd to use Student Scholarship money on the PEU craps table.  I wonder how Robert G. and Nona K. Carr would feel about their estate being 99% invested in Texas Tech's Long Term Investment Fund?  Surely, someone in West Texas remembers their investment predilections.

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