University of California Boosts Gains After Sales of Funds

  • Bessemer, Ross investments among those cut to reduce fees
  • Portfolio divestments totaled $10 billion in fiscal 2015

The University of California is boosting performance by cutting fees, revamping its portfolio with the sale of $1 billion of private equity fund stakes including investments with Bessemer Venture Partners and billionaire Wilbur Ross’s WL Ross & Co.

The university, which oversees $98.2 billion in endowment, pension and other assets, made portfolio cuts totaling $10 billion and saw returns improve in the fiscal year ended June 30 as a result, officials said. The private-equity stakes were sold ahead of schedule on the secondary market rather than held until after the funds’ lock-up period expired.

The overhaul has been led by Jagdeep Singh Bachher, former executive vice president of venture and innovation at the Alberta Investment Management Corp. who took over as the chief investment officer of the 10-campus state system in April 2014.

Slashing Fees

“He’s convinced us that in a lower-return environment the fees are more important,” Daniel Hare, a faculty representative on the investment committee overseeing the University of California endowment, said in an interview. “Many of the things he’s done were things that were hoped for when he was hired.”

The $283.9 billion California Public Employees’ Retirement System has similarly sought to slash fees by reducing the number of managers in its private-equity portfolio while schools such as Columbia University have unloaded alternative assets before they mature.

The $1 billion of private funds were sold in the fiscal year ended June 30, according to the University of California. Bloomberg identified the names of most of those funds, with a combined value of almost $600 million, using the university’s quarterly performance reports through March 31, the latest available. Buyout and venture capital funds sold by the school dated back to 1999 and had net asset values as small as $1.2 million.

Most of the funds had positive annualized returns after fees, where the data was made available. The highest gain, at 35.8 percent, came from Bluerun Ventures IV, a partnership from 2008.

Redpoint, Polaris

Other funds sold included those managed by Menlo Park, California-based Redpoint Management; Intersouth Partners in Durham, North Carolina; and Polaris Venture Partners in Boston, according to the data. Among more recent vintages was Bessemer Venture Partners VIII, a fund from 2011 run by the Larchmont, New York-based company. The university’s stake had a net asset value of $16.2 million at the time it was sold.

Ross’s WLR Recovery Fund V and IV and two funds run by New York-based Lindsay Goldberg & Co. also exited the university’s endowment.

Dianne Klein, a university spokeswoman, confirmed the sales.

The funds were sold on average at their par value, Bachher told the university board’s investment committee in September, according to minutes of the meeting and video that has since been made public. Bachher declined to comment further on the changes.

Prime Time

Investors have become more comfortable with secondary market sales as prices have risen, according to Preqin Ltd., a London-based financial research firm. The sale of private equity funds in the secondary market reached a record $42 billion in 2014, the most recent data available, according to Preqin.

“This is the prime time to sell in the secondary market because pricing is at its highest levels,” said Patrick Adefuye, Preqin’s head of secondary markets in London. “There’s a lot of investor appetite.”

The University of California sales show how much the secondary market for private fund stakes have evolved. In the wake of the credit crisis in 2008, Harvard University was forced to sell more than $1 billion of private equity funds at a deep discount as it sought to raise cash. Other schools such as Stanford University have canceled such secondary market sales when faced with poor pricing.

The California system also downsized its portfolio of publicly traded stocks to 5,700 from 12,000 and sold $1.1 billion of real estate investment trusts in the year ended June 30, Bachher told the committee in September. He said the overhaul generated $10 billion, of which $6 billion was reinvested last year, with the rest remaining in cash.

Cutting fees and concentrating money with the best managers boosted performance, Bachher said. The California system’s $8 billion endowment had a 7.2 percent return in the year through June, besting peers such as the University of Texas and University of Michigan, according to data compiled by Bloomberg. The system’s $55 billion pension fund was up 4.5 percent, better than twice an internal benchmark, according to a University of California annual report.

New Ventures

“Hundreds of private equity managers and relationships for very small teams are simply not manageable,” Bachher told the board’s investment committee.

Since Bachher arrived, the university has said it will commit $1 billion to clean energy innovation in a partnership with Bill Gates as well as $250 million to new ventures emerging from the state’s 10-campus system. A $3.9 million commitment was made last year to Mission Bay Capital, an early-stage investor in University of California-related startups, according to quarterly reports.

Regis Kelly, former executive vice chancellor of the San Francisco campus who heads Mission Bay Capital, said the investment office realizes it needs to do more to help research make the transition from the lab to society. He said the private equity portfolio will only benefit with improved performance.

“The University of California has been punching below its weight,” said Kelly, who is also a senior adviser to Janet Napolitano, the university system’s president since 2013.

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