Yale's Endowment Shows Its Muscle in Negotiating Manager FeesBy
Fund cites payments, terms in its 2016 investment report
Endowment defends fees for managers who’ve delivered returns
Yale University’s $25.4 billion endowment is willing to pay for performance. Just not at any price.
In its 2016 investment report, the team, led by Chief Investment Officer David Swensen since 1985, said it “negotiates fees and terms throughout the endowment portfolio.” The report defended the fees it pays to external managers because they’ve delivered outstanding performance.
“They’re doing all the right things to even out the playing field in an environment where there is a strong demand for the best managers,” said David Fann, chief executive officer of TorreyCove Capital Partners, which advises institutional investors on alternative assets.
Here’s how fees and terms are structured by asset class, according to the report.
Yale said it has “little bargaining power” in some markets, including leveraged buyout and venture capital. Top-tier firms “present the greatest challenge,” Yale said, because of overwhelming demand from investors. Yale said its team uses “transaction, advisory, and monitoring fee offsets, strong clawback protections, and material general partner co-investment.”
Deal terms in absolute return include management fees of less than 2 percent, carried interest payments of less than 20 percent, and hurdle rates that are frequently based on the one-year U.S. Treasury rate.
Most of the foreign equity managers have a “market-based or fixed hurdle in combination with a rolling incentive fee structure aligned with a long-term investment time horizon.”
Yale is frequently a lead investor, using the position to negotiate terms for all limited partners with annual fees that “offset firm overhead, hard preferred returns in the 5 percent to 6 percent range, and a 20 percent carried interest structure.”
All domestic equity managers must meet a market-based hurdle or a fixed hurdle as part of incentive compensation structure; the majority have management fee rates that scale down as firm assets grow.
Managers use a variety of tailored fund and fee structures suited to their specific investment strategies.