University of California Fund to Double Private-Equity Holdings

(Bloomberg) -- The University of California plans to double the endowment’s investments in private equity and trim stock holdings, the latest move as it tries to improve performance.

The $9.9 billion endowment had a 7.1 percent investment gain for the six months through Dec. 31, propelled by global stocks and private equity. Endowments of all sizes gained a median 4.4 percent in the same time, according to Wilshire Trust Universe Comparison Service, a database provided by Wilshire Associates.

Jagdeep Bachher, who has been trying to boost performance since he became CIO almost three years ago for the 10-campus state system with $103 billion in endowment, pension and retirement assets, said he’s focused on long-term results and managing risk.

“It’s not a short-term target,” Bachher said Wednesday in an interview. “Timing isn’t our priority. I guarantee I’m not going to just be filling buckets.”

Bachher, at a board of regents meeting Tuesday, said the private equity asset allocation in the endowment will almost double to 22.5 percent from 11.5 percent. The target for equities will be reduced to 30 percent from 42.5 percent. Absolute return, which includes hedge funds, will increase marginally to 25 percent from 23 percent.

Hedge funds in the endowment have been cut to 65 from 175 about two years ago, Edmond Fong, a managing director, said at the meeting.

The investment office is “looking like hawks” for opportunities to cut fees, Bachher said, and performance fees are paid if the manager delivers above a hurdle rate.

“No hurdle rate, no business,” Bachher said at the meeting, without detailing the process or the rate.

Co-Investments

Bachher said in the interview that his office will look for venture capital investments and opportunities like co-investments to expand its private equity portfolio.

“We certainly like mid-market, buyout, any niche-y type strategy," he said. “We like focus.”

Bachher said his office is more heavily invested in public equities than private equity, and staff is trying to change the asset allocation so the endowment competes with its peers.

“If you look at the best performance of the last decade, you don’t have to look too far to notice something very striking,” Bachher said. “We’ve been much slower at going into private assets.”

The endowment’s investments declined 3.4 percent in fiscal 2016, the lowest return among U.S. colleges with assets of more than $4 billion, according to data compiled by Bloomberg. The loss was driven by poor returns from public equity fund managers and hedge funds.

University endowments of all sizes had their worst year since 2009, losing an average of 1.9 percent, according to National Association of College and University Business Officers and money manager Commonfund.

For the six months ended Dec. 31, the California endowment’s gain was 7.1 percent, according to documents prepared for the board meeting.

Asset Classes

Every major asset class contributed positively to the endowment’s performance, Fong said at the meeting. Gains were mostly driven by public equities. Non-U.S. equity, which accounts for 14 percent, rose 16 percent in the six months through Dec. 31 while U.S. stocks, which make up 21 percent, increased 11.2 percent, according to documents. Private equity had a 10 percent gain.

Bachher said his office doesn’t view investments in terms of their asset class, but instead for the risk they may pose.

“You’re buying risk in two different ways, it doesn’t matter in some ways that you’re shifting from one to another,” he said. “We’re making sure that we manage the equity risk factor by looking at more private opportunities.”

To contact the reporters on this story: Kate Smith in New York at ksmith304@bloomberg.net, Michael McDonald in Boston at mmcdonald10@bloomberg.net.

To contact the editors responsible for this story: Mary Romano at mromano6@bloomberg.net, Steve Dickson