Harvard to pare down GP relationships

The $27.4bn endowment – one of the private equity industry’s most influential LPs – will continue to be an active player on the secondaries market, concentrating on ‘best-in-class’ managers.

Harvard’s $27.4 billion endowment will continue to reduce its private equity relationships to counter an “overcrowding” in the market, according to Jane Mendillo, president and chief executive officer of the Harvard Management Company.

“The field of private equity has become more and more crowded – with capital, with managers and with investors – over the last decade. Our expectation for this asset class are that returns will be more muted going forward, and we are even more committed to holding our fire for the best-in-class opportunities,” Mendillo said. Her comments were published in the endowment’s fiscal 2010 performance report this week.

“We will continue to have a meaningful level of exposure to this asset class over the long term, and we are making new commitments to fund strategies that we like, but we anticipate that the number of active relationships within our private equity and venture capital portfolio will be reduced, while the concentration will be increased in our highest conviction managers,” Mendillo said.

One way Harvard will look to tweak its private equity portfolio is through the secondaries market, where the endowment will remain an active player.

“When we are holding a partnership interest that is no longer core, or one that is core but is not sized correctly for our portfolio, we may look for a buyer who wants some of the position,” Jane Mendillo, president and chief executive officer of the Harvard Management Company, said in the fiscal 2010 performance report.

“Conversely, if we are interested in a geography or sector that is not currently represented in our portfolio, we may look to be a buyer of another party’s interest in an existing fund,” Mendillo said.

We anticipate that the number of active relationships within our private equity and venture capital portfolio will be reduced, while the concentration will be increased in our highest conviction managers.

Jane Mendillo

Harvard published its fiscal 2010 performance report this week, which showed the endowment experienced a reversal of the tough slog it faced in the prior fiscal year. It enjoyed a total investment return of 11 percent for the fiscal year, compared to a return of negative 27 percent in fiscal 2009.

Private equity generated a 16.2 percent return, compared to a return of negative 31.6 percent the prior year. Real estate, though improved from last year, produced a negative 2.7 percent return.

“Real estate values continued to correct downward during the year,” Mendillo said. “Nevertheless, real estate is one of the areas we find most interesting in terms of current and future opportunities. As a result, we have added experienced leadership to our real estate team that will enable us to strengthen [our] strategic position and … make high-potential investments over the next several years.”

Harvard will continue to reduce uncalled capital commitments, both to private equity and real estate managers, Mendillo said. Uncalled capital commitments at the end of fiscal 2010 stood at $6.5 billion, down from more than $11 billion two years ago, she said.

Harvard’s plans to reduce its private equity relationships, while concentrating more capital to its favourite managers, is a move other limited partners have made.

The California State Teachers’ Retirement System, for example, has been culling its private equity programme, dropping underperforming managers and keeping its eyes open for “new and potentially less traditional” opportunities.

Earlier this year, Anthony Tutrone, who runs the alternative investments division at Neuberger Berman, said the private equity fund of funds was reducing the number of relationships it has with managers, sticking with GPs who deliver the best performance but also meet high levels of governance and transparency standards. The firm is not cutting its commitment to the asset class.