David Swensen, the chief investment officer of Yale University from 1985 until his death earlier this week at age 67, led a generation of money managers headlong into alternative assets such as hedge funds, real estate, timber and private equity.
Yet the co-creator of the influential “Yale Model” of investing was no cheerleader for private equity. In his book “Pioneering Portfolio Management” Swensen offers one of the most scathing assessments of the asset class ever written.
Among their flaws, he wrote, private equity firms generate lackluster median returns, especially in light of the leverage they use; mask the volatility of those returns; and charge exorbitant management fees. They also fail to distinguish between returns generated from leverage from those generated by improving company performance when charging carried interest.
His skepticism for alternative investments, even as he poured billions of dollars from Yale University’s endowment into them, remains a paradox of Swensen’s investment philosophy. It’s the main one I explored in a February 2009 column for Buyouts Magazine, “Swensen Exposes LBO Flaws.” I was pleased to observe that the university still includes a link to the piece on its “Dave in the Media…” page.
Swensen once told me at a cocktail reception that he read my columns and liked them–praise that has buoyed and sustained my confidence ever since. And when he published the second edition of Pioneering Portfolio Management more than a decade ago I worked up my courage and emailed to ask for what would turn out to be my only formal interview with him.
Swensen addressed the paradox by pointing to his team’s ability to pick top-performing private equity firms that went light on leveraging portfolio companies while making significant operational improvements.
In setting up one of my final questions of the interview, I noted that the first edition of his book came out amid the fallout of the Internet bubble bursting, the second amid the fallout of the financial crisis. So when would the third edition be published?
I was hoping to disarm him into giving me a major scoop. But Swensen was thoughtful and said there would be no more editions. “I’m done.”
Sadly that turned out to be true.
This article has been corrected to clarify that David Swensen considered median returns in private equity to be lackluster, especially in light of the leverage the use. The original version said that he considered returns in private equity to be lackluster. Swensen co-created the Yale Model of investing. The original version said he created it.