PASADENA, Calif. - The $1.3 billion endowment of the California Institute of Technology set a new target of 25% of total assets for alternative investments, a significant commitment.
The old allocation to alternatives was small; it was invested primarily in venture capital and buy-out funds, said Philip Halpern, treasurer. Mr. Halpern joined Caltech in mid-1996, following four years as chief investment officer of the $27 billion Washington State Investment Board, Olympia.
Increasing alternative investment targets is nothing new to Mr. Halpern.
During his tenure with Washington state, he was involved in that fund's decision to expand its alternative investments to $2.4 billion from $1.6 billion, said James Parker, chief executive officer of the pension fund.
The actual increase is higher because the fund received distributions of $1 billion in calendar year 1996, said Mr. Parker. The board, with assistance from Mr. Halpern, increased the alternative investment target to 15% of total assets, up from 10%.
"It didn't surprise me to see that he (Mr. Halpern) would take that position on alternative investments with Caltech," said Mr. Parker. "He saw that returns have exceeded (those of) public equities."
Caltech's increase is dramatic, but fund trustees will move deliberately to commit and invest the money, Mr. Halpern said.
"Other universities are fairly opportunistic in this area," he said. "We have dipped our toe in the water in the past, and we have been successful.
"The worst thing you could do is have an allocation to something and just blindly get into it," said Mr. Halpern. "We will look at everything, but we will only invest if the expected hurdle rates are attractive."
"We will be looking at absolute return strategies, private equity (such as) buy-outs and venture capital," said Mr. Halpern. "If real estate deals are attractive, we will look at them within this category."
Because the Caltech staff is developing an implementation plan now, Mr. Halpern was light on the details of how the endowment will proceed. He said, however, the fund will seek to take advantage of perceived "competitive advantages" that it has in private equity.
These advantages range from Caltech's relative small size and uncomplicated decision-making structure to its technology transfer office as a potential source of deal flow, to the use of the faculty's expertise to evaluate the viability of technology, said Mr. Halpern.
"We do have some competitive advantages on the private equity side," said Mr. Halpern. "Pension funds have lots of money, but it is hard for them to be nimble and get invested in a meaningful way.
"We are a funny size, in that it is not cost-effective to hire lots of staff, but big enough to take it (investment in alternatives) seriously," said Mr. Halpern.
The fund has internal expertise; Mike Beblo, a senior investment analyst, recently joined from Frank Russell Trust Co., where he worked on alternatives.
The internal staff is complemented by advisers/consultants who have been used on a project-by-project basis, said Mr. Halpern.
The Caltech faculty is another resource Mr. Halpern thinks the endowment can tap, particularly in venture capital. He anticipated the faculty might be used to evaluate venture capital general partners that bring arcane technologies to the endowment.
The faculty also can be a potential source of deal flow, he said.
"Our faculty does a lot of research, a lot of which is commercializable," he said. "There is a source of potential deal flow.
"We have a technology transfer office here that tries to bring (faculty) ideas to market," he said. "We are a producer of product, so people will be interested in forming relationships with Caltech."
Some old relationships with the endowment have ended, however. The Carmack Group, a consultant to the endowment, and The Common Fund no longer are used by Caltech, confirmed Mr. Halpern.
Margaret Price contributed to this story.
