CHARLOTTE, N.C. -- Thanks to a lineup of blockbuster IPOs such as Red Hat Inc. and VA Linux Systems Inc., the Duke Endowment's private equity portfolios returned a dazzling 151% for the year ended Sept. 30, said Brad Alford, who oversees the private equity program.
The $2.3 billion Duke Endowment, which is actually a foundation, was started in 1924 with $107 million from industrialist James Buchanan Duke.
Mr. Alford credits the foundation's good fortune in owning initial public offering success stories to investing with some of the top venture capital firms that backed those companies.
Mr. Alford, who four years ago came to Duke from the Emory University Endowment to create Duke's private equity program, said he probably will have to rebalance early this year after the 1999 returns are finalized.
"Because some of those stocks appreciated so, it looks like they're going to be north of 200%, which puts the (private equity) allocation around 20% to 25% of assets, while the target allocation is just 15%," he said.
Since the program's inception, Duke has made 48 commitments ranging from $5 million to $25 million each to 28 private equity partnerships. It has committed a total of $337 million.
Of that, $173 million has been drawn down by the general partners. And $55 million already has been returned to Duke in distributions, leaving the portfolio bigger than its planned allocation.
It was worth $400 million at year's end, Mr. Alford estimated, mainly because of the stratospheric performance of some of its venture capital partnerships, some of which have been returning more than 1,000% on an annualized basis. Mr. Alford wouldn't reveal details.
Duke must give away 5% of its assets each year to maintain its tax-exempt status. Duke University, which has its own endowment fund that is separate from that of The Duke Endowment, is the largest beneficiary of the grant money. But the foundation also gives to three other educational institutions, health care institutions in North and South Carolina, non-profit programs for needy children, and rural United Methodist churches and retired ministers in North Carolina.
Duke's overall target allocation is 25% domestic equities, 20% fixed income, 15% absolute return/hedge funds, 15% private equity, 10% international equities, 5% high-yield bonds, 5% energy and 5% real estate.
Because the portfolio is somewhat "out of whack" now, as Mr. Alford put it, he won't add any new private equity investments for a while. Instead, he plans to maintain his positions and wait for more distributions to be returned.
The private equity program is weighted toward venture capital (70%), with the remaining 30% in leveraged buyouts.
"There is more opportunity in venture cap, where more money is being raised," Mr. Alford said.
Duke focuses its venture capital investments on technology and health care, diversified by region and stage of development.
Were he starting the program today, Mr. Alford said he might not be able to invest in some of the partnerships, because "money has become such a commodity. Certain venture capital funds such as Kleiner Perkins Caufield & Byers are by invitation only and Duke was not invited to that party," he said.
But Duke is a limited partner of Sequoia Capital, another sought-after venture firm that makes it difficult for new investors to gain entry.
"To get in, I did a lot of legwork," Mr. Alford said. "I begged and pleaded. I visited with them several times, and finally we were able to participate. They liked the idea that we are doing good by giving money away."
A lot of venture capitalists warm to that idea as well as to the fact that endowments and foundations are long-term investors, Mr. Alford said. But there are many venture firms that prefer to invest with an entity that brings them deals, and Duke doesn't have that capacity.
Other venture funds in the Duke portfolio are North Bridge Venture Partners, Draper Fisher Jurvetson, Battery Ventures, Institutional Venture Partners, Redpoint Ventures and Benchmark Capital.
Mr. Alford said that Duke invested with Benchmark before the fund owned eBay Inc., which put it on the map as a hot venture capitalist. In September, Benchmark brought Red Hat public at $14 a share. The stock ended the year up 1,409% from its offering price. It's now Duke's second-largest holding at 30 million shares. Duke's largest holding is Duke Energy Corp., which makes up 25% of the foundation's total assets.
The fourth quarter of 1999 was the best quarter ever for the foundation's private equity portfolios, because several of its holdings went public in offerings that have surged.