University of Nebraska Foundation’s $2 billion endowment has posted strong returns recently, thanks in part to the power of its private investment portfolio and the shift in industry power dynamics to favor limited partners, Brian Neale, chief investment officer, said in an interview.
This past fiscal year ended June 30 was particularly strong, as the endowment posted a net return of 14.5%. While the numbers were short of the endowment’s policy benchmark return of 16.8%, it was the second-highest return among the 53 college and university endowments with $1 billion or more in assets that Pensions & investments has tracked as of Dec. 4. The median return of the universe was 9.6%.
Neale joined the Lincoln-based foundation in June 2014 as its first CIO-level official and was previously senior investment manager, corporate treasury, at MedStar Health, Washington, where he managed a $2.5 billion pension fund.
“What I inherited at that time was really what you would consider your classic 70/30 portfolio with very little exposure within private markets,” said Neale.
At the time, Neale said the private markets portfolio was at a nascent stage and a hedge fund portfolio was being built out around the same time.
“You fast forward to today, and the portfolio does look markedly different,” Neale said. “We have a 40% target to privates, so we’ve gone from zero to 40% in terms of the target. We’re probably closer to about 27% to 30% actual NAV (net asset value) today, but the point is we’re building toward that 40%.”
Neale said he made the decision about eight years ago to eventually reach a 40% target and has gradually raised the target over that span of time.
“At the same time, we took some steps internally to increase our flexibility around liquidity, just how we manage the operations of the foundations as well as our spending,” he said. “That additional flexibility really allowed us to be more return-seeking vs. mitigating volatility within the portfolio. To be clear, all things being equal, I’d prefer to have less volatility, but in order to get the returns that we need to generate, we’re willing to make that trade-off.”
The return the foundation needs is significant, said Neale. The foundation’s spending policy is 6.5%, and when accounting for inflation as well as the desired growth rate, he said they are looking at a nominal return target of about 9.5%. A more typical spending policy for endowments and foundations is 5%.
“There is no shortage of pundits on Wall Street than can opine, but there’s some validity to what we’re hearing about, (which is) a decade of 3% or 4% returns right from U.S. stocks. If you look at the private equity ratio right now, as well as earnings growth, you do the math, and it’s pretty east to see where 3% to 4% is probably not an unreasonable expectation. So you’re trying to get 9%. How do you get there?”
Neale said his office is doing so by continuing to look for “uncorrelated opportunities that we feel we have an edge in due to our tolerance for illiquidity.”
The private markets remain the foundation’s best opportunity for return enhancement, even as the IPO market is largely shut down, M&A activity remains low and the impending arrival of a new economic regime in January have all created a number of question marks looking ahead.
More selective
“One of the things that we’ve done is really tried to be more direct in building out our private program,” said Neale, “taking advantage of this tough fundraising environment by introducing ourselves to managers that maybe three or four years ago would have been harder to access. Not all those conversations are productive, but the response that we’ve received has been very, very positive in terms of folks looking at what we can bring to the table,” being under target with cash to deploy.
Neale said his office has been a little more selective in recent years in terms of their relationships with the private market.
“I think three years ago, the power dynamics definitely favored the GP relationship, and I think that shifted some to the LP side, so we’re trying to take advantage of that,” said Neale.
Neale also said another advantage his office has is that they’re only now building out their private investments program, without exceeding target allocations that occurred for some institutional investors when there were stellar returns on their private investment books before 2022.
“Now we’re seeing the flip side of that, and you know to be clear (in the most recent fiscal year), our private portfolio did lag the public markets, but our privates were up about 10.9%, so by all measures, still not a bad year,” said Neale.
The foundation measures its private investments against a blended benchmark of public market indexes plus 3 percentage points, and so for the fiscal year ended June 30, the private portfolio did lag its 20.7% benchmark.
However, for the three and five years ended June 30, the private portfolio outpaced that benchmark by 2.8 percentage points and 1.5 percentage points, respectively, according to the foundation’s most recent endowment report.
As of June 30, the endowment's actual allocation was 59.1% public equities, 25.2% private investments, 7.4% real assets, 5.7% multiasset credit, 1.6% transition to equity and private investments, and 1% fixed income and cash.
“We’re patient capital,” said Neale. “We’re long-term capital. We like to say our time horizon is forever, but the reality is we look at the five-year rolling as our basis for tracking. But I think we’re going to look back at this period and view it as I think there’s going to be some very productive vintage years.”
