Endowments & Foundations Part 1: A Basic Overview

Mod Note (Andy) - as the year comes to an end we're reposting the top discussions from 2015, this one ranks #31 and was originally posted 6/28/2015.

Endowments & Foundations Part 1: A Basic Overview

I think the most useful threads I've read on this site were threads from people like @BlackHat who explained a specific industry in finance and what they do. They always helped while I was in undergrad and was trying to figure out what I wanted to do so I thought this might help some people potentially looking into the industry.

Endowments & Foundations (E&Fs) are an industry that doesn't come up too much on this site and when I was evaluating my job offer there weren't a lot of resources out there to help my decision. Over the next few months I'm going to post a few threads like this one that go into detail on various aspects of E&Fs and answer any questions people may have about the industry. To give you my background, I currently work as a Jr. Analyst at one of the largest E&Fs in the US. Let's get started with a basic overview of the industry, how it works, and what a typical day is like.

What is an E&F?

E&Fs are large pools of money that benefit a specific charitable cause. Endowments benefit academic institutions and Foundations typically write grants (though some continually fund something specific like an endowment) that can benefit a wide range of causes. E&Fs will typically pay out in the range of 4-5% of AUM to each year. Payout rate varies between E&Fs but this is about the average from my experiences. So if a university has a $1B endowment, each year the university is receiving approximately $45MM from the endowment.

As I'm sure many of you know, David Swenson of Yale is considered the godfather of the industry and has a very popular book called Pioneering portfolio management that explains the endowment style of investing. Today, almost all E&Fs use some form of Swenson's ideology. One of the most interesting things about E&Fs is that they have a perpetual life - meaning that they invest with the idea that they should last forever. No one has a longer time horizon than E&Fs and as a result they are able to invest in some really interesting ways.

Many pensions, sovereign wealth funds, and FoF try to use the E&F model of investing, but it doesn't typically work as well for them for a few reasons. These types of funds have shorter time horizons (especially FoF because investors can pull money from them and move elsewhere) and managers like to take money from E&Fs because of the cause. My biggest surprise about working in the industry is how much managers would rather have your money over other LPs because it's typically stickier and benefits a good cause. This is most notable in the VC space where there are certain managers that everyone wants to give money to, but they will only take so much.

The Nature of the Work

E&Fs do fund investments and co-investments. The work is divided into two main areas: alpha due diligence and beta due diligence. E&Fs are required to understand the global investment environment and give the money to the managers who are going to generate the most alpha. Understanding this is important because you can give money to the world's greatest small cap manager who generates an alpha of 500bps, but if the S&P outperforms the Russell by 1000bps you're in no better position than if you bought into an S&P500 index ETF. This is why both alpha and beta are important.

Our beta due diligence ranges from Private Equity vs. Public Equity vs. Fixed Income to US vs. Internationals to Brazil vs. Mexico and so on. This is obviously never 100% obtainable, but we try to understand every market in every region of the world as best as possible. I'm constantly being sent articles, books, research reports, etc. about something different that I need to read and summarize for my boss (I've gotten 4 since I started writing this). I sit in on a lot of fund's investor calls just to hear what they are saying about their respective markets. Ultimately, we aggregate all the information we can from varying sources and use this to generate our own research and investment theses. At least at my shop, we don't rely on any external parties (like consultants) to give us ideas - we come up with everything in house.

Alpha due diligence is simply manager selection. This is the part where we try to find the best investors in the world. If we think Brazilian Private Equity is the best place in the world right now (we don't in case you're wondering) we will then try to find the best PE manager in Brazil. The due diligence process is pretty long and can take more than a year in some cases. It involves multiple meetings with the managers and a lot of research on our part. While we do look at past performance, this isn't always the best indicator of how we chose who to invest with. We look for trends and sound reasoning more than anything.

One of the more interesting parts of the job are manager pitches. I like these because you get to meet a lot of really interesting people and hear about some cool (and really strange) investment ideas. At the junior levels, the job is a lot of analyzing and summarizing for senior guys and as you work your way up it becomes more big picture and relationship oriented. As you get higher up there's a lot of travel involved which can be a really interesting way to see different parts of the world.

Day in the Life

One of the things I like about this job is that I get to do a lot of different things. The work I do varies every day, but I'd consider the following to be as close to "typical" as possible.

7-715: Arrive in the office, grab a coffee, and read all the major new for the day.
830: Put together my to-do list for the day and figure out what I need to accomplish; run some things by boss before I get started.
900: Update some of our models that track market indicators. I'm responsible for distributing internal research reports to the team so it's better to get these out earlier in the day.
1000: The guy who runs our Hedge Fund book has a conference call with our biggest HF relationship at 1030, he comes by to invite me to the call.
1030: Sit in on the manager call. There's no need for me to be here, but I go to these just to get information. You learn a lot from listening to good managers.
1115: Back at my desk. My boss sent me a few readings he wants me to analyze and summarize. I'll put together a high level overview and send the important information out to the team.
1200: Lunch; split 50/50 between going out of the office and eating while I work. I know a lot of people in the area so I try to get out of the office for a bit every day.
100: Work on due diligence for a manager we're looking into. Typically involves modeling out some risk/reward scenarios and finding patterns or trends in the manager's return or risk profile.
230: Real Estate fund we invest in is having an investor call on RE in Australia. They're considering starting a new fund dedicated to that region so they want to educate there investors on what's going on in the region. No one else is able to make the meeting so I'm sitting in and taking notes. After the call is over I'll send out a summary to the team.
400: Start working on an ad hoc exposure project. My boss is interested in diving deeper on our PE portfolio and has asked me to create a model we can use for that.
530: Read through the headlines again and see if anything major occurred today.
630: Typically when I leave

Prestige, Comp, & Exit Ops

It wouldn't be a good WSO post if I didn't talk about prestige now would it? As you can tell from the typical day above, hours are typically in the 55-60 hour range with occasional work on the weekends. Not a 9 to 5 corporate finance gig, but definitely not IB either. Comp is surprisingly good. I think it's pretty standard across the industry regardless of location. I'm in a pretty low CoL place and my base is almost the same as an IB Analyst.

Exit opportunities are more up-in-the-air. I constantly see people posting that FoF -> PE is almost impossible, but I don't believe the same is true for E&Fs. We obviously don't do the same fundamental modeling that someone in IB does, but you learn a lot about being an investor when working for an E&F and funds value that. I've spoken with 2 local MM PE firms, both of which said they would consider me for PE Associate roles if I wanted to go that route. At this point I'm happy working in the E&F space, but it's good to know that there is exit potential. If I end up making this jump, I'll let you guys know.

Conclusion

Hopefully this was a helpful introduction to the E&F industry. If you have any questions about E&Fs or suggestions for Part 2 just let me know.

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Comments (39)

Jun 19, 2015

Excellent post. It's always interesting to read detailed reports about different industries.

Jun 19, 2015

thanks for posting, will frontpage now and next week, plus just came across your "reneging" post, will frontpage that next week as well

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Dec 29, 2015

Thanks Andy!

Jun 19, 2015

any interest in doing a webinar on this topic? if so send me a pm, thanks!

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Jun 19, 2015

Great post

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Jun 19, 2015

Well written

How are you coming in at 7am ?? These places are nonprofits...

Dec 29, 2015
Going Concern:

Well written

How are you coming in at 7am ?? These places are nonprofits...

Nonprofit is a loose term. Yes we're technically one, but the investment teams at E&Fs don't necessarily work or get paid like one. Our most senior director gets in around 530-6 every day. My impression of the AM world is that people like to get in early because they want to know what's going on in the world.

Jun 19, 2015
BlueWing:

Going Concern: Well written
How are you coming in at 7am ?? These places are nonprofits...

Nonprofit is a loose term. Yes we're technically one, but the investment teams at E&Fs don't necessarily work or get paid like one. Our most senior director gets in around 530-6 every day. My impression of the AM world is that people like to get in early because they want to know what's going on in the world.

It's unlikely that your bonus will be anywhere near what you would get doing the same exact thing at a for-profit (ie a FoF), unless you're at the harvard or yale endowment, or somewhere where the endowment fund operates independently of the endowment. Your base might be similar, I'll buy that

At the end of the day your team exists to provide the funding for a charitable cause. That does not carry the same sense of urgency as trying to maximize revenue or output in order to please various stakeholders (investors/LPs) or clients. You don't need to come in at 530 to understand what's going on in the world, at least to the degree that's required for an extremely long term investment horizon

In industry lingo the investment team of an endowment or foundation isn't referred to as an asset manager, it's typically referred to as an asset owner. Again the exception is something like the Harvard Management Company where they do a lot of direct investing and exist independently, so in that case asset manager is more appropriate

I'm not trying to knock your post

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Dec 29, 2015
Going Concern:

BlueWing: Going Concern: Well written
How are you coming in at 7am ?? These places are nonprofits...
Nonprofit is a loose term. Yes we're technically one, but the investment teams at E&Fs don't necessarily work or get paid like one. Our most senior director gets in around 530-6 every day. My impression of the AM world is that people like to get in early because they want to know what's going on in the world.

It's unlikely that your bonus will be anywhere near what you would get doing the same exact thing at a for-profit (ie a FoF), unless you're at the harvard or yale endowment, or somewhere where the endowment fund operates independently of the endowment. Your base might be similar, I'll buy that

At the end of the day your team exists to provide the funding for a charitable cause. That does not carry the same sense of urgency as trying to maximize revenue or output in order to please various stakeholders (investors/LPs) or clients. You don't need to come in at 530 to understand what's going on in the world, at least to the degree that's required for an extremely long term investment horizon

In industry lingo the investment team of an endowment or foundation isn't referred to as an asset manager, it's typically referred to as an asset owner. Again the exception is something like the Harvard Management Company where they do a lot of direct investing and exist independently, so in that case asset manager is more appropriate

I'm not trying to knock your post

I appreciate the point of view and some of what you said is definitely true. I think a lot of what you said varies place to place, and I'm fortunate to be at a firm that operates at a pretty high level. I think the sense of urgency about performance is probably higher at my shop as opposed to smaller E&Fs. Mostly due to the backgrounds of our senior guys. However, I do agree getting in that early is a little ridiculous. I don't know what FoF bonuses are, but the target for a first year analyst is 15% +/- 5%, which to me is pretty competitive given what we do.

It's good stuff to have out there though, because a lot of what you said is true to parts of this industry and it's the stigma a lot of people have.

Best Response
Jun 19, 2015

I'm well endowed

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Jun 20, 2015

Thanks for writing this! How was the recruitment process and how did you find about an e&f position?

Dec 29, 2015
bbrraww:

Thanks for writing this! How was the recruitment process and how did you find about an e&f position?

It's pretty unstructured. I found out through the connection of a connection. I actually didn't even know they were hiring, but I met someone through a mutual connection and just started talking to him about his job. Eventually he asked for my resume and told me they were hiring. We also use headhunters, but I honestly don't know which ones because I'm not involved in that process and didn't go through it.

As for the process, it's pretty thorough. Multiple rounds of interviews both over the phone and in person. Basically had a superday where you meet with a bunch of people. Interviews are mostly fit and markets related. Typically a case study as well to see how your work looks, how you think about investing, and how good you are at stating your opinion.

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Jun 22, 2015

Awesome post.

Can you tell me more about the case study? Was it take home, modeling intensive, time sensitive, etc.?

Dec 29, 2015
Pokemon Master:

Awesome post.

Can you tell me more about the case study? Was it take home, modeling intensive, time sensitive, etc.?

Had a little less than a week so I'd say not time sensitive. It's a combination of using excel to analyze a potential manager and creating a write up about your analysis that you then have to present. Mostly about how you think.

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Jun 20, 2015

This is an awesome post. One question: many people I see in this space have the CFA, is there a (un)spoken norm for people to obtain one or is it a route to become a 'lifer' at one of these places?

Dec 29, 2015
NESCAC:

This is an awesome post. One question: many people I see in this space have the CFA, is there a (un)spoken norm for people to obtain one or is it a route to become a 'lifer' at one of these places?

It's a spoken norm. I think everyone but maybe one person at my place has it. Most places pay for it. At the premba level it isn't required because they understand you may only do this for a few years before b school, but if you want to make a career out of this its practically a right of passage.

Jun 20, 2015

Thanks for this. How common is it for folks to go from FoF/manager research into long only/LS investing as an analyst for public equities?

Pretty common sentiment that it's not possible on WSO - I've heard otherwise in real human life, but I'm curious on your take.

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Jun 19, 2015
pktkid10:

Thanks for this. How common is it for folks to go from FoF/manager research into long only/LS investing as an analyst for public equities?

It's not common but certainly possible. Lot more likely if:
a) you're willing to go to a small shop or city that's not a financial hub
b) you get a top MBA or CFA first
c) you have some sort of relevant experience before your FoF/manager research job
d) you have a strong network

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Jun 20, 2015

Thanks, SB to you. Time to start checking some boxes

Dec 29, 2015
pktkid10:

Thanks for this. How common is it for folks to go from FoF/manager research into long only/LS investing as an analyst for public equities?

Pretty common sentiment that it's not possible on WSO - I've heard otherwise in real human life, but I'm curious on your take.

I'd second what Going Concern said. I think it's doable, but definitely not the traditional or easy path. This is the path I'm hoping to go down, so I can speak to this more in the future. While you don't get the hardcore modeling work at an E&F, you really learn how to think like an investor which I think so a valuable skill.

Jun 22, 2015

I agree what you said its good you working in a big endowment. For me, Im in a smaller team but similar to your work as junior analyst. But we do less modelling and don't really have a basis or particular strategy. I am not sure how I can get into a larger endowment fund... coz it seems its a quite niche business and as you said they do not have formal/structured recruiting

Jun 21, 2015

Appreciate this and look forward to upcoming posts

"Whenever you feel like criticizing any one, just remember that all the people in this world haven't had the advantages that you've had."
-F. Scott Fitzgerald

Jun 22, 2015

Amazing post, SB'd - thanks for writing it up.

Would love to know more about the structure of your firm (junior vs senior employees) and how folks scale / move up within the org - basically you touched on exit opps, but what happens if you want to stay there and climb the ladder? How do your pay, responsibilities, and title scale?

Dec 29, 2015
fryguy22:

Amazing post, SB'd - thanks for writing it up.

Would love to know more about the structure of your firm (junior vs senior employees) and how folks scale / move up within the org - basically you touched on exit opps, but what happens if you want to stay there and climb the ladder? How do your pay, responsibilities, and title scale?

No problem, glad you enjoyed. I can explain responsibilities/titles, but I don't want to discuss pay because I don't have any data to back that up. Since I'm a Jr. Analyst, that's the only pay level I know at this point. Though from my understanding the pay is pretty good at the senior levels.

Hierarchy:
- CIO
- Senior Director
- Director
- Associate Director
- Senior Analyst
- Analyst
- Jr. Analyst

CIO runs the place and approves just about everything. Senior Director and Director have same responsibilities, one has just been there longer. These guys are running a specific part of the book, whether it be public equity, hedge funds, private equity, etc. They handle the relationships for their portion of the book, recommend investments to the investment committee, and put together research on managers/themes for their book. Associate Directors do the exact same thing as Directors, but on a smaller scale. ADs typically run a portion of a Directors book. For example, an AD may run the VC book for the Director who oversees all Private Investments. Director has final say, but the AD is the one doing the majority of the work for this book. Senior Analyst and Analyst do the same with the former having more seniority. This is where someone post MBA or post IB would come in. They typically work under ADs and Directors and focus almost all time on due diligence. Junior Analysts split there time about 70/30 between research & reports and due diligence.

Jun 23, 2015

Interested to know if there is any feeling of goodwill about the work you are doing. I think one of the major knocks about working IB / PE is that the work feels soul sucking in a way (only interested in the bottom line). Do you get a sense of chartiableness in the work you do or is it just a business trying to make money like any other investment shop, just with longer investment horizons?

Thanks for the post, really enjoyed it and looking forward to reading the rest.

Dec 29, 2015
Forgetfullmonkey:

Interested to know if there is any feeling of goodwill about the work you are doing. I think one of the major knocks about working IB / PE is that the work feels soul sucking in a way (only interested in the bottom line). Do you get a sense of chartiableness in the work you do or is it just a business trying to make money like any other investment shop, just with longer investment horizons?

Thanks for the post, really enjoyed it and looking forward to reading the rest.

Yes and no. We all know what we're benefiting and we are definitely reminded of that by the most senior people, but in the end we need to do the best job possible to make the portfolio have the highest possible return. In the end, this is finance and when people's bonuses are tied to performance they are going to make sure you do it right.

Jun 28, 2015

Great post, Sb'd

In terms of exit opportunities, do you think skills/experience from E&F are transferrable to a L/S fund?

Dec 29, 2015
Lion Cub:

Great post, Sb'd

In terms of exit opportunities, do you think skills/experience from E&F are transferrable to a L/S fund?

I answered this one earlier in the thread, but the basic answer was that I think its doable but not necessarily an easy path.

Jun 28, 2015
  • What are the top endowments to work for in the industry?

-all in how much do senior-level employees make a year?

Dec 29, 2015
FeedMeDealFlow:

- What are the top endowments to work for in the industry?

-all in how much do senior-level employees make a year?

Endowments: Yale, Harvard, the typical names you here
Foundations: MacArthur, Ford, Howard Hughes, Hewlett, Packard

In the foundation space there's a lot of $5B-$10B foundations that are known for being really good at what they do. Some also stay super under the radar so you'll never hear of them. The ones above are for the most part well known.

As for salary, this is pretty variable based on size. Yale's top 2 make over 3MM a year and a lot of the ivy universities have similar levels. I honestly have no idea what the top guys where I'm at make, but across the board it's a pretty well paying industry.

Jul 2, 2015

Great read, thanks for this. My background is in PE FoF / LP consulting and I only worked with a handful of E&Fs so I'm curious to hear more about it from the inside, as it relates to PE/VC.

  • What's your allocation like to alternatives? Within that, approximately how much to PE?
  • You mentioned doing everything in-house; have you ever heard any outside FoFs/consultants pitch to you on the PE side? If so, I'm curious what your opinions are of them, if you can speak to any specifically.
  • How much co-investment do you do? Ever thought about "outsourcing" that to a dedicated CI FoF or is this something else you do entirely in house?
  • You mentioned managers liking your "stickier" money; do you almost always get the full allocation you ask for in a fund? How typically do you get cut back or shut out completely?
  • Can you give the backgrounds of the CIO and the Senior Director/Director of PE (generic to preserve anonymity, of course)? I've done some thinking about my own career and that would be an interesting place to end up long-term.
Dec 29, 2015
Hugh Myron:

Great read, thanks for this. My background is in PE FoF / LP consulting and I only worked with a handful of E&Fs so I'm curious to hear more about it from the inside, as it relates to PE/VC.

1) What's your allocation like to alternatives? Within that, approximately how much to PE?

2) You mentioned doing everything in-house; have you ever heard any outside FoFs/consultants pitch to you on the PE side? If so, I'm curious what your opinions are of them, if you can speak to any specifically.

3) How much co-investment do you do? Ever thought about "outsourcing" that to a dedicated CI FoF or is this something else you do entirely in house?

4) You mentioned managers liking your "stickier" money; do you almost always get the full allocation you ask for in a fund? How typically do you get cut back or shut out completely?

5) Can you give the backgrounds of the CIO and the Senior Director/Director of PE (generic to preserve anonymity, of course)? I've done some thinking about my own career and that would be an interesting place to end up long-term.

Great questions! I went ahead and numbered them to make it easier to respond.

1) Depends what you mean by alternatives. If you mean HF/PE, then we're 35% to 45% in those with about a 60/40 split towards PE. We invest in other nontraditional investments that don't fit anywhere else so we consider them alternatives, but I'm assuming you mean the standard PE/HF.

2) FoFs and consultants do pitch on the PE side at some places, but we don't usually do that. If a FoF manager called us and wanted to meet about an opportunity we'd most likely take the meeting but I think we've only ever invested with 1 FoF ever and it was for a very specific reason.

3) I'd say about 10% of the PE deals we do are co-investments. I doubt we'd ever outsource this because we have a specific way of dilligencing co-investments. Typically only do them in certain areas and with teams that we know very well.

4) We get our full allocation most of the time and don't ever get shut out if we get that far in the process. Typically if we are getting our allocation cut its because we were either late to the party or there's a lot of other E&Fs investing in the fund so we don't have as much leverage. With our typical deals, we can use our cause as a reason to not get cut when a manager needs to lower allocations somewhere.

5) Most have been in the E&F business for a long time. I think one of our PE guys used to do RE PE, but other than that they are all career E&F investors.

Thanks for the great questions and I hope this helped! Best of luck with the transition.

Sep 15, 2015

This is by far one of the best posts I have ever read on this website!

I just accepted an offer from one of the top endowments and will start working after I graduate this December. I was wondering how long you have been working in your current shop because your knowledge about E&F really dwarfed that of mine and I am really embarrassed. Anyways I will be looking forward to reading more from you.

Dec 29, 2015

Glad you enjoyed it. I'm less than a year in, but I took a very proactive step to learn as much as I could prior to starting and once I got on board. I think I have more responsibility than your typical entry level analyst too, so that's definitely helped. As long as you're at a top endowment you'll get up to speed pretty quickly. That can't be said for all E&Fs -- there's a big difference between those that are good and those that aren't.

Oct 13, 2015

Just curious if you went to work for an endowment at a pretty prestigious institution, how does this bode for your chances of entry into their business school later down the line?

Also, what are the endowments doing with all the excess cash? If 4-5% is going back to he university, what are they holding all the other cash for? Couldn't that money be used for more scholarships or bringing in more professors etc?

Nov 14, 2016

Great post, it is very helpful. How do you break into E&Fs? Most do not have much of an online presence and are not exactly posting open positions. Is an email expressing interest with an attached resume the best approach?

Oct 27, 2017

Thanks for the post. Fairly specific E&F question:

How do you imagine exit ops and b-school placement out of the Gates Foundation as an investment analyst?

Oct 27, 2017
Feb 26, 2018