LP interview: Rockefeller University

Rockefeller University was at a turning point in 2011. The New York-based endowment had sunk to the bottom quartile among its peers for five consecutive years. Something was needed to kickstart new growth. To a large degree, Asia was the answer.

That year, the firm brought in Amy Falls, a former Morgan Stanley executive, as CIO. Her first priorities were to build out a new team and reconstruct the portfolio. Within six months, she engaged Thomas Lenehan as deputy CIO, and the strategy started facing East. By 2012, the new team had made their first investment in Asia via Axiom Asia’s third fund-of-funds.

“We thought we were a little bit late to the game as it relates to Asia,” Lenehan says. “We thought we missed the initial wave of investment and innovation, and we’d be better off in Africa or Latin America or other emerging markets. We’ve already been able to enjoy some terrific returns out of Asia, and I still classify our program as in its infancy. It’s going to continue to grow its overall share in the endowment, and our committee is happy with it.”

Tianhao Wu, a Shanghai native with experience as a private equity analyst at China International Capital Corporation, was brought on board in 2014 as an analyst, rising to director of investments by 2017. Between 2011 and 2020, assets under management (AUM) rose from $1.6 billion to $2.4 billion, while Asia went from effectively zero to 10% of the portfolio. The interim target is 15%.

“The things that attracted us were the fundamental economic growth, but more importantly, the very strong entrepreneurship and innovation, and the healthy, improving capital markets. Those support a very promising venture and growth investment opportunity,” Wu says.

“What we have seen in the past in buyouts has not been as attractive. That doesn’t mean it won’t be in the future, but the reason we want to invest in Asia is not to diversify for the sake of diversifying but really to look for higher return potentials – and that’s what venture capital and growth managers can provide us.”

Venture rising

Rockefeller posted a 10.7% net return for the year ended June, ranking it in the top decile of its peer set. Annualized returns for the past three, five, and 10 years came to 10.1%, 8.5% and 9.6%, respectively. Private equity was the top performer in 2020 with a 33.7% net return. The long-term target for the asset class is 18-20%.

“Venture capital has been a key driver to our performance for multiple years,” Wu observes. “Similarly, in Asia, we are seeing our managers generating much greater outsized returns compared to the market indices and benchmarks on both the public and private side.”

Allocations in terms of asset class have increasingly reflected this thinking. Private equity and venture capital have grown from about 15% of AUM in 2011 to 30% currently. That’s 5% in excess of the 25% target, but there is no alarm in house given the performance to date. Some of the endowment’s earliest moves in this space were Kleiner Perkins funds in the 1990s that went on to achieve returns of up to 17x.

During the past decade, real assets have climbed from around 6-7% of AUM to 13% with the addition of a natural resources portfolio, while long-short hedge funds have been reduced from 25% to about 10%. Total hedge fund exposure, including absolute return funds, now accounts for about 30% of the portfolio. Overall, alternatives is now around 70% of the pie.

“We think if you’re going to lock up your money and give up your liquidity – which is a very valuable asset for any long-term institution – you should only do so if you are getting a return to compensate for that,” Lenehan says, noting that allocations are reviewed several times a year.

“Some other large institutional money managers like pensions funds and sovereign wealth funds don’t necessarily think that way. They tend to think of the private world as a diversification of their public world that gives them access to things that they couldn’t otherwise access.”

With private equity playing a distinct role as returns enhancer, Rockefeller’s approach to alternatives as has tilted toward a relatively high risk-reward profile.

For the year ending in June commitments to venture capital funds totalled $330.6 million compared to $274.5 million for buyout funds. In 2018, these allocations were $237.3 million and $227.8 million, respectively. Real estate fund commitments, by comparison, fell from $65.2 million in 2018 to $47.9 million last year.

The number of active private equity manager relationships has roughly doubled in the past 10 years to around 25. This includes a smattering of large global buyout firms, which receive commitments of about $20 million per fund, and fewer than 10 single-country GPs, which receive $10 million per fund. The rest are VCs, which represent a bite size of $7-8 million.

Axiom and beyond

The first commitment in Asia outside of a fund-of-funds was Redpoint China Ventures in 2016. This was followed by Capital Today, a Chinese growth-stage investor, Altos Ventures, a Korean VC with strong ties to the US, and Source Code Capital, a Beijing-based firm with DNA from Sequoia Capital China and Matrix Partners China. The most recent additions are China’s Hillhouse Capital and Lilly Asia Ventures.

“We travel to China about 3-4 times a year, and things are changing so fast that every time, it feels quite different. You always see new things, and new types of companies are being formed,” says Wu. “We were in a coffee shop just waiting for a meeting, and the people sitting next to us were talking about their next start-up and raising venture capital. It’s really dynamic.”

Clearly, this kind of on-the-ground reconnaissance cannot be done in the COVID-19 era. While the Hillhouse and Lilly Asia commitments were based on relationships forged prior to the pandemic, there is an understanding that future outreach to Asia will require greater leaps of faith. This is both in terms of virtual networking and embracing first-time GPs.

“We have seen really good success in the US by backing emerging managers. We don’t do it a lot, but some of those managers have really generated superior returns,” Wu adds. “We see this even more in China, where the whole GP landscape and community has evolved at a much faster pace. We constantly see new groups spinning out of established groups. That’s a challenge for us but also an opportunity.”

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• Topics
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• Rockefeller University