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Goldman Courts Endowment Chiefs in Bid for School Fund Business

Date: Monday, April 12, 2010
Author: Bloomberg

Goldman Sachs Group Inc., the most profitable securities firm in Wall Street history, is courting endowment heads to join its asset-management group, according to three people with knowledge of the search.

The company started approaching chief investment officers at endowments, as well as money managers that oversee such assets, late last year, said the people, who declined to be identified because the search isn’t public. The bank is looking to expand its portfolio-solutions team of 50 employees, which invests on behalf of clients and works on asset allocation, portfolio construction and manager selection, said Andrea Raphael, a spokeswoman for the New York-based company.

“When they hire a CIO, not only can they then sell their product better, but that gives them internal knowledge,” Charles Skorina, whose headhunting firm Charles A. Skorina & Co. in San Francisco advises endowments, said in an interview last week. “This guy comes into Goldman and the Goldman guys say, ‘OK, what kind of products does an endowment need and how should we structure our products so we can go and sell a complete set?’”

Pacific Investment Management Co. and Perella Weinberg Partners have added or expanded asset-management services for endowments as they recover from record losses during the financial crisis. U.S. institutions will outsource more than half a trillion dollars in investments by the end of 2012, according to estimates by consultant Casey Quirk & Associates LLC.

Candidate Search

The portfolio-solutions group is part of Goldman Sachs Asset Management, catering to endowments, foundations, public and corporate pension funds, sovereign wealth funds, family offices and insurance firms, Raphael said. Chris Kojima and Charles Baillie, partners at the firm, run the group. The asset- management unit also serves those clients through its fund-of- funds group, which invests about $80 billion in outside firms.

The firm approached candidates through headhunter Charles Sterling Group LLC in Boston, said two of the people, who had been contacted and turned down the job. The bank has talked with candidates from pension funds, endowments and other asset managers, according to another person familiar with the search. Raphael declined to comment on the firm’s recruiting efforts.

U.S. institutions will probably outsource $510 billion in investments by the end of 2012, more than double the $195 billion as of the most recent data at the end of 2008, according to Casey Quirk of Darien, Connecticut. Investors most likely to use outsourcing services are those with $250 million to $750 million in assets, which struggle to find talent and can’t access the best investment strategies, the company said.

Yale’s Swensen

It costs about $2 million to $3 million a year to maintain an investment office with five employees, compared with a fee of 50 basis points on assets under management in a typical outsourced agreement, Skorina said.

Endowments outperformed market indexes for years by following a style pioneered by David Swensen, Yale University’s investment chief. The strategy relies on so-called alternative assets including commodities, real estate and private equity to outperform market indexes. Some of those hard-to-sell holdings fell more than public stocks and bonds in the year ending June 2009, leaving endowments with losses.

“Investing in alternatives and alternatives being a much bigger allocation of portfolios has been a big driver in the interest in outsourcing,” said Kevin Quirk, a partner at Casey Quirk. Losses from some alternative investments “brought into question whether or not these things are sustainable for the long term,” he said.

Rate Swaps

For more than 20 years, Goldman Sachs, JPMorgan Chase & Co. and Citigroup Inc. sold swaps as a way for schools, towns and nonprofit organizations to reduce interest costs and protect against rising payments on variable-rate debt. In 2008, the value of Harvard’s interest-rate swaps tumbled and its endowment plunged, forcing the school to raise $2.5 billion in bonds that December as it was squeezed for collateral.

Edward Forst, who rejoined Goldman Sachs in September after 11 months helping to oversee finances at Harvard University in Cambridge, Massachusetts, became co-head of the firm’s investment-management division at the end of February with Tim O’Neill. Before he left for Harvard, Forst had spent less than a year helping to run Goldman’s investment-management unit.

Asset management, which oversees funds for institutions and wealthy individuals, is a smaller department at Goldman Sachs than investment banking and trading. The division’s 2009 revenue of $3.97 billion accounted for 8.8 percent of the firm’s sales. Revenue at the unit fell 13 percent from 2008 as incentive and management fees declined. Assets under management climbed 12 percent from a year earlier to $871 billion as rising markets more than offset fund withdrawals.

Pimco Additions

The division doubled its third-party distribution sales force last year and “significantly” increased its coverage of institutional and private wealth accounts, according to the firm’s annual letter to shareholders April 7. The unit serves 2,000 institutional clients and more than 25,000 private wealth accounts.

Pimco, led by Mohamed El-Erian, the former Harvard fund chief, last month hired Gregory Hazlett as head of equity strategies and Andrew Hoffmann to oversee real-asset investments. They report to Mark Taborsky, an executive vice president at the firm and former Harvard endowment manager. Taborsky leads a fund-of-funds unit, based on the alternative- investing model of endowments, targeting school funds and other clients.

Campus Recruits

Other asset managers have recruited chief investment officers from schools. Perella Weinberg in New York hired Christopher Bittman, former CIO of the University of Colorado Foundation, in July to lead a unit that manages money for endowments. David Russ, a former manager of Dartmouth College’s fund, was hired in June at Zurich-based Credit Suisse Group AG as a chief investment strategist in asset management.

A number of higher-education money managers have left academia to start their own firms. They include Jack Meyer, who stepped down from his Harvard Management Co. chief executive officer post in 2005 to form Convexity Capital Management LP in Boston with $6.3 billion from clients, and ex-Stanford Management Co. head Michael McCaffery, who raised $7 billion from investors including Microsoft Corp. co-founder Paul Allen to start Makena Capital Management LLC in 2006.

University funds lost an average of 19 percent in the year ending June 2009, according to the National Association of College and University Business Officers, based in Washington, and Commonfund in Wilton, Connecticut. It was the biggest annual loss in the 35 years for which records have been kept.

Endowment Turnover

With tumbling endowments has come turnover in the ranks of managers who oversee the funds. Dartmouth College in Hanover, New Hampshire, Brandeis University in Waltham, Massachusetts, and New York University in Manhattan didn’t immediately fill CIO positions as they reviewed spending. Wesleyan University in Middletown, Connecticut, fired CIO Thomas Kannam in October.

James Walsh of Cornell University in Ithaca, New York, announced plans in February to step down at the end of the academic year. Christopher Brightman resigned last month from the University of Virginia in Charlottesville. Stanford University’s endowment, the third-richest among U.S. colleges, is searching for a chief investment officer after leaving the post vacant for more than two years.