Yusko Dropped as Endowment Fund CIO, Replaced by Lee Partridge

Advisers to the struggling Endowment Fund have removed Mark Yusko and temporarily closed the fund to new investments, appointing former Texas Teachers deputy Lee Partridge as CIO.

(January 22, 2013) – Mark Yusko—former CIO at the University of North Carolina and a high-profile advocate of the endowment model—has been removed as CIO of the Endowment Fund, which his firm co-founded in 2003.

Lee Partridge, former deputy CIO of the Teacher Retirement System of Texas, has been promoted from chief portfolio strategist and taken over as CIO. The $3.5 billion Endowment Fund is a joint venture between Houston-based Salient Partners and Morgan Creek Capital Management, which Yusko founded after leaving the University of North Carolina. Spokespeople for Salient and Morgan Creek have confirmed the shake-up, and aiCIO has obtained copies of letters sent to investors today by the fund and Yusko announcing the departure,

“After nearly a decade of working with our joint venture partner in Texas, we found ourselves differing on material aspects of how to best run an Endowment portfolio and run the business, so we decided that a change was appropriate,” Yusko wrote. “In a recent quarterly letter, I talked about the Darwinian principal that it is those who are most adaptable to change that survive and we are clearly adapting to change and expect to thrive in the years ahead.”

The fund’s advisors, in their letter to investors, stated that recent withdrawals of invested capital indicate “that a meaningful number of investors in the fund have lost confidence in Mr. Yusko’s ability to deliver results consistent with expectations and we believe that a change is warranted.”

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Yusko will remain on the boards of directors of Morgan Creek and the Endowment Fund’s advisory body, according to two sources. The fund will also remain a 50-50 ownership split between Salient and Morgan Creek. Yusko is not looking for another position, according to someone briefed on the matter.

A board review of the fund in June 2012 called its first-half performance “disappointing,” but concluded its results “should be viewed in a context of extremely volatile markets and historic difficulty for numerous hedge and private fund strategies.” A few months later, Yusko sent a letter to investors announcing quarterly limits on withdrawals. Roughly a quarter of its assets (about $1 billion) had been pulled out in the first eight months of 2012, according to documents filed with the US Securities and Exchange Commission. At that point, gating had been a rarity since the financial crisis, and was an unpopular move with investors.

The board has now overturned the withdrawal limits, according to its letter to investors. In fact, the Endowment Fund will distribute 5% of its net asset value to investors in cash by February 15 to make up for the gating. The fund has also been temporarily closed to new capital, and is set to reopen March 1. According to the letter, “neither the board nor the adviser believed it appropriate to accept new capital into the fund, even via a dividend reinvestment option, until updated offering documents reflective of the changes” were available and distributed to current and prospective investors.

In addition to a new CIO and overturning the gating policy, the letter said Partridge will revamp the investing strategy. He “intends to focus the fund’s hedge fund portfolio with larger allocations to fewer funds, primarily within the global macro and relative value style categories, which he believes are the most fertile ground for managers who ‘hunt’ for excess return or alpha.”

Spokespeople for Partridge and Yusko both declined to comment on their behalf.

(January 22, 2013) — North American public pension funds continue to offer valuable capital to the private equity industry, Preqin says.

Preqin’s Investor Intelligence database that tracks 1723 investors actively looking to make new fund commitments shows 149 are North American public pension funds. Of these pension funds, 70% anticipate making new commitments to the asset class over the coming year.

Public pension funds in North America aiming to make new commitments in 2013, according to Preqin, include the $6.4 billion San Bernardino County Employees’ Retirement Association, which has planned commitments of $125 million over the next 12 months. The Seattle City Employees’ Retirement System expects to commit between $25 million and $30 million to private equity in 2013.

South Carolina Retirement Systems (SCRS) is also continuing to deploy capital to the asset class in 2013, the data firm noted. “In order to diversify its private equity portfolio by geography and strategy, SCRS will make commitments to third-party funds, including mezzanine, buyout, venture and distressed private equity vehicles, as well as investing in direct funds with specific strategies,” Preqin said in a release.

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The majority of North American public pension funds are looking to invest in North America-focused funds (56.7%), followed by funds including Europe (41.3%) emerging markets (37.5%) and Rest of World (14.4%).

Buyout vehicles remain the preferred fund type for North American public pension funds, with 52.9% expecting to commit capital to such vehicles over the next 12 months. Thirty-nine percent will consider distressed private equity, while 42.3% and 31.7% will consider investing in venture capital and growth funds respectively. Timber and natural resources vehicles are the fund type preference for 21.2% of North American public pension funds.

Yet that obvious propensity among public pensions to invest in domestic private equity firms may be hazardous, according to recent academic research. Two researchers at the Kellogg School of Management, Yael Hochberg and Joshua Rauh, recently published an article titled “Local Overweighting and Underperformance: Evidence from Limited Partner Private Equity Investments,” in the Review of Financial Studies. “Our analysis suggests that institutional investors of all types (endowments, foundations, public and corporate pension funds) exhibit substantial home-state bias in their PE portfolios,” the authors wrote. They found that institutional PE portfolios held an extra 8.1% of in-state investments on average, beyond what would be predicted statistically. For public pension funds, however, this over-allocation to in-state investment funds is even larger, at 9.7%.

Related video:“Mercer Warns of Home-Country Bias”