David Swenson is an unavoidable figure in the development history of the global VC/PE industry.

On May 6, 2021, Yale University announced that David Swenson, chief investment officer and investment guru of Yale University, died of cancer on May 5 at the age of 67.

David Swenson, who ran the Yale endowment for 36 years, is a legendary investor and godfather of institutional investment. Barton Biggs, former chairman of Morgan Stanley Investment Management Company, once said that there are only two really great investors in the world. They are Buffett and Swenson.

David Swenson is also an unavoidable figure in the development history of the global VC/PE industry. David Swenson was one of the earliest supporters of PE funds, who pioneered the practice of university foundations investing in VC/PE funds and greatly influenced the concept of asset allocation of VC/PE funds by other institutional investors around the world.

In China, David Swenson has also influenced many investors. He was the mentor of Hillhouse founder Zhang Lei when he was a student at Yale and the first LP of Hillhouse Capital.

The legendary road: excess income of $30 billion in 30 years

Under David Swenson, the Yale endowment fund went through several cycles, including the dotcom bubble in 2000 and the financial crisis in 2008, with impressive long-term performance. Over the past 20 years, the Yale endowment has an annualized return of 9.9%, creating an excess return of $25.7 billion relative to the average market return; over the past 30 years, the Yale endowment has an annualized return of 12.4%. Created an excess return of $34.1 billion. Over the past three decades, the Yale Endowment Fund has been one of the most successful institutional investors in the United States.

The Yale endowment fund totaled $31.2 billion as of June 30, 2020, according to data disclosed by the Yale University Investment Office. David Swenson's investment income exceeds the endowment income earned by Yale University, which is tantamount to the creation of an endowment fund.

The Yale University Endowment Fund is the largest source of funding for Yale University. Faculty salaries, student scholarships and operating expenses all come from the endowment fund. In fiscal year 2020, the Yale Endowment Fund provided $1.5 billion in expenditure for Yale University. Therefore, the success of Yale University as a world-famous university is inseparable from the success of the Yale Endowment Fund.

The Cornerstone of "Yale Model": Zhong Cang VC/PE

In 1985, David Swenson gave up his high-paying job at Lehman Brothers and accepted the call of his alma mater to become CEO of Yale University's investment office, for which he reportedly accepted an 80 per cent pay cut.

After returning to Yale, David Swenson revamped the portfolio of the Yale endowment fund. Before David Swenson took over, the Yale endowment, like other university endowments, invested most of its money in highly liquid, low-yielding asset classes such as Treasurys, bonds and domestic stocks. With a big wave of his hand, David Swenson sharply reduced his investment in these traditional asset classes, turning to alternative investments, especially private equity, that were not yet in the view of mainstream institutional investors at the time.

In the 1980s, KKR, the pioneer of PE, was just in its infancy, and the Yale Endowment Fund was an important LP of KKR's early fund. At that time, the leveraged M & A business was profiteering, with an annualized rate of return of 30% to 50%.

David Swenson's boldness is also reflected in the fact that when Zhang Lei founded Hillhouse Capital in 2005, although Zhang Lei had never managed any investment fund at that time, the Yale Endowment Fund still decided to contribute $30 million. At the end of his article in memory of David Swenson, Zhang Lei recalled that he once asked David why he wanted to invest in Hillhouse, and no other organization would take the risk at the time. David Swenson replied, "when you work with the right person, something good will happen." "

David Swenson's approach seemed radical at the time, and as the Yale endowment continued to succeed, the model was gradually recognized as the "Yale model." Today, institutional investors around the world are more or less affected by this model. David Swenson has become a godfather of institutional investment. his book, the innovative Road of Institutional Investment, is a must-read Bible for institutional investment in the United States.

Today, the biggest feature of the "Yale model" is still the emphasis on VC and PE. According to the annual report of the Yale Endowment Fund for fiscal year 2020, 51 per cent of its funds are allocated to alternative asset classes such as leveraged mergers and acquisitions, venture capital, natural resources and real estate, with only 2.3 per cent invested in domestic stocks. Allocating half of the money to alternative assets is the long-term allocation goal of the Yale Endowment Fund. However, among alternative assets, the allocation proportion of leveraged mergers and acquisitions and venture capital has continued to rise in recent years. In the five years from 2016 to 2020, the proportion of venture capital allocation increased from 16.2% to 22.6%, making it the largest allocation category. At the same time, the proportion of leveraged mergers and acquisitions rose from 14.7% to 15.8%. VC and PE together account for 38.4% of the total asset allocation of the Yale endowment fund.

It can be said that the emphasis on VC/PE is the cornerstone of the success of the "Yale model". Allocating VC/PE funds to university endowments was a terrible thing in the 1980s, but it is now the norm under the successful example of the Yale endowment fund.

It is worth mentioning that David Swenson himself has a deep understanding of the risks and mixed interests of VC/PE funds, and does not hesitate to issue critical comments. In the innovative Road to Institutional Investment, David Swenson says bluntly that the overall return of the VC/PE fund is not high, because the GP that can generate excess returns for LP is only a small part. If you can't invest in the best GP on the market, you shouldn't blindly follow the example of the Yale Endowment Fund. David Swenson is also very dissatisfied with the high management fees charged by PE funds, saying that many PE funds seem to have high returns, but most of them have been taken away by GP, and there is little left when they fall into the hands of LP. To that end, David Swenson had a war of words with Kravis, the founder of KKR, in the 1980s.

A rigorous master of academic investment

Unlike Buffett, Munger and other investment masters who often mock academic theory, David Swenson is an out-and-out academic investor who believes in efficient market theory and portfolio theory. When David Swenson was a PhD student at Yale, one of his mentors was James Tobin, one of the founders of modern portfolio theory and a Nobel laureate in economics. Throughout his life, David Swenson has been a practitioner of portfolio theory.

David Swenson even believes that because the market is efficient, "stock selection" and "timing" in investment are futile, and investors should focus on asset allocation and cost reduction. In the book "the innovative Road of Institutional Investment", David Swenson hardly talks about the skills of "stock selection" or GP selection. He spends a lot of time analyzing and comparing the transaction costs and management fees of various investment methods, which is regarded as the key factor to determine the long-term yield.

The interpretation of its investment concept by the Yale Endowment Fund emphasizes its academic background, saying that the theoretical framework is the mean-variance model established by two Nobel Prize-winning Yale economists, Tobin and Markowitz. The Yale model's practice of cutting investment in domestic equities and bonds and increasing investment in alternative assets appears to increase risk to the outside world. But the Yale Investment Office believes that such a shift significantly increases yields, but does not increase risk, which is the charm of diversified portfolios.

Despite boasting about academic theory, the Yale Investment Office still places great emphasis on the role of "people" in investment decisions:

• There are as many elements of art as science in investment management, and qualitative thinking plays an extremely important role in portfolio decision-making. Even the definition of asset classes is subjective, looking for subtle differences where there is no difference.

• Returns and correlations are difficult to predict, and historical data can be used as a reference, but adjustments must be made because of abnormal or structural changes in a certain period of time.

• Quantitative analysis tools are powerless in the face of "compound factors", such as market liquidity, the influence of small probability events and so on.

Of course, despite so much "art", David Swenson is still a believer in academic theory in the final analysis. He has said: "despite many operational challenges, the rigor of the mean-variance model can still provide an important panoramic judgment in the process of asset allocation. "