Author: Xian Yi Translator: Kunyang Wang
Publisher: GPLP
GP: Chinese LPs are rarely professional, and very distrustful of us. Why is it so hard to raise funds? It seems other companies are having a very leisure time while raising billions. I can’t act like I have no jealousy in me at all.
LP: The difficulty of raising funds equals that of asking money from your parents. What on earth do other companies hand you several millions to manage? What is all this is just a fraud? I have seen tons of examples of GP spending our money on fancy cars and luxury houses, and receiving commission.
LP is getting more and more furious. The GP we funded performed so poorly that it literally cost me everything.
After hearing all these, we feel very embarrassed. Regarding raising money, we have conducted countless conversations with different GP and LPs, which turned out with one conclusion: The core of fund-raising lies in the network of fund founders. LP and GP do not trust each other. Or, only GP that is LP can make money, but it doesn’t work the other way around.
It leads to some LPs feel unsatisfactory. There is no such thing as networking abroad. Everyone must follow the rules of the game. However, is it the true story?
We’ll here give you the truth of fund-raising and the power of networking, taking US University Endowment as an example.
The Truth of Fund-raising in American University Endowment : the network of acquaintances
The very special groups of colleges in the US have boosted the country to jump to the top in only 120 years, and kept their premium until now.
Part of the support for American universities comes from government funding, and part of it relies on endowment, which includes alumni donations, school operations, and revenues to support school operations.
The college fund we usually talk about is endowment, usually the USD LPs including the Blackstone Group, The Carlyle Group and KKR, also some USD funds active in China.
Then, how does top US university endowment make investment?
According to the research of GPLP, university endowment fund in the United States rarely hold certain assets directly, they act as LPs and invest in other funds instead. For example, Yale University Endowment Fund is a FOF consisting of more than 1,000 funds.
As LP who manages more than 1,000 GPs, how does Yale choose GPs?
The cardinal principle is checking on GP’s network.
If you look closely, you will find that the funds invested by the Yale University Endowment Fund are inextricably intertwined. For example, they like to invest in their own students, and provide seed funds to whom they value. If the investees perform well, they will continue investing. For example, Zhang Lei, the founder of Hillhouse Capital Group, was graduated from Yale University. And then they continuously eliminated the unqualified and left the best talents.
The reason why Hillhouse has the capital and confidence to make ultra-long-term investment is that they have received the injections from the Yale University Endowment Fund. Before he founded Hillhouse Capital Group, Zhang Lei got an internship at the Yale Investment Office. And then he won the first term of 20 million US dollars of investments due to Swensen’s appreciation, and received more funds given his good performance at that time.
Of course, there are failures of the investment of the Yale University Endowment Fund. For example, in 2007, hedge fund Sawwood Capital closed down, hence Yale University’s endowment fund lost $350 million. Of course, Harvard University also suffered a serious loss.
Why is that?
Because Sorwood was a former employee of the Harvard Foundation and later started his own business. Then Harvard gave him a seed fund. The first three years have witnessed a very good job, earning 10% through arbitrage every year, which seems to be very stable. Unfortunately, in July 2007, the abnormal bond market caused them to lose 50% the very same month.
Nothing would go wrong since Harvard has already invested, so did Yale think. So Yale’s adding on ending up losing 350 million dollars.
Of course, this is only one case. Under the super long-term investment and with the support of the large amount of capital, the Yale University Endowment Fund has performed well in the overall investment ratio.
Therefore, we can see that in the United States, university endowment fund investment is basically introduced by acquaintances to start with, and the way to know acquaintances is through social occasions such as cocktail parties and dance parties, or introductions of colleagues and acquaintances, etc. It is unlikely to have be financed without the introduction of acquaintances. Even in the United States, venture capital is known as “Caucasian Club.” 20 years ago, it was difficult for Chinese to enter this circle. Objectively speaking, not only China, but also in the US, the classes is solidified regarding this area.
However, the world of finance is always so small that it is inevitable that acquaintances often run into each other. Once, GP rushed to report his good results, which he just sold a project with high price. When the other LP heard it, he almost broke down! Because he is the receiver of what just was sold.
The project changed from one to the other? Everyone was facing this would break down.
Incentive system leads to the outbreak of contradiction between GP and LP in university endowment fund
The situation that Chinese GPs are increasing is somewhat similar with that of the US. In the United States, fund managers are also highly paid, even if they are performing poorly.
Hence, this has given the manager of college funds a headache of how to stimulate GPs?
According to LP, most people in American universities believe that the fund managers’ compensation is not equal to what they give. They think that fund managers only rely on the huge resources of their platform, sitting in their office, waiting for the passers-by to recommend themselves, which is what has been desired for in the investment industry. So after the 2008 financial crisis, the college fund raised the proportion of returns shared by managers.
However, most GPs also felt that they were treated unfairly, so the contradiction broke out.
The tipping point of the incident was the departure of a GP named Jack Meyer, who was hailed as Harvard’s god of wealth. During his time as a Harvard administrator, Meyer created an annualized rate of return of 16.1%. At the same time, he managed Harvard University’s financial, his annual salary is also extremely high, up to 6.9 million US dollars.
The high salary up to this level has made many professors in Harvard secretly jealous.
The professors said: “Harvard is given millions of bonuses to Meyer, while raising tuition fees at the same time, and the increase is higher than the price increase rate.”
Under harsh and stark criticism that Meyer decided not to put up with, he left Harvard furiously with his capable person.
Therefore, between American universities and the GP, how to formulate a reasonable incentive mechanism has led to a long-lasting discussion, which has not been solved until now. Gaming between professors and professional fund managers cannot be settled easily.Although it has not happened in China, I believe that this problem will come sooner or later.
