Investor Focus – University of Oregon Uses Funds-of-as VC Window –

The University of Oregon Foundation, which administers the endowment of the University of Oregon, aims to invest up to 20% of its capital in alternative assets, including venture capital funds.

At the initiative of Peter Rothschild, chairman of the investment committee of the University of Oregon Foundation Board of Trustees, the foundation started diversifying the allocations of its endowment five years ago, looking past domestic stocks and bonds toward other asset classes, including private equity.

“It took us a while to move along the learning curve and understand the advantages of venture capital, as well as the good reasons why we need to commit capital to private equity,” Rothschild said, adding that he and the committee looked to other university endowments, including those of Harvard, Yale and the University of Texas, as investment models.

As of October 31, the committee chaired by Rothschild had $216.4 million under management in the Wilamette Endowment Pool and the Oregon Legacy Trust, of which conservative alternative assets total $19.7 million and aggressive alternative assets amount to $17.5 million. Additionally, $98.9 million is invested in domestic equities and $17.1 million in global equities. Some $26.2 million is invested in mutual funds, $5.7 million in co-mingled funds and $30.8 million in fixed income funds.

As of the end of October, 17.17% was allocated to the alternative asset class, of which 8.1% is invested in hedge and venture funds (aggressive alternatives) and 9.07% in absolute return and debt investments (conservative alternatives). The foundation’s venture and hedge investments amount to $17.5 million, while absolute debt and return investments total $19.6 million.

The 20% target for alternatives has not changed since the foundation started the diversification of its investments, Rothschild said. The University does not have specific targets for the subcategories of alternatives assets, preferring to invest opportunistically.

All the university’s venture capital investments are managed by the Westport, Conn.-based Commonfund Capital Inc., an investment shop catering exclusively to the endowments of colleges, universities, foundations and non-profit educational organizations and a subsidiary of Commonfund Group.

In March 1997, the University of Oregon Foundation invested $4.2 million in Endowment Venture Partners III, with an additional $1.2 million committed. In January, the foundation invested $1.1 million in Endowment Venture Partners IV, with an additional $3.8 million committed; both vehicles are funds-of-funds. Endowment Venture Partners III closed in 1996 on $250 million, and Endowment Venture Partners IV wrapped in March 1999 on $489 million.

The university targets 5% returns plus inflation overall on its investments and 20% or more on alternatives. “Venture investments are more volatile and involve more risks, so we expect better rewards,” Rothschild said.

Given the modesty of the University’s funding available for venture capital investing, the endowment could not make large enough commitments to invest in venture funds directly so the University opted for funds-of-funds.

Along with Rothschild, who is a partner at Quennell, Rothschild & Partners L.L.P., an architecture firm, six other trustees sit on Oregon’s investment committee: Roger Engemann, president at Roger Engemann & Associates; Michael Humphreys, a real estate developer; Grant Inman, a general partner at Inman Investment Management; David Petrone, chairman at Housing Capital Co.; Donald Tykeson, a managing partner at Tykeson Associates/Enterprises; and Robert Wulf, an independent financial consultant.

Karen Kreft, executive director at the foundation, and Karri Pargeter, director of finance, also are part of the committee. The foundation is recruiting an investment coordinator to add to its staff.

The University of Oregon Foundation has had an advisory relationship with the Portland, Ore.-based consulting firm R.V. Kuhns & Associates for more than 10 years. “They [Kuhns] do the research and analysis for every deal, but the committee members have the final decision,” Rothschild said.

In the future, the investment committee may consider venture capital partnerships with other firms, in the information technology, health-care and biotechnology fields, but there are no formal plans in place, he said.

“We looked at several other venture funds, but no one has matched the value of Commonfund in terms of price and track record returns,” he said. In 2000, the committee will consider new investment opportunities in a new venture vehicle, a leveraged buyout fund, a distressed debt vehicle and an emerging markets debt fund. Further details on these funds were unavailable at press time.

“Given the current economic conditions, with high growth and low inflation, almost all sectors have promising prospects, so we’ll have to adopt a case by case approach, and adjust to new opportunities as they come,” he said.

University of Oregon Foundation

Asset Allocation, as of October,1999

Asset Class Current Allocation Guideline Range

Domestic Equities 48.3% 40%-60%

International Equities 12.1%

(foreign equities only)

Global Equities 0%-15%

(funds include domestic 7.9%

& foreign equities)

Alternatives 0%-20%

Aggressive Alternatives 8.1%

Conservative Alternatives 9.1%

Bonds/Fixed Income 14.2% 15%-40%

Real Estate 0.3% 0%-15%

Total 100.00% 100.00%

Source: University of Oregon Foundation/R.V. Kuhns & Assoc.