UNC Gets Formal and Charges Ahead with Private Equity –

The University of North Carolina at Chapel Hill (UNC), a key player in private equity investing, is making room for more partnerships.

Although UNC has had a 16 year history of alternative investing, the university officially carved out 15% of its $800 million endowment for private equity in May 1998, based on the suggestion of its new Chief Investment Officer Mark Yusko. Prior to that, the university’s Foundation Investment Fund Inc. made opportunistic private equity investments, which it classifies as venture capital and buyout partnerships.

And the endowment’s investment activity has not let up since then. As of June 30, UNC had committed $136 million to private equity, with $84 million in venture capital and $52 million in buyouts.

The university chooses funds that invest in early- to late-stage deals mostly on the East and West Coasts. However, in an effort to diversify its portfolio and find opportunities at lower valuations, UNC also pursues vehicles that seek deal flow in the Southeast, Northwest and Central States.

Under Yusko’s helm, the main objective of the university’s four-member investment team is to seek diversity within the asset class, but like most limited partners, UNC has an ongoing bias toward the Internet, information technology and health-care sectors. Overall, the investment staff looks for venture capital firms that focus on novel approaches to real world investment problems, rather than just seeking the next hot product. ARCH Venture Partners, for example, often sources deals from academic or government research communities. UNC gravitates toward firms, such as Draper Fisher Jurvetson, that have a track record of success as well as young professionals who are excited about their specializations and the investments they make.

“We clearly want people to know and appreciate that although the UNC program is early on in its [formal] development, we are establishing relationships aggressively and making capital commitments,” says Yusko, whose first course of action upon arrival was to formalize UNC’s private equity investments by setting target allocations.

UNC’s goal is to reach its 15% allocation by the middle of 2001, and the university hopes to increase that figure to 20% over the next four to five years based on the belief that universities can benefit from private equity because their endowments have no termination date and can afford to make long-term investments, Yusko says.

The university’s most recent five-year returns in venture capital were 30.5%, but the number is deceptive because less than 2% of the endowment was invested, Yusko says. The university is not interested in chasing high returns and would be satisfied with a net return of inflation plus 11% from its venture capital funds, he says.

At the suggestion of a board member affiliated with Donaldson, Lufkin & Jenrette (DLJ) Inc., UNC backed its first venture capital partnership in 1983, investing $5 million in the $75 million Sprout V, a fund run by the Sprout Group, an early- to late-stage venture firm affiliated with DLJ. The endowment in 1987 made a follow-on $5 million investment in the $90 million Sprout Growth, which invested in late-stage retail, information technology and health-care companies. Without a formal target set for private equity investments, UNC’s venture deals continued to dwindle until 1995, when the endowment had a market value of $470 million. The board approved $25 million for just three separate venture capital funds for the next three years.

UNC is open to backing partnerships that have not attracted the attention of too many other universities. Fifteen months ago, for example, the endowment was the only university to back SOFTBANK Technology Ventures IV, and its $5 million investment was expecting more than $5 million in distributions in September.

UNC typically invests $5 million in each venture capital fund, although its investments have ranged from $2 million to $7 million. Some of the endowment’s most recent investments were in Draper Fisher Jurvetson Fund VI, SOFTBANK Technology Ventures V, Accel VII, Acacia Venture Partners II, Great Hill Equity Partners and ARCH Venture Partners IV.

“UNC is very, very serious about building its program and is actively looking for emerging talent,” Yusko said, referring to a host of general partnerships in which to invest. The university’s goal is to achieve a strong investment program similar to those already at universities such as Yale, Duke, Notre Dame and Stanford, he says.

As the endowment grew to a market value of $650 million in 1997 from $180 million in 1989, the board decided to hire a full-time professional investment staff to manage its expanding pool of capital. UNC actively recruited Yusko, who previously worked as a private equity investment officer at the University of Notre Dame. Seeking the chance to take a leadership role in a smaller but growing endowment, Yusko accepted the offer and joined UNC’s investment team in January 1998. Six months later, Yusko hired Charles Merritt as the endowment’s investment director for private investments. Merritt came to UNC from NationsBank, now Bank of America, where he focused on direct investments in private equity. UNC hopes to add two investment analysts before the end of the year, bringing the endowment’s total investment staff to six members.

UNC had no chief investment officer prior to Yusko, only its non-discretionary adviser Cambridge Associates, which made investment suggestions to the board. Cambridge now acts in the capacity of a retainer-based consultant.

Upon his arrival, Yusko suggested that the university establish a target for private equity investing, and shortly thereafter, the board approved its current 15% allocation. The endowment stood at $650 million in December 1997, when UNC made a huge plunge into the world of venture capital investing. The university has backed 16 new partnerships in the last two years, and is in the midst of negotiating three new venture partnerships. UNC also invested in eight buyout partnerships in the last two years, compared with just one in 1996.

UNC never has made direct investments, but expects to co-invest with some of its current fund relationships.

“Not only are we great partners, but we actually have money,” Yusko says. In fact, the investment team’s most difficult task is keeping up with its target because it is constantly being outpaced by its distributions. “It’s a good problem to have.”

The investment team makes suggestions to its 10-member board of directors, which makes all final decisions, and a three-member executive committee gathers when immediate decisions are required.

UNC’s VC Partnerships

Sprout V

Sprout Growth

Vector Later Stage

Endowment Venture Partners III

Vector Later Stage II

Intersouth Partners IV

SOFTBANK Technology Ventures IV

Patricof/APA Excelsior V

Draper Fisher Jurvetson Fund V

Weston Presidio Capital III

Tudor Private Equity Fund

ARCH Venture Partners IV

Great Hill Equity Partners

Acacia Venture Partners II

Accel VII LP

SOFTBANK Technology Ventures V

Draper Fisher Jurvetson Fund VI

Source: UNC

UNC’s Investments

Target Actual

Domestic Equity 25% 31%

International Equity 15% 18%

Opportunistic Equity 10% 9%

Absolute Return 10% 11%

Private Equity (Venture and Buyout) 15% 6%

Real Estate 5% 7%

Energy 5% 1%

Bonds/Cash 15% 17%

Total 100% 100%

Source: UNC