Vanderbilt Professor Holds Forth on PE –

If you can’t do, teach. So goes the adage. However, it’s one platitude that Vanderbilt University’s William “Bill” Spitz will likely never hear. He not only can do, he has done, and based on the historical performance of Vanderbilt’s endowment, he’s managed to do quite well.

Spitz, a clinical professor of management and finance at the university, also serves as the school’s treasurer and vice chancellor for investments. And while he’s been teaching for more than a decade, he considers himself a businessman first. “I teach for fun,” he says.

As a professor, Spitz hosts one of the most popular classes at Vanderbilt’s business school, and as successful as he’s been at putting his theories up on the blackboard, he’s proven even more adept at applying his strategies in the real world. During Spitz’s tenure at Vanderbilt, the endowment has earned an annual return of roughly 17%, putting it among the upper 10% of all pension, profit sharing and endowment funds domestically.

On top of his work at Vanderbilt, Spitz is a founder and director of Diversified Trust Co., which runs the DTC Private Equity fund-of-funds, among other investment vehicles. Additionally, he has also served as an advisor to a number of private firms and advisories, including Council Ventures, The Bradford Funds and Endowment Advisors. This past April, Spitz received the 2005 Award for Investment Leadership from law firm Hirtle, Callaghan & Co.

As the head of Vanderbilt’s endowment, Spitz is an expert in many asset classes, but the chancellor calls private equity his first love. “To the extent that I can dabble in the space and spend some time there, it’s a very exciting area, and we’ve done very well there over time,” he says.

Spitz was introduced to the asset class in the 1970s, when he arrived at Vanderbilt. The learning curve may have been steep, but it didn’t take too long for the professor to catch on. Through his venture investments, Spitz has been able to participate in some of the industry’s biggest home runs.

He was among those to cash in on Google’s initial public offering last year. Before that, he experienced similar windfalls from commitments to venture firms that invested in Juniper Networks and Yahoo. “Our LP investment in those three alone was $500,000 and we netted around $200 million,” he says.

Venture Roots

Like many university endowments, Vanderbilt has traditionally had a tilt toward venture capital. Part of that comes from Spitz’s early exposure to some of the pioneers in the industry, and he credits the pros at Sequoia Capital with helping introduce him to the asset class. However, Vanderbilt is also among the schools with a new technology transfer program, which attracts potential venture investors and lends itself to the entrepreneurial spirit of the asset class. Furthermore, as an endowment, Vanderbilt has the time horizon that allows it to focus on early stage investing and tolerate the volatility of the asset class.

Because of his history in the space, Spitz has built up a number of ties to VC firms, and he currently sits on the advisory committee of Charles River Ventures, an early stage firm based in Waltham, Mass. Spitz maintains similar roles overlooking the Heartwood Forestland fund, Acadia Realty Acquisition Fund, and ZN Mexico Trust. Also on the venture side, Spitz spearheaded investments in Domain Associates, Great Hill Equity Partners, Highland Capital Partners and Summit Ventures, among many others.

Even as Vanderbilt’s private equity roots are in venture capital, the endowment’s exposure stretched out to the buyouts space a little more than five years ago, and the university has been active there ever since. Vanderbilt has established relationships with Apax Partners, Clayton Dubilier & Rice, Zell/Chilmark Partners, H&Q Asia Pacific, Ripplewood Holdings and others. And while Vanderbilt has yet to see its buyout investments generate profits in line with Google or Yahoo, it has participated in a number of solid winners, such as CD&R’s investment in Kinko’s, ZN Mexico Capital Management’s stake in Homex and Triton’s buyout of Tetra Holdings.

Spitz says his goal is not to necessarily be a home run hitter, but rather to find consistency in performance. “It’s better to consistently hit singles and doubles and avoid the strikeouts,” he says, adding that with that mindset Vanderbilt “has been able to do quite well in the good markets and not too badly in the down markets.”

Today, Vanderbilt has a 15% target allocation for private equity, which is split right down the middle between LBOs and venture capital.

Even as Spitz has been an early and faithful proponent of private equity, he’s not necessarily among those happy to see the asset class gain mainstream status. “I worry about it. … We won’t be looking to reduce our exposure, although we won’t be increasing it dramatically either. We started pretty early on, but the landslide has now passed us.”

He adds that because of the flow of money into the space, he anticipates that returns will start to diminish, as they have in other alternative assets, such as hedge funds and timber. Regarding private equity, though, he notes that “PE returns are bottled up, so it’s tough to know [where they’ll actually fall].”

In trying to avoid the inevitability of this, Spitz is left without an answer. “There is no solution,” he says. “The only solution is to cut your spending and decrease liabilities. We’re looking around trying to find the new asset categories that might be appealing, but right now we can’t find any.”

So without any alternative, Spitz’s answer is to stay true to private equity. He has diversified by looking overseas, and of the endowment’s total commitment to private equity, 25% of that is dedicated toward investing in international funds. Meanwhile, he adds that like other investors, Vanderbilt may also look to trim its GP base.

The university, Spitz says, has invested in around 150 different PE funds with almost 70 separate GPs. “We’re trying to force ourselves to invest bigger chunks of capital, and if we’re not willing to put in a bigger chunk, we may not make the investment. … If there’s too much clutter, then you can’t do the quality monitoring and due diligence that is really necessary.”

 

Bill Spitz’s Quick Takes on …

Getting into private equity:

“When I came to Vanderbilt, we had a small allocation to venture capital. At the time, I didn’t really know too much about it, so I basically learned on the job.”

Becoming an institutional investor:

“I don’t think there’s any single career track. It’s important to start early with a top firm and build great relationships. Also, the key to all of this is financial analysis, so it’s crucial to be in a position that allows you to tear up and analyze financial statements.”

The convergence of private equity and hedge funds:

“We’re in a number of hedge funds, and there are some fundamental issues involved. Hedge funds have a different time horizon and they don’t have as much operating expertise. They are certainly savvy in the financial markets but we’re scratching our heads like everyone else asking if these two can actually meet.”

Adding staff:

“We may add one more person, but I’m dedicated to keeping our staff small. [It currently has five pros.] We don’t want a large staff. I’m at the point in my career that I don’t want to be an administrator, I want to be an investor.”

Co-investing:

“We don’t co-invest. We haven’t had the staff to do the due diligence on individual investments, but our board has looked for us to be more active. Co-investing is the logical next step, though… Once you have the expertise to build a fund, it’s not too much of a leap to invest in an individual deal.”

The model GP:

“We tend not to be too focused on performance numbers. We’re focused on teams and chemistry, with a bias for teams that have been together a long time. We’ll look for a few emerging market funds, but in general we want stable teams and specific industry expertise.”

Investing in specific regions:

“I think it’s a bad idea myself. Our job is to maximize the return of the fund, and you shouldn’t be mixing in the objectives of the state or local government. It’s not our job. … We have done a fair amount of investing in buyout funds that do have a regional focus, not in this region, but we look for attractive funds.

The prospect of buyout funds going public:

I hope that doesn’t happen. When you start retailing institutional investments, it kills them. We’re in the club, so we’d obviously like to keep the club closed.

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