Not all endowments are created equal
Why should multi-family offices take inspiration from endowment models?
Investing through the so-called Endowment Model has become increasingly popular not only among leading universities, but also among multi-family offices (MFOs), single-family offices (SFOs), and other institutions with a similarly long-term approach to capital.
The reasons are straightforward:
- a similarly long investment horizon, often effectively perpetual,
- the need to distribute part of the portfolio’s income to support the institution, foundation, family, or other beneficiaries,
- and, not least, the objective of preserving the real value of wealth above inflation.
As mentioned, the model emphasizes a long-term perspective, diversification, and the use of alternative assets.
Note: There is no single universal Endowment Model. Different institutions and regions approach its implementation differently, and each variation has its own characteristics and advantages.
In this article, we look at how endowment-style investing is implemented around the world, including the American, Canadian, Norwegian, and other approaches that can serve as inspiration for multi-family offices.
The Yale Model: Diversification and close collaboration with managers
ale University is considered a pioneer of modern endowment investing. The approach developed by David Swensen, Yale’s long-serving CIO until his death on May 5, 2021, became a blueprint for many other institutions. Many people who worked with or learned from Swensen went on to manage endowment portfolios at other leading institutions.
The Yale Model is built on extensive diversification, with more than three-quarters of the portfolio allocated to alternative investments, including hedge funds, private equity, venture capital, real estate, and timberland.
One of its defining features, however, is close collaboration with external investment managers. Swensen believed strongly in diversification and in working with exceptional managers capable of outperforming the market over the long term.
Thanks in part to its extensive alumni network, Yale has historically been able to identify and access high-quality managers at relatively early stages of their careers and fund development. This has been particularly evident in its venture capital portfolio, which has generated substantial excess returns and contributed meaningfully to the performance of the overall portfolio.
But the important point is something else. Yale devotes a significant amount of time to sourcing, filtering, and conducting due diligence on investment talent. Paradoxically, its portfolio is not simply a collection of the biggest names. It includes many lesser-known managers who have earned Yale’s trust and offer distinctive investment approaches.
The Canadian approach: Internal management and direct access to alternative investments
Canadian institutional investors, including the Canada Pension Plan Investment Board (CPPIB), approach endowment-style investing with a strong emphasis on internal management and direct access to alternative investments.
Canadian institutions often manage a significant portion of their portfolios internally. This allows for greater flexibility and faster decision-making while reducing some of the costs associated with external management. CPPIB, for example, invests directly in real assets such as real estate and infrastructure projects, seeking stable long-term returns.
This approach can be particularly attractive to institutional investors and family offices with sufficient scale to make direct investments while maintaining greater control over portfolio management.
In other words, you need to be large enough to develop genuine specialization within your own team. From a cost perspective, the model is a mixed bag. You save on external fund fees, but maintaining a high-quality internal team is enormously expensive. More importantly, there is significant key-person risk if critical members of that team leave.
The Norwegian model: Strict governance, central bank management, and public markets
The Government Pension Fund Global is another example of a successful long-term institutional investment model although its approach differs substantially from the American and Canadian models. Managed by the Norges Bank, the fund is known for its transparency and strict adherence to governance rules. This model is often referred to as the governance model, because the emphasis is placed on management and risk control, and the fund is managed with a high degree of accountability and transparency.
The Norwegian fund focuses on global diversification, with investments spread across markets and asset classes around the world.
Interestingly, however, its exposure to private equity remains very limited, and efforts to expand into unlisted equities have faced resistance. Among the concerns raised have been costs, transparency, and the practical challenges associated with investing such enormous amounts of capital (see our article on the performance of large PE funds).
Given the fund’s size, this is hardly surprising. Allocating meaningful amounts to smaller and mid-sized funds is extremely difficult because there simply is not enough capacity. At that scale, the fund could easily become a dominant, or even the sole, limited partner.
The fund currently owns approximately 1.5% of the world’s listed equities. At the same time, it places considerable emphasis on responsible and sustainable investing, going well beyond simply applying an ESG label. This is a topic that increasingly resonates with private investors and family offices as well.
For investors seeking to minimize risk while pursuing stable long-term returns, the Norwegian approach offers an interesting example of how strong governance can be combined with effective global diversification.
The Norwegian model represents a rare combination of enlightened leadership capable of taking a long-term perspective and relying on a high-quality, functional framework. The rest is left to professionals. And then there is a vision extending well beyond a few election cycles. The parallel with families and generational wealth is obvious. It is ultimately the same issue.
The California approach (CalSTRS/CalPERS): Collaboration with private equity funds
The California State Teachers’ Retirement System (CalSTRS) and the California Public Employees’ Retirement System (CalPERS) provide another approach to accessing alternative investments.
Both have pursued elements of what is sometimes described as a collaborative model, combining relationships with external managers with efforts to negotiate better terms and participate more directly in alternative investments such as private equity.
This model can give large institutions access to established investment funds on more favorable terms due to their scale. In theory, this can improve long-term economics while creating opportunities to reduce costs and participate more directly in portfolio investments.
It remains true that it is best to focus on the things you can control: fees, tax impact, and, of course, your investment risk profile and asset allocation.
CalPERS has been working to increase its exposure to private equity while simultaneously dealing with the challenge of deploying very large amounts of capital into relatively illiquid assets. It is difficult. Managing capital at this scale requires careful asset allocation and inevitably creates liquidity challenges.
Daily valuation in public markets is not for the faint-hearted, and it is certainly not always helpful for a career in an institution where investment decisions can become politically sensitive. Private equity brings a different problem: the famous J-curve. You may report negative returns for several years while your obligations to beneficiaries continue regardless.
It will be interesting to see how this approach develops as more institutions explore collaborative models and look for ways to become strategic partners to alternative investment managers. For large investors, such arrangements can also provide greater flexibility when allocations of sufficient size would be difficult to execute efficiently in public markets.
A multi-family office should have deep internal expertise, sustainable governance, a high-quality investment framework, and always act in a fiduciary capacity
Endowment-style models from different parts of the world demonstrate very different approaches to long-term wealth management and alternative asset investing. Yale emphasizes diversification and manager selection. Canadian institutions have developed substantial internal investment capabilities. Norway demonstrates the importance of governance and global diversification. CalSTRS and CalPERS show how large institutions can work more collaboratively with external managers..
Each provides useful lessons for institutional investors, multi-family offices, and single-family offices considering how to structure the long-term management of wealth.
For family offices seeking to generate returns while protecting wealth over the long term, the objective sounds simple, although achieving it is anything but:
- Develop a thorough understanding of individual investment categories, ideally in-house.
- Establish a high-quality governance system, essentially a “cookbook,” and understand how it works. People come and go, but a well-designed system remains.
- Investment management can be outsourced through an OCIO (Outsourced Chief Investment Officer). However, external managers often do not have their own capital invested alongside the family, which can affect alignment.
- Build a strong investment framework, including clear investment filters, rigorous due diligence, and a broad personal network of global relationships.
- Use economies of scale through aggregated investments to reduce the total cost of the solution, while always considering the expected real return after costs.
There is no shortage of diversified models based on simple and accessible strategies available online, including All Weather, Permanent Portfolio, Browne, and GAA approaches. Achieving more than 7% p.a. over the long term is actually an excellent result. The real challenge lies in sustainability, resisting unnecessary complexity, and having the discipline not to constantly change course.
If you are aiming for higher returns, anything above 6–7% p.a. inevitably comes with greater risk (+), greater diversification needs (+), greater complexity (+), and greater demands on management (+). Put simply, alternative investments such as real estate, hedge funds, private equity, and venture capital become increasingly difficult to avoid.
In the context of a mid-sized multi-family office in the Czech Republic, we have a significant advantage over large endowments. We already have sufficient capacity for appropriate investment tickets in the range of several million euros or dollars, combined with deep internal expertise and global experience across alternative asset classes, including hedge funds, private equity, venture capital, and real estate.
Most importantly, every year we review a large number of small and mid-sized managers that are simply too small for major endowments because those institutions cannot deploy enough capital with them. These managers then pass through our rigorous investment filter. We invest with only a select few and build close, long-term relationships with them.
When this is done well and responsibly, however, the hard work and long-term discipline are rewarded. Compounding has time to do what it does best.
In the end, you may find that the biggest risks are often outside the markets altogether: geopolitics, the state, your own family, and the impulsive or even irrational behavior of individuals.
Perhaps that is why a multi-family office needs more than a carefully managed investment portfolio. It also needs long-term sustainability, oversight, and a framework that connects wealth across generations. That includes internal rules and structures and, of course, the capabilities of everyone involved. Without these foundations, it simply does not work.
Why Yale Owns a Forest https://www.bloomberg.com/news/articles/2017-08-29/why-yale-owns-a-forest
CalPERS analysis finds that private equity's 20-year annualized returns stand at 12.3% https://www.calpers.ca.gov/docs/board-agendas/202403/invest/item07b-01_a.pdf
Here’s What CalPERS Will Face in Its CIO Search https://www.institutionalinvestor.com/article/2cb2zzw1jlc5lydgjkcn4/corner-office/heres-what-calpers-will-face-in-its-cio-search
CalPERS Finds Its New CIO, Feb-2022 https://www.institutionalinvestor.com/article/2bstnjig319zikotviuww/corner-office/calpers-finds-its-new-cio
CIO of CalPERS Will Step Down in Two Weeks, Sep-2023 https://www.institutionalinvestor.com/article/2c7208c130k8qna27z18g/corner-office/cio-of-calpers-will-step-down-in-two-weeks
Controversy Still Follows CalPERS’ CIO Resignation https://www.ai-cio.com/news/controversy-still-follows-calpers-cio-resignation/