David Swensen is the Chief Investment Officer of Yale University, and perhaps no other person in the last decades has reshaped how large-scale institutional investors think about private market investing more than he has.
Late last year, Swensen sat down with former U.S. Treasury Secretary Robert Rubin for the keynote session of the Stephen C. Freidheim Symposium on Global Economics at the Council on Foreign Relations. The engaging, nearly-hour-long talk covered a range of topics, including current political instability, the role of operating and financial partnerships as an effective private equity model, how to choose GPs, and more.
On Private Equity
SWENSEN: That is what I love most in my portfolio. I think the private equity that you’re talking about, where you buy the company, you make the company better and then you sell the company is a superior form of capitalism. I’m really concerned about what’s going on in our public markets. I think short-termism is incredibly damaging. There’s this focus on quarter-to-quarter earnings. There’s this focus on whether you’re a penny short or a penny above the estimate.
And there’s this activist mentality that permeates the markets. It’s not just the companies where the activists take a position and then ask for cash back, whether it comes back through a dividend or comes back through a share buyback. It’s the possibility that the activist is going to go after the company that’s not currently under threat. And it’s a very naïve playbook that I think is destroying the quality of the companies and destroying the quality of the markets.
If you compare and contrast that with the—let’s say the buyout world, where you’ve got hands-on operators that are going to improve the quality of the companies, there’s no pressure for quarter-to-quarter performance. There’s no pressure to return cash at any cost. There’s an opportunity, with a five- to seven-year time horizon, to engage in intelligent capital investments that will improve the long-term prospects of the company.
Approach to Investment Management
RUBIN: What about the notion, David, that over time—a notion that I think is getting a lot of currency now, actually, that over time AI, machine learning, and all these kinds of things are going to replace the David Swensens of the world. And they will be—and I know all of us reject that. And we say, no, our judgement is what we want to rely on, but they have done an awful lot of back-testing on one thing or another, and they have a sort of an interesting case to make. Do you have any view of that?
SWENSEN: So, Bob, usually I’m not glad that I’m 63 years old—(laughter)—and nearer to the end of my career than the beginning of my career. But that question actually makes me glad of those two facts. (Laughter.) You know, I have never been a big fan of quantitative approaches to investment. And the fundamental reason is that I can’t understand what’s in the black box. And if I don’t know what’s in the black box, and there’s underperformance, I don’t know if the black box is broken or if it’s out of favor. And if it’s broken, you want to stop. And if it’s out of favor, you want to increase your exposure.
And so I’m an old-fashioned guy that wants to sit across the table from somebody who’s done the analysis and understand why they own the position. And then if it goes against them, I can have another conversation and try and figure out whether the thesis was wrong and we should exit, or whether the thesis is intact and we should increase the position. And I don’t understand any other way to invest.
SWENSEN: I’m absolutely convinced that there is nothing more important than being partners with great people.
RUBIN: I agree with that.
SWENSEN: In the investment world, if people are the way that you’re taught and—introductory econ—if they’re maximizers, they’re going to raise massive funds, charge high fees, and make a lot of money for themselves. I’m looking for somebody that’s got a screw loose and they define winning not by being as rich as they can be individually, but by producing great investment returns. And you do that—you can still make a great living, but instead of managing $20 billion, you probably manage $2 billion. And the other day we met with a manager, and they said their goal was to be in the IRR hall of fame. And I love that, because if they produce great returns, that’s going to benefit the university. But if they gather huge amounts of assets and charge high fees, that’s going to benefit them and not Yale.