Should University Endowments Tap Their Alumni Networks?

Earlier this week, NYT’s DealBook published quite an interesting story on Dartmouth’s endowment and its penchant for tapping alumni networks to access top tier asset management firms. Said slightly differently, the article pointed out how Dartmouth seems to entrust large sums of its endowment to alumni asset managers, and Dealbook was raising the question as to whether this practice was ethical. And I agree that this is a very important question.

Then, yesterday, I read an interesting article over on aiCIO that draws on a new academic paper by a fellow Stanford professor entitled "Endowment Management Based on a Positive Model of the University". The paper is very interesting and, if I’m interpreting it correctly, suggests that university endowments should diversify away from its alumni base, since the latter represents a stream of donor funds. (The paper actually goes into a bunch of other interesting topics, such as endowments making investment policy without much information on the long-term plans of the university... but I’ll leave all that for another time.) Anyway, here’s a blurb from the aiCIO article:

‘"Stanford invests in human capital, and a lot of that investment goes into the computer-science related industry. That suggests that they already do a lot of investment in that type of human capital," according to Hoxby. "The school invests in the students, many of whom go on to Silicon Valley firms." Since Stanford University by nature has a large stake in Silicon Valley through their alumni network, it doesn't make much sense for the endowment to take money from the portfolio while also investing it in Silicon Valley, the paper argues. As noted by its author, "that would be doubling up the bet, creating a poorly diversified portfolio.”’

So, should university endowments “double their bet” by tapping alumni networks? There’s a case for tapping privileged networks (see Dartmouth), and there’s a theoretical case against tapping those networks in order to diversify the university’s broader source of funds and avoid any chance of improper behavior.

I’m curious, what would you do? Would you leverage your alumni network... enriching them as you enrich yourself... or would you avoid all potential conflicts of interest and work to diversify your holdings? If you help to enrich your alumni, they will invariably turn around and give some of that money back to the university... something non-alums would not do. But by focusing on your alumni base only, do you risk accepting a lower return? Tough questions.

My own thinking on this topic has seesawed a bit. I genuinely understand the value of networks and relationships ... trust-based relationship and loyalty are everything in the asset management business. But I also see enormous potential for conflicts of interest and unethical behavior.

Anyway, here’s my take ... and my mind could still be changed on this... I think an endowment that doesn’t tap into its privileged access points is leaving money on the table. At Stanford, we have unparalleled access to Sand Hill Road, and many of our graduates go on to build huge companies. Why wouldn’t we want to invest in our alumni if the interests align? Why wouldn’t we want allocations at the top VC firms? We’d be silly not to jump at some of the opportunities our alumni offer us.

But we have to have a process for managing these relationships that is bulletproof. It all comes back to good governance. Conflicts of interest will inevitably creep up in this space, so the key is to manage those conflicts in a very transparent and rigorous way. It’s crucial that privileged access doesn’t result in cronyism. And this can only happen with strong and robust governance policies.

But, again, I'm curious: What do you think?