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Endowments Don’t Plan to Increase Headcount. KKR Says This Is a Mistake.
“The CIOs have been at the right place at the right time, so the question is ‘can that model outperform going forward?’” says KKR’s Henry McVey.
Despite tremendous growth in assets under management in recent years, many endowments and foundations have no plans to increase headcount.
But according to a KKR report expected to be released on Wednesday, that strategy could be a mistake. The report concludes that if endowments and foundations intend to keep up with an ever-changing, increasingly specialized investment landscape and the growing pools of capital that go with it, they can’t afford to slow down hiring.
The report, which looked at how current macroeconomic conditions are impacting institutional investors, included a survey of 30 chief investment officers from endowments and foundations with $1 billion to over $5 billion in assets. Seventy-one percent of survey respondents said they don’t plan to increase the number of people on staff. This is a result of a number of factors, the report said, including “intensifying scrutiny” about compensation for investors at nonprofit organizations, growing fees, and mounting regulatory pressures.
The investment offices at these types of institutions often have difficulty attracting the same kind of talent found at for-profit firms. Many job seekers who would be well-suited for positions at endowments and foundations often gravitate to family offices and hedge funds, which offer higher compensation.
But while the majority of respondents said that they don’t plan to increase headcount, KKR said that it “respectfully” disagrees with this plan of action. The firm said it is “concerned that [endowments and foundations] are understaffed on a go-forward basis, [especially] if their boards are expecting them to maintain the same high level of performance.”
“The CIOs have been at the right place at the right time, so the question is ‘can that model outperform going forward?’” Henry McVey, head of global macro and asset allocation and CIO of the KKR balance sheet, told Institutional Investor.
In the report, McVey said slower growth in staff is a long-term risk for the industry.
The solution? KKR said that in order to keep up with an already-strained system, foundations and endowments need better “investment infrastructure” as their AUM grows. When asset pools exceed $5 billion, the firm said that it tends to favor “greater specialization across products,” and that endowments and foundations need a better “top-down” approach when it comes to portfolio construction and asset allocation.
Newer investment trends also require more people. For example, as more endowments and foundations enter co-investments, specifically in an effort to expand their private portfolios or thematic titles, the institutions will need more talent to find and keep track of these investments, as well as to conduct due diligence. In the report, 60 percent of survey respondents said that they already had a co-investment program in place, although most of them were admittedly “sub-scale.”
“Not surprisingly, those [organizations] that don’t participate in co-investments cited resource constraints as a key factor, which reinforces our earlier point that more staffing is likely required,” the report said.