Anne Casscells Managing Director, Aetos Capital

Anne Casscells joined private investment firm Aetos Capital in October following a three-year stint as chief investment officer of the Stanford Management Co., where she was responsible for the investment of over $9 billion in endowment funds and other assets on behalf of Stanford University.

Prior to assuming the CIO position in 1998, Casscells served for two years as managing director of Investment Policy Research for Stanford. Earlier in her career, Casscells worked first as an analyst at Morgan Stanley & Co. in New York, and later as a vice president in Goldman Sachs’ fixed income division on the West Coast. Casscells earned a Masters of Business Administration degree from the Stanford Graduate School of Business, where she was an Arjay Miller Scholar, and a Bachelor of Arts in British Studies, cum laude, from Yale University.

When you began as CIO of Stanford Management, what did you see as the most pressing needs within the endowment’s alternatives portfolio?

When I took over in late 1998, the Stanford endowment had a heavy commitment to private equity; it had a reasonable commitment to absolute return investments and a significant commitment to real estate as well. We were very satisfied at that time with the exposure to alternatives.

As 1999 and 2000 went on, however, we did become concerned with our venture exposure. It was very high, so we took steps to limit it.

Stanford has, indeed, historically been known for aggressive venture weighting in its private equity portfolio. How did you go about limiting that exposure?

It was primarily a matter of slowing down on investing in new teams, and sometimes not taking a full pro rata allocation when re-upping with an existing fund. A lot of the risk management with venture capital over the course of 1999 and 2000 was also about trying to aggressively liquidate venture distributions.

When you managed to limit the VC exposure, how did you parcel the freed-up capital?

In 1999, a lot of the cash we raised from liquidations went into rebalancing the portfolio, especially into increasing our real estate and REIT exposures, especially since REITs were undervalued at the time. We also rebalanced into fixed income and inflation-linked bonds, which had very high yields at that time.

Stanford was considered a pioneer when it came to implementing post-venture distribution (PVD) portfolios. Considering how hard those positions have been hit across the board, what do you see as the future of PVD allocations?

There’s no right answer, but I think it’s an important issue right now.

I think a lot of LPs are reexamining their post-venture distribution strategy. Many are asking themselves whether they should be combining small-cap growth portfolios with the task of liquidating their venture [investments], or whether those functions should be separated.

What do you think most LPs will end up doing?

In the next few years, I think it is more likely that people will take a pure liquidation approach to the venture distribution. To the extent they want a portfolio of small-cap technology and biotechnology growth stocks, they’ll create that as a separate mandate.

Institutional investors are not supposed to be easily swayed by market ebbs and flows. That said, why have so many venture capital firms had such difficulty hitting their fund-raising targets?

I’m not sure that there are that many venture firms raising money right now. Our experience at Stanford was that an awful high number of top quartile firms went out and raised funds in 2000 and early 2001, so those firms are well-funded.

Overall, I do think that you have a change in risk tolerance among some investors who, when the market was at its peak, may have overestimated their risk tolerance. Also, people have an asset allocation issue in that the overall decline of the market has reduced the denominator in people’s portfolios. So if someone has a permanent range for private equity, they could be finding themselves over-committed just because their total assets have fallen.

There is a perception that another reason for the funding downturn is that LPs are currently quite angry at private equity GPs. Is that true? If so, what do GPs need to do to get back in to LPs’ good graces?

Most LPs I know want to have a constructive relationship with their GPs, and be partners in the long run so it will be profitable for both of them.

Over the next year or so, GPs may need to be a little more transparent about what’s going on with some of their companies. Some GPs, not all, may need to be a bit more realistic about the value in their portfolios, and share that information with LPs. Some may also have to consider whether or not they’ve really sized their funds appropriately to the available investment opportunities.

When buyout firms raised enormous funds in the 90s, their overall returns declined. Do you think we’ll see history repeat itself when it comes to the venture mega-funds?

It will certainly be hard to repeat the very high returns we saw in 1997 through 1999, and that will be made even more difficult by the fact that there is more capital at work now than there was in the years that produced those returns.

Your reputation at Stanford was, in part, that you were very focused on ramping up the absolute return portfolio. Is that an accurate portrayal?

During my tenure, we did increase the size of the absolute return portfolio quite a bit; we tripled the size of it. That was a good deal of the work I did, but I was not alone. I was working with my colleagues on it.

You decided to leave Stanford for a private investment house, and have since recruited another endowment manager in Northwestern University’s Jeff Mora to join you. Why is the institutional LP community such a revolving door?

Let me answer that by talking about what’s attractive to me, and to some extent Jeff, about working on a private sector platform rather than on a not-for-profit platform.

Historically, the endowments and foundations and some of the other institutional investors like the pension funds have done a good job becoming thoughtful and intelligent investors. However, inside many of these investment groups, you’re usually pretty limited when it comes to putting together a critical mass of people who have the talent and range of skills needed to do everything you’d like to do, or ought to do, to conduct a complete due diligence. And that’s what a platform like Aetos allows us to do.

So now instead of being the one person with hedge fund experience, I’ll have Jeff and several other portfolio managers who also have experience in hedge funds.

It’s that exchange of ideas and ability to cover a lot more ground that makes you feel good about the due diligence job you’re doing. There are also a lot of really important areas like risk management, which is very hard to address without enough staff.

Compensation also figures into the equation. Do more institutional LPs need to provide their people with incentive-based compensation packages?

I think you’ve seen a definite movement over the last five to 10 years for more of the larger endowments and foundations to create separate investment groups, to professionalize the staffs and try to bring the salary structure more in line with the salary structure of the industry you’re basically recruiting talent from. So that’s a trend I believe will continue. It will always be perennially controversial and challenging inside a non-profit institution to pay Wall Street-type salaries.

Do you expect Aetos to sign on more people like Jeff and yourself?

We certainly have plans to hire more people, and do plan to add another senior portfolio manager, but I wouldn’t presume that they’ll come out of the endowment sector.

Speaking of Aetos, your literature says the firm plans to form a global property fund, a private equity fund and an absolute return fund, but that you’ll begin with the global property endeavor. Why begin there?

Well, we’re really launching the global property and the absolute return funds simultaneously. Both of them are very ripe opportunities at this moment. Having surveyed the real estate markets around the world, we’ve decided that the opportunity to provide transitional capital to the real estate markets in Japan really is the deepest and broadest opportunity we’ve found, so we’re launching products to address that. Expect the private equity product to show up late in the first half of next year.

Are those three asset classes all Aetos plans to focus on, or are they a jumping-off point?

I think that those are three core investment areas that are likely to always provide some opportunities for skilled investing. Absolute return, for example, is a very broad category. So long as you don’t take the position that you have to be invested in all categories at all times, there will always be something to do. I also think that private equity or property, when viewed on a global basis, will always provide opportunities.

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