Mike McCaffery, the former CEO of Stanford Management Co., has a new hedge fund that will be managing about $6 billion, according to two sources familiar with the situation.
McCaffery’s firm, Makena Capital Management, is located on Sand Hill Road in Menlo Park, Calif., and a large portion of the hedge fund is coming from Paul Allen, the Microsoft co-founder turned investor and philanthropist. Sources say that Allen may be contributing up to $2 billion to the fund.
McCaffery, who left Stanford in December to launch Makena, is joined by David Burke, former managing director of the university endowment, and Michael Ross, the LP’s former CIO. Also on the team is Susan Meaney, who is listed as a manager at the firm in a March regulatory filing. Meaney was formerly the director of real estate investments for the William & Flora Hewlett Foundation.
“We’re not ready to discuss our plans yet,” said Burke, who spoke to PE Week while traveling with McCaffery and Ross on their way from Europe to South Africa. Burke would not say if their globetrotting was fund-raising related and would not confirm the fund’s size or Allen’s contribution.
“Everything is going really well,” he said while he reiterated that he couldn’t discuss the fund. “I wish I could help you, but I really can’t.”
As of its regulatory filing on March 30 – an asset-backed issuer distribution report – Makena had raised $15.9 million, which included commitments from McCaffery, Ross and Burke, who are each listed as beneficial owners. Another listed investor is Seattle-based Cougar Investment Holdings.
Of that $15.9 million, $3.2 million was set aside as “working capital” while $12.8 million was designated for Makena’s “employee recruitment and retention program.”
No one should be surprised that money is flowing to McCaffery and company. By the end of his tenure at the helm of Stanford, the $14.3 billion endowment had become the third largest of any North American University, trailing only Harvard University (whose endowment recently hit $25.9 billion) and Yale. The endowment grew annually an average of 7.9% under his stewardship, which began in 2000, according to figures supplied by Stanford. Before Stanford, McCaffery was chairman and CEO of investment bank Robertson Stephens & Co.
McCaffery, Burke and Ross have never publicly said why they left SMC, but a story in Barron’s earlier this year cited “scuttlebutt” that Stanford had denied the investors’ their request to manage money for parties outside of Stanford.
It is not the only endowment that has seen changes in its top ranks. The Harvard Management Co. (HMC) ousted longtime chief Jack Meyer over a disagreement in bonus pay (which amounted to roughly $30 million each year). Meyer, who joined HMC in 1990 and oversaw 16% annual returns over the last decade, left last year with more than 20 colleagues to form a $6 billion hedge fund.
Ross told The Stanford Daily in 2004 that the compensation for Stanford’s then 15 senior investing professionals was “substantially less” compared to that of HMC employees. At the time, Ross also said that Stanford pays fees to more than 150 outside managers, who control the individual funds in which the endowment invests.
Whatever their salaries at Stanford, the opportunity for McCaffery, Burke and Ross to earn more than they did appears strong. Hedge fund managers are typically paid 20% of the profit earned on their portfolios. If Makena’s team sees similar returns as McCaffery managed to produce during a tough economic period – meaning 7.9% on a $6 billion portfolio – they would earn about $95 million. Meaney, who was making $230,678 as of 2003, according to IRS records of the William & Flora Hewlett Foundation, will also likely see a significant bump in pay.
Since McCaffery left, Stanford has replaced him with John Powers, a Stanford MBA and managing director at Offit Hall Capital Management. Powers is set to begin his post on June 26.