Led by President and CIO Scott W. Wise, Covariance Capital is a Houston, Texas-based provider of an increasingly popular brand of services known as outsourced CIO (also called fiduciary management or outsourced investment services). Wise started the business around mid-2010 after 21 years as chief investment officer at Rice University,
Outsourced CIO services are just what they sound like. For small institutional investors Covariance Capital will take over everything from setting asset allocation targets to hiring, firing and monitoring individual money management firms. It is initially trying to attract endowments and foundations with at least $25 million in assets.
Senior Investment Manager Daniel E. Feder, who joined Covariance Capital in early 2011 after launching a similar business for venture capital shop Sequoia Capital, declined to talk about specific funds his firm offers, or pricing details. But most Outsourced CIO providers, he said, charge an annual fee of anywhere from 20 basis points on up to 100 basis points or more. Rarely do they charge a carried interest, he said.
Private equity and venture capital investing is one of nine strategies offered by Covariance Capital. Feder oversees the area, drawing on his experience from 2000 to 2008 managing the private equity and venture capital program for Princeton University Investment Management.
Feder expects to steer clients into portfolios that divide roughly equally into private equity and venture capital, with an emphasis on operationally-focused mid-market buyout funds and earlier-stage venture capital. About half the capital will be earmarked for the United States and most of the rest for Western Europe and Asia.
On behalf of its first client, TIAA-CREF, which provided Covariance Capital $1 billion to start investing, the firm has to date committed money to 14 funds on its way to reaching an undisclosed target allocation to private equity and venture capital. While declining to name names, Feder described most of them as oversubscribed funds managed by sponsors with whom he’s worked before. The most recent two are first-time funds.
TIAA-CREF is hardly alone in the outsourced CIO business. One of the largest players, with some 450 clients, is SEI Investments Co. The Oaks, Penn-based firm pioneered the business back in the early 1990s along with Russell Investments, according to Paul F. Klauder, VP and managing director in SEI’s institutional group. Other significant rivals, said Klauder, include Cambridge Associates, Commonfund, Mercer and Northern Trust, while other providers of outsourced CIO services identified by Buyouts include HighVista Strategies, Investure LLC, and Makena Capital Management.
Casey Quirk, a management consultant to money management firms, early last year predicted that the fully-outsourced CIO market in the United States would grow more than 14 percent annually to about $500 billion in AUM through 2016.
SEI has seen its outsourced CIO AUM grow from about $45 billion five years ago to $63 billion as of September 30, Klauder said. Clients added in just the last several months include the defined benefit plans of Chemtura Corp., Iowa Health System, and Pirelli USA.
SEI’s outsourced CIO business includes about $1 billion in venture capital and buyout fund investments and co-investments managed by sub-adviser JPMorgan. The private equity program, in which the firm invites clients into funds of funds every two years or so, isn’t growing as rapidly as overall AUM, said Klauder. One reason: Many clients already have mature private equity portfolios when they hire SEI.
Klauder points to two main drivers for the outsourced CIO trend. One has been the “tremendous volatility in the market,” especially during the financial crisis, which convinced many endowments, foundations and others that they couldn’t react quickly enough on their own to changing market conditions. Many investment committees, he noted, meet just four times a year.
The outsourced CIO firms themselves have also driven things along—particularly those that expanded into the business after starting out as non-discretionary consultants. Many such consultants used to eschew offering discretionary services over potential conflicts of interest.
But rather than fight the fight, said Klauder, these firms now say it’s a “good idea for some clients and we can do it for you.”