University of Michigan plots SBIC investment program

  • Proposed program capped at 1.5 pct of assets
  • Staff would be able to commit to funds without board approval
  • $10.5 bln endowment backs Kayne Anderson co-investment

University of Michigan’s $10.5 billion endowment is launching a program to invest in private funds that benefit from government-guaranteed debt financing, an investment memo released by the endowment said.

The funds, known as small business investment companies, are often categorized alongside private equity or private debt strategies in institutional investment portfolios. General partners who license their funds as SBICs with the U.S. Small Business Administration are eligible for as much as $2 of leverage for every $1 of private capital raised. Leverage is capped at $150 million per fund.

The government claims the program led to more than $21 billion of investment in U.S. small businesses between 2011 and 2015.

Why the university is now establishing a new investment program to target SBIC funds is unclear. Spokesman Rick Fitzgerald declined to comment.

The endowment’s new commitments to SBIC funds would not exceed more than one and a half of its long-term portfolio each fiscal year, according to the investment memo. University of Michigan will not represent more than 25 percent of the committed capital in any single partnership.

Staff is asking the Board of Regents to give the executive vice president and chief financial officer the authority to approve new commitments when timing issues would constrain the endowment’s ability to access the fund. The Board of Regents typically meets around 10 times per year and often approves commitments to new fund managers at its meetings.

“These partnerships are small in size and highly capital constrained as a result of SBA regulations, which will require the university to respond to each fundraising swiftly to obtain a material fund allocation,” according to the memo, which is signed by Executive Vice President and Chief Financial Officer Kevin Hegarty.

The endowment’s recent alternative-asset-commitment activity has been concentrated in real estate and natural resources funds. In October, the university committed $10 million to a co-investment opportunity in Casillas Petroleum, which is managed by Kayne Anderson Energy Fund VII.

University of Michigan also committed $50 million to Cabot Industrial Fund V, which is investing in industrial properties, according to its most recent investment disclosure. The endowment also allocated $17.5 million to a Related Fund Management vehicle acquiring a portfolio of multifamily mortgage loans secured by Freddie Mac.

University of Michigan valued its PE portfolio at $1.3 billion as of Dec. 31, 2016. Its allocation to venture capital, which is separate from its commitments to PE funds, was valued at $1.4 billion as of that date.

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