University of Michigan goes direct with hospital deal

The university disclosed the investment in its October 15 meeting materials. Board of Regents spokesman Rick Fitzgerald declined to provide any additional detail on the investment.

Healthcare real estate trust Ventas Inc agreed to acquire Ardent, which runs 14 U.S. hospitals, for $1.75 billion in April. Ventas planned to split Ardent’s real estate portfolio from the hospital business, then sell the hospitals to another entity owned by other equity stakeholders in the deal.

While the University of Michigan’s $10.2 billion endowment co-invested alongside its existing fund managers in the past, none of those deals was referred to as a “direct private equity investment.”

Many institutions aren’t nimble enough to pursue direct investments. For certain public LPs, boards must approve any new investments, and most boards don’t meet often enough to hear the pros and cons of a deal before it slips away.

To allow staff to move more quickly, the Board of Regents this year gave limited authority to Executive Vice President and Chief Financial Officer Kevin Hegarty to make direct investments. Hegarty was given permission to make up to three investments per fiscal year without the board’s approval, so long as none of the deals are larger than 1 percent of the endowment’s assets.

“On occasion, an investment is of such nature that it cannot be approved by the Board of Regents prior to commitment,” Hegarty wrote in a May memo, which requested the one-time authority “to ensure flexibility.”

The board granted Hegarty approval in May to do one deal, then in July it said he could do three such investments per fiscal year, according to endowment documents.

In addition to its commitment to Ardent, University of Michigan also approved commitments to funds managed by two new firms specializing in energy and real assets: Bernhard Capital Partners and Carnelian Energy Capital.

The endowment committed up to $50 million to Bernhard Capital, a Baton Rouge, Louisiana-based firm targeting $750 million for its debut BCP Energy Services fund. University of Michigan also committed up to $30 million to Carnelian Energy, which is led by former Natural Gas Partners executives Tomas Ackerman and Daniel Goodman. Carnelian set a $400 million target for its first fund, according to a September 14 SEC filing.

Besides the commitments to those new managers, the endowment said it committed another $174 million for re-ups with existing fund managers.

University of Michigan held 12.2 percent of its assets in private equity as of June 30, according to its most recent investment report.

Big bet on PE

The October 15 meeting materials also included the University of Michigan’s annual report, which outlined $362 million of new commitments to private equity during the fiscal year ending on June 30, according to its annual report. The commitments included 11 re-ups and new relationships.

Even as University of Michigan boosts its exposure to private equity, however, its $1.25 billion portfolio failed to beat its benchmark on a one-, three- and five-year basis as of June 30, according to the endowment’s annual investment report.The portfolio returned 7.8 percent for the fiscal year ending on the same date, underperforming its benchmark from Cambridge Associates by approximately 1.4 percentage points.

The strength of the U.S. dollar damaged returns in certain non-U.S. funds in the endowment’s portfolio, the report said. “About half” of the University of Michigan’s private equity portfolio is allocated to international funds, CIO Erik Lundberg told Institutional Investor in July. The portfolio includes vehicles managed by Advent International, U.K.-based Candover Partners and CDH China, among many others.

“We try to globalize wherever we can,” told Institutional Investor. “You can go to places and be bold, like to Brazil or Russia or other emerging markets that seem very troubled but may be very good investments over time. How do you buy some of these countries that look terrible? If you go back five or six years, India looked like a terrible place to invest, but people who invested there got hugely rewarded over that period.”

Action Item: University of Michigan’s annual report is available here: http://bit.ly/1GmTlrR