Yale’s low-key new fund chief embodies daring investment style

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To understand how a young, low-key and geeky Midwesterner this week landed the job of following the hugely respected David Swensen as head of Yale’s endowment, industry insiders point to how the fund has evolved over the years.

Back in 2007 — when 36-year-old Matthew Mendelsohn first joined the Yale Investments Office after a degree in physics from the Ivy League university — bets on private equity and venture capital funds jointly made up less than a fifth of Yale’s $23bn endowment. At the time, this was considered daring and perhaps even a little dangerous. 

Today they make up nearly two-fifths of Yale’s now $31bn pot of money. Add in other untraded, unlisted investments in areas like real estate, and over half of its capital sits in what is commonly termed “private capital” — far more than most endowments are willing to allocate.

Mendelsohn is in charge of venture capital, which at 22.6 per cent is by far the biggest allocation, and has worked on its private equity side in the past. Industry insiders say that made him a natural choice when Swensen — who pioneered a more adventurous endowment strategy and inspired investors of all kinds in his 36-year tenure — passed away from cancer in May.

“It’s hard to separate the transformation of Yale’s portfolio over the past decade from the decision to appoint Matt,” said Scott Kupor, managing partner at Andreessen Horowitz, a prominent venture capital firm that Yale has invested with. “The belief among many investors is that in the future, returns will increasingly come from private markets. Time will tell if they’re right, but they’re voting with their feet.” 

That helps explain the practical reason why the St Louis native got the top job. But people who know Mendelsohn also describe an earnest, polite, bright and exceedingly calm person adept at building relationships with the top players in Silicon Valley and Wall Street despite a low-key nature.

“Like many of us in this business, he is probably a natural introvert that has to play an extrovert,” one observes. “He’s not the kind of guy you are going to find sitting at a bar late at night, regaling people with stories.”

Others recount how Mendelsohn often asks venture capitalists detailed questions over how their firms are organised, rather than quizzing them about individual bets they might have made.

“He’s really emblematic of the Yale culture and strategy. Everything is about partnership,” says Kupor. “When they do due diligence they ask what I think are the right questions. They ask about organisational design, decision-making processes, the overall strategy, firm culture, how we align incentives, and only after that asks about our portfolio companies. Many other investors just ask about our portfolio.”

Yale's endowment has beaten its rivals over the past decade

Some people who know Mendelsohn say he has a greater appetite for potentially risky, newer investments than many of his colleagues at Yale and elsewhere in the world of university endowments. For example, under his direction Yale invested in Paradigm, a cryptocurrency fund that has become a big player in the fast-growing but risky decentralised finance sector.

“Unfortunately, most people in our industry are followers,” said Ryan Akkina, a senior member of the investment team at MIT’s endowment. “Matt is one of the very few people in the institutional venture space who’s at a big place and is very willing to be innovative.”

Yale’s venture capital investments have returned an average of 21.6 per cent a year during the past decade, the endowment said. A Cambridge Associates index of venture funds made annual returns of 18.3 per cent during roughly the same period.

This has been a major contributor to the overall YIO’s returns of 10.9 per cent a year on average over the past 10 years. Although that is down from its own 12.4 per cent average over the past three decades, it comfortably outpaces the average US endowment’s 7.5 per cent returns.

Bar chart of 2020 asset allocation in per cent showing Yale is more aggressively invested in  private equity and venture capital than most US endowments

Nonetheless, Akkina predicts that Mendelsohn would likely be prepared to experiment with the “Yale Model” that Swensen first established decades ago with his big moves into once-risqué strategies like private equity, venture capital and hedge funds. “That was a product of the 80s, 90s and 2000s,” Akkina said. “The investment landscape is very different today.”

Although returns have been largely upbeat for much of the post-crisis era, valuations are now so high that future performance is likely to be weak, forcing many big investors to look for alternatives.

But many of the once cutting-edge strategies Swensen first championed are now commonplace, leaving Mendelsohn arguably facing a more treacherous investment landscape than his mentor did when he first arrived at the New Haven, Connecticut-based Yale fund back in 1985.

David Swensen first established the ‘Yale Model’ decades ago © Yale University, Michael Marsland

“For anyone managing a portfolio of this size, there will of course be challenges, let alone trying to follow in David’s footsteps,” Mendelsohn said in an emailed statement. “However, I am confident that our team is well positioned to meet those challenges. The foundational principles of our investment approach are ingrained in a very deep, experienced team that is passionate about furthering Yale’s mission.”

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