The fourth quarter of 2018 ransacked the University of California’s assets as the stock market tanked, but the $114 billion organization forged ahead with its plan to deploy its cash stash into alternatives.
In the first three months of the new fiscal year, which began July 1, the $11.7 billion endowment section of the institution more than halved its position in cash, from roughly 7.5% to about 2.1%, or $300 million, according to a video of the UC Regents’ January 15-17 board meeting.
“We had been talking about our desire to remain opportunistic, but also at the same time, we were concerned with the fact that this growth risk factor was so dominant in our portfolios that we actually wanted to diversify as well,” said Edmond Fong, senior managing director overseeing absolute return, at the meeting. “What we ended up doing was creating a fairly robust pipeline of private market opportunities that shared some common characteristics.”
The similarities between the changes were that several were “non-market non-auction in transactions, directly where we were having a bilateral discussion with the seller,” said Fong, adding that this allowed the UC endowment to “control pricing discipline and reduce costs of transactions.” The cash-fueled allocations brought in additional diversification to the endowment. Fong said these opportunities had a “strong cash-flow profile.”
The shift started in the third quarter, where 60% of that cash went into real estate, with projects that the investment team had identified as good targets. According to Fong, his unit is conservatively underwriting these projects.
Another 20% was invested into other real assets, where they found several co-investments that helped reduce the overall program costs. An additional 15% of the cash was moved into absolute return strategies, via hedge funds.
“We’re quite comfortable with how we’ve been able to deploy that capital,” Fong said.
The remainder of cash was further committed in the fourth quarter, with 40% to private equity, which included a number of co-investments. Another 40% was invested in absolute return strategies.
“Again, we found a number of unique investment opportunities that we felt would diversify the endowment investment portfolio,” Fong said.
Fong expects an increase in cash due to some “inbound capital” from FFE’s (furniture, fixtures, and equipment) in this month and February, padding its somewhat depleted cash cushion by 2% to 3%. He said the University of California’s endowment is now ahead of its target schedule in private markets, but is foreseeing more volatility, which will alter that number.
The endowment’s asset mix as of December 31 was 38.6% public equity, 22.4% absolute return, 14.2% liquidity, 13.3% private equity, 7% real estate, 4.2% non-property real assets, and 0.4% cash.
The University of California’s Office of the Regents allocates its $114 billion in assets across five areas: the endowment, pension, retirement savings, working capital, and captive insurance.
The organization declined comment.