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Harvard’s direct RE team to spin out

The high-performing group will become an external manager by the end of the year, as the university endowment shifts away from a siloed, internally-managed investment approach.

Harvard Management Company (HMC) expects its direct real estate investments team to spin out and become an external manager by the end of the year, as part of sweeping changes that will involve cutting its staff by half and adopting a more generalist investment approach, the $35.7 billion endowment announced Wednesday.

On Wednesday, Nirmal Narvekar, who was named HMC’s new chief executive in September, detailed several changes to the overall endowment and to real estate “to better position the endowment to support Harvard University for the long term,” he wrote. A spokeswoman for HMC declined to comment further.

One major shift is a move away from internally-managed portfolios in hedge funds and real estate. Although HMC’s investments in internally-managed portfolios generated superior returns in the past, in recent years, the massive flow of capital to external managers has made it more difficult for the endowment to attract and retain talent and remain agile enough to take advantage of shifting opportunities.

HMC allocated 14.5 percent of its portfolio to real estate during its most recently ended fiscal year, and direct real estate comprised more than half of the overall real estate portfolio. Dan Cummings has been HMC’s head of real estate since June 2009, according to its website.

“The real estate portfolio has been a key driver of returns for HMC since the direct platform was established in 2010, and the team will continue to be a valuable partner to HMC moving forward,” Narvekar wrote in his Wednesday letter.

In the 2016 fiscal year, which ended June 30, real estate overall returned 13.8 percent against a 9.4 percent benchmark return, while direct real estate had a 20.2 percent return. The overall endowment had a -2 percent return against a 1 percent benchmark.

“This seems to indicate their intention to remain invested in the real estate asset class,” Nathan Flanders, a managing director at Fitch Ratings, told PERE. Flanders noted that HMC was an exception among its peers for investing in alternatives internally.

In other changes, Narvekar said he will transition HMC to a “generalist investment model,” in which its investment staff works across asset classes and is compensated based on the performance of the overall endowment, rather than the performance of an individual asset class.

To guide this shift away from investment siloes, HMC hired four executives. Rick Slocum will become HMC’s first chief investment officer in March after working as CIO for a family office. HMC also hired three managing directors: Vir Dholabhai, formerly the senior risk manager for APG Asset Management US; Adam Goldstein, previously a managing director of investments at Columbia; and Charlie Saravia, earlier the co-manager of a Latin America family office research firm.

Narvekar also plans to create a “risk allocation framework” where portfolio allocations will be based on risk exposure rather than asset class. Columbia University’s endowment, where Narvekar previously was chief executive, developed a similar framework in 2004.