Harvard Management Company’s direct real estate team has been the most successful of the endowment’s investment groups in recent years. Now, in an unusual move for the endowment space, the team that oversees the investment strategy plans to spin out to become an externally-managed platform by the end of the year.
While a spokeswoman for HMC declined to detail why the real estate team was spinning out, chief executive Nirmal Narvekar hinted that compensation could play a role. In a January letter, he wrote that the overall investment world’s shift toward external managers has made talent attraction and retention difficult.
Regardless of the catalyst, consultants noted that HMC has been unique among its peers for investing directly in real estate, while the external management model is more standard for the space.
Marc Cardillo, the managing director of hard assets research at advisor Cambridge Associates, said he doubted HMC’s spin-out represented a trend among peer investors because most endowments have invested in real estate through fund managers. Direct real estate requires significant internal oversight, for which most endowments lack sufficient staffing.
“For the endowments and foundations that we work with or we’re familiar with, occasionally you’ll see schools own property near the campus, but pure investment mandates are pretty rare,” he said. “There are no goings-on in terms of things that would indicate [other] groups spinning out or movement across the endowment world.”
Scott Krouse, managing principal at Chicago-based consulting firm Alignium, noted that direct real estate has driven HMC’s overall returns. In its 2016 fiscal year, which ended June 30, real estate 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.
“I’m not surprised to see that group spin out and decide to have its own identity,” said Krouse, who, along with two partners, spun out the real estate team at consultancy RVK to form Alignium this year. “I think they’re going to be very, very successful.”
Though HMC has the most assets under management of its seven Ivy League peers, the university had the second-lowest returns of the group over the 10 years ending June 30, according to the schools’ annual reports. Yale University and Columbia University led the pack, with 8.1 percent returns over the decade, while HMC returned 5.7 percent.