Why you should care

Because the follow-the-money question is getting a little more complex.

Just a few years ago, managing a college endowment would surely have been one of the least desirable jobs in the world. After the crash, running endowments meant playing it safe while trying to pull off a recovery.

Today? If you’re Jagdeep Singh Bachher, the chief investment officer of the University of California system, your life is a little more exciting. And a little more cowboy. Indeed, that’s the case for most so-called institutional investors — the organizations that sit on big, big bucks, like pension and sovereign wealth funds, insurance companies and endowments. In an economy that’s gone from flailing to booming — especially in the tech world — such behemoths, known more for lumbering than agility, are diving into the fast-paced startup economy. In Bachher’s case? He’s making a move that makes his job even more exciting, if not daring.

And did we mention he’s doing it with a quarter of a billion (yes, billion) dollars?

The fund is bypassing the world of venture capitalists, the traditional middlemen in a lot of big-time investing circles, and has announced that it’s investing some $250 million of its $100 billion, picking companies to back on its own. The advantage: The endowment gets the intellectual property. In other words, an inside peek at the knowledge and research of a spunky startup that might be on the verge of, say, curing a disease. Those startups, meanwhile, are getting a pretty sizable backing that goes beyond the money; now they have access to a big research institution with patents aplenty.

What’s more, companies are staying private for longer, so it’s hard not to get antsy.

This is the “du jour” thing to do for institutional investors — to head straight for the companies themselves, says Josh Lerner, a professor at Harvard Business School and one of the foremost authorities on venture capital. Take a look at the business pages if you don’t believe us: The Qatar Investment Authority, the country’s sovereign wealth fund, on an Uber financing round, for example, or Singapore’s government investing in the payment app Square.

Of course, not every major institution is willing to take a big bet in the startup space, which is why many are co-investing with other money pros. In 2014, some 71 percent of private equity investors said they expected to increase co-investments, according to a report by investment giant BlackRock. (A measly 2 percent said they weren’t interested in upping their commitments.) Lerner points out that’s some decent cost savings to the institution, now not saddled with a VC middleman fee. “There’s a sense of frustration” among huge private equity funds who’ve seen “quite mediocre” returns, Lerner says, in large part because of those fees. What’s more, the companies are staying private for longer, so it’s hard not to get antsy; anyone with a penny or two burning a hole in her pocket is sprinting to get in on even late funding rounds for private companies, hoping to squeeze in just before an IPO.

Even with all this happening, the venture capital industry is doing quite well; it hit a record high in 2013, which set it booming last year, raising $495 billion, according to a 2015 report by Preqin, which gathers data on assets and performance. But, ironically, such venture vertiginousness means money doesn’t come as cheap as you’d think, even if you’re literally giving it away. Indeed, venture capital has been a “very tricky place” for large investments, Lerner says. “They’ve suffered.”

Co-investing isn’t a guaranteed solution by any means, though. Co-investments can actually underperform, warns Ashby Monk, executive and research director of the Stanford Global Projects Center and a top academic on investing. And many would say it’s a risk they’re unwilling to take. Just ask John Powers, who recently stepped down as president and CEO of the Stanford Management Co. It’s “really asking for trouble,” he says. Powers calls the hope of intellectual property benefits “naive” and “a fantasy” and points out that there are reasons to trust VCs: their ability to do research, hire full-time analysts, make smart connections and understand an entire space, to name a few.

In any case, investment is evolving — and it has to. The structures running the investment world are horse-and-buggy. They were built in an era of $20 million funds, says Lerner. Today, you can strike that “m” and replace it with a big fat “b.” Time for the Model T.

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