There is a growing trend right now in the endowment industry to outsource the function of the Chief Investment Officer (CIO) to a third-party firm, which is effectively an investment consulting relationship. This decision is typically made with an eye toward lowering total overhead costs. Acquiring top talent dedicated only to your endowment fund can be expensive and difficult; so many endowment funds have decided to outsource this role to a third-party adviser.
Endowment funds also outsource their CIO function because these outsourced CIOs are already working with multiple endowment funds, family offices, foundations, and pension funds, as well. This breadth of portfolio management responsibilities may give the outsourced CIO greater experience, more lessons learned, tactical/strategic insights, and a diverse toolset to manage risk within a portfolio. For example, many of these consulting firms use sophisticated software and risk management reporting tools which would be expensive and time-consuming for a endowment fund of $50M to $1B in assets under management.
For investors hiring an outsourced CIO firm, typically non-discretionary relationships are set up so that the consulting firm is advising on assets, but not holding custody of the assets or making trades and investments on behalf of the endowment fund. Still, both discretionary and non-discretionary relationships do exist. The talent resources, experience, relationship with the consultant, and time constraints of a endowment’s staff all play a part in the custody decision. Most consultants have deep expertise in fund manager selection, risk management, public markets, bond and credit investments, and how to manage a diverse portfolio of traditional security-based investments. While there are exceptions, the majority of these consultants have little experience in hard assets, asset-based lending, physical real estate, physical commodities such as gold bullion, or executing direct investments into operating businesses.
Chief Direct Investment Officers (CDIOs): One trend that I’m just now starting to see is the offering of outsourced Chief Direct Investment Officer services to endowment funds. These CDIOs supplement what a CIO provides and, as the name suggests, they bring a level of sophistication, focus, and deal flow due diligence value to endowment funds. The CDIO will help a endowment fund with their work in the areas of co-investments, club deals, and direct investments into operating businesses. As endowments increasingly seek to make direct investments, co-investments, and invest outside of the standard fund model, the need for talented professionals who can head up the direct investing activities is growing. This is one of several ways that the endowment fund industry is maturing and developing new solutions to meet challenges that endowment fund managers are now facing in allocating their capital.
If you would like help identifying a Outsourced Chief Investment Officer (CIO) or Outsourced Direct Investment Officer (CDIO) for your endowment fund we can help. Please call (503) 922-1811 or Team@Endowments.com and we can schedule a time to talk.