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The Outsourced Direct Investment Officer for Endowments
Adapted for endowment and foundation boards from Chapter 17 of The Single Family Office by Richard C. Wilson.
When I wrote about outsourced CIOs, I added a newer role I was starting to see. I called it the Chief Direct Investment Officer, or CDIO.
A CIO picks managers and runs the overall portfolio. A CDIO focuses on deals. Co-investments next to a fund manager, club deals with other investors and direct stakes in operating businesses.
Where endowments run into this
Many endowments with private equity managers get co-investment offers. A manager calls and says there is a chance to put more money into one company, often with low or no fees.
That sounds great. But the endowment then needs someone who can read a deal memo, test the numbers and say yes or no in two or three weeks. Most small investment offices don't have that person. Many outsourced CIO firms don't either.
What a direct investment lead does
- Screens co-investment offers against a written strike zone
- Reviews the manager's diligence and asks what is missing
- Checks deal terms such as fees, carry, governance rights and exit plans
- Tracks the co-investment book separately from the fund book
- Reports to the investment committee on each deal
Three ways to staff it
- In house. Larger investment offices hire a dedicated director for co-investments.
- Outsourced. An outside adviser reviews deals on a retainer or per deal.
- Paired. Some families hire an outside CIO and an outside direct investment lead who work together. An endowment can do the same.
The rule I come back to
Deals that went well for the families I know usually had real time behind them. In the book I pointed to research on angel investors that found the deals returning the most capital had 40 or more hours of diligence behind them. That means one person can only look closely at about one deal a week. Fast yeses tend to be expensive.
If your institution can't put that time into a co-investment, it may be better to pass and stay in the fund.
Frequently asked questions
Are co-investments always fee free?
Not always. Many carry reduced fees, but terms vary by manager. Read the documents.
Do we need board approval for each co-investment?
That depends on your investment policy. Many institutions set a size limit above which the committee votes.
Can an outsourced CIO also do co-investments?
Some can. Ask how many co-investments they have reviewed and closed for clients like you.
Sources
- The Single Family Office, Chapters 11 and 17, Richard C. Wilson .
