Endowment-Style Private Equity Investing

EMS:

Hi, Roger. Thank you so much for being with me today.

Roger Vincent:

Thanks for having me, Elana.

EMS:

Absolutely. So, to kick off the conversation, tell us a little about the firm and how you got to where you are today.

RV:

Sure. So, Summation is a newly formed firm and we're pioneering a style of investing, which we call endowment style private equity investing. Before I founded Summation earlier this year, I ran the private equity portfolio for the Cornell University endowment for over a decade, but the story really begins quite a bit before that. The beginning of my career, which I started in the mid-1990s, was as a direct private equity GP, and I was at a couple of different private equity firms, both on the buyout side and the venture side, and really learned the business from the ground up. And I learned later as an LP that that was hugely advantageous. And so, as I was underwriting GPs for the Cornell endowment, we probably underwrote over 150 manager funds over the period of time I was there. And the insights that I had, knowing how the business really works from the GP side of the table was a huge advantage. And it showed up in the numbers. Over the time I was at Cornell, we had returns that were north at 20% annualized and at a fund level, just looking at mature funds, more than 25% of our funds did over a 3x net return, and more than 50% of them did north of a 2x. So, knowing what you're doing when you select managers is really powerful, but there's a lot more to it than that. And the insight I had on the desire to start Summation was to try and bring that quality that I saw within Cornell's endowment, bring it to other asset owners and help them to access the private equity asset class in that same style.

EMS:

Great. Roger, that segues nicely into the follow-up question I have for you. Given your former seat working inside of an Ivy League endowment, what does successful endowment style PE investing look like? And how are you applying that to your new role as Founder of Summation Capital?

RV:

Well, the first part of it within an endowment is understanding that private equity is an opportunity to get excess outsized returns. And the first thing that an asset owner should do or that an endowment does, is try to figure out how much of an illiquid asset class they can fit within the overall investment program. And so, Cornell and many of the other Ivys have really taken this to the limit, have made private equity the largest asset class within their endowments. Beyond sizing it at the right level, manager selection, which I talked about before is obviously a core skill of any private equity investor. But the things that people don't think about as often are things like portfolio construction, vintage year diversification, the operational implications of having a large portfolio and managing your unfunded liabilities. One of my observations from being at Cornell is the right level of diversification is much higher than most asset owners can handle. And one of the things you'll see if you look at how the large endowments are allocating to private equity is the larger ones are putting more into private equity, but they're also building much more diversified and sophisticated portfolios. And as I looked at what people were doing that had fewer resources than a large endowment, what I saw was oftentimes under-resourced and under diversified portfolios and Summation's solution is to help bring that level of sophistication to those investors.

EMS:

Roger, as a follow-up, what are some of the specific greatest opportunities you see in your space and why?

RV:

Well, we see great opportunities across the private equity ecosystem, and that's everything from early-stage venture to growth equity to mid, small-, mid- and large-cap buyouts. At Cornell and at Summation, we do that on a global basis, so around the world, and it's really our job to go and find great opportunities in all the nooks and crannies of the industry. So, the first answer is there are great opportunities everywhere if you have the time and the expertise and the resources to go find them. But to be a little bit more specific about it, an area that we think is very interesting that not a lot of people are knowledgeable about would be buyouts in the Japan market. And that's exciting to us for a number of reasons. We've been investing over there, or I've been investing over there for seven or eight years, know the market very well, have a lot of things I like about it, but I find that it's a market that not a lot of people understand or become familiar with yet.

EMS:

Roger, on the other hand, what are some of the greatest challenges you face in your space and why?

RV:

Well, as a new firm, getting the word out is a challenge. And we're not just a new firm, but we're doing new things. And it often takes leading minds to adopt new innovations. And so, we're trying to find those people out there on the capital side who would like to partner with somebody who has a new way of doing things. And one of the things that we're doing that's new is how we're charging for our services. Here I took a page out of the endowment playbook. One of the things the endowments have learned to do very well is to pay for private equity the right way. It's an expensive asset class. And so, keeping an eye on the overall fee level and keeping it low and well aligned is very important. And so, what we did is we said that we can disaggregate the returns that we generate in Summation into beta, which is the market passive equity return that any asset owner can really get for themselves for free and no effort and excess return over that. And that's what we call the alpha. And so, we're only charging a performance fee on our ability to generate alpha. That's a common way of doing things in the endowment world, but it hasn't been done before in the market. And so, it's a great innovation. It really aligns us with our investors, keeps the fee burden much lower, which we can offset further through no fee, no carry, co-invest with our underlying GPs, but it's different. And so, we need to find asset owners that are willing to try something that's a little bit different.

EMS:

Roger, we've covered a lot of ground today and wanted to see what your future plans are.

RV:

Well, we raised our initial capital, and we built out the core team. Today we're really focused on two core initiatives. One is finding capital partners that would like to access the private equity asset class in this style. And two, building out the portfolio. And we're well along with that, having already allocated to some very interesting lower middle market buyout funds as well as hard to access tier one venture funds both domestically and globally.

EMS:

Roger, I wanted to thank you so much for sharing your perspective with our listeners.

RV:

Thank you for having me.

EMS:

And thank you for listening to the EisnerAmper podcast series. Visit eisneramper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business.

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