How Do Financial Expertise and Networks Affect Investing? Evidence from the Governance of University Endowments

Abstract

Using the unique laboratory of university endowments, we study the effects of expertise and networks on investment performance. Using detailed information on more than 11,000 unique board members for 579 university endowments, we show that the financial expertise of an endowment’s governing board is positively correlated with allocations to alternative investments and higher total returns. The type of expertise matters as elements appear unique to particular subsets of alternatives, such as private equity and venture capital, which are more difficult to analyze and manage than traded public securities. Further, we find that endowments whose board members have extensive networks of investment professionals also invest significantly more in these asset classes. With respect to returns, we find that endowments benefit from both higher allocations to private assets and, in some cases, selection of high performing managers. Expertise in venture capital, in particular, is associated with endowments being able to earn higher returns in alternative investments than predicted by benchmarks for the asset class. Aside from merely capturing illiquidity premia, this is consistent with improved manager selection and access to high performing funds. To shed light on the channels through which elevated performance arises, we conduct a unique survey of endowments. The respondents confirm our empirical results, reporting that more knowledgeable and connected investment committees are associated with more frequent recommendations of and access to restricted, high-performing funds. Our results suggest that endowments directly benefit from having experts in alternate investments serving on their boards.