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Beyond Basics is published by  Wealth Advisors (India) to give our readers meaningful insights on investing and entrepreneurship.


KR Lakshminarayana, popularly referred to as LAN, is building one of India’s first endowment funds inspired by funds of universities like Yale and MIT. In this interview, he takes us through his investment philosophy, approach and the finer nuances of managing an endowment fund.

 

Lan_insideiim When Mr. Azim Premji wanted to setup an endowment structure to fund his philanthropic work, one of his first calls was to Lakshminarayana (LAN), then the Chief Strategy Officer and Head of M&A for the IT business at Wipro. The message to LAN was simple. Premji wanted to setup a fund, modelled along the lines of global endowment funds such as Yale, MIT, Stanford, Hewlett and various other foundations and universities. The purpose of the endowment was to bring in an annuity income to fund various philanthropic activities of Azim Premji in the areas of primary education and related development.

We quizzed LAN on what he did as soon as he received the call. “On day-1, I was just Googling for information on University endowments. I probably downloaded annual reports of various endowment funds to study them,” says LAN. The next six months were very structured. He noted down a list of questions he wanted answers for, and put together a list of endowment fund managers he wanted to meet. “The questions were broadly divided into operations, structural and tax-related,” he explains. LAN travelled across the U.S. and Europe, and met with some of the most well-known endowment fund managers at universities and foundations like Harvard, Yale and Wellcome Trust. “It was a wonderful learning experience and the process we’ve put together now has been shaped by many of these meetings,” he says.

So, what is an endowment fund? The goal of any endowment fund revolves around balancing two key goals: one, the constant need for liquidity to fund the philanthropic activities of the foundation and, two, build this wealth for the long-term and protect it for inflation.

This means that your benchmarks of measuring fund performance are different. He explains, “You ask yourself – How much do you need on an annual basis? Over the long-term, are you protecting yourself against relevant inflation (for instance, in case of Universities, , education inflation). I think endowments have the ability to take on volatility much better; If we take care of the first two, we can use volatility as an ally.”

Charity, deep rooted in India

LAN is of the belief that the concept of charity is deep-rooted in India. “Several years back, people used to setup a temple or a dharamsala, and over a period of time the community would fund it. Of course, people would also allocate some amount of money, annually, for charity.”

But, he feels, one of the biggest changes in the ecosystem is the desire for individuals to look at charity as a multi-generation effort. There is permanent capital, which when invested well, can give annual returns which can be used for philanthropy. Of course, in India, there is no legal recognition of an endowment fund or even an ecosystem of endowment fund managers. “But, the desire to engage in long-term philanthropy is deep,” says LAN.

Approach to portfolio construction

If you look at the colloquial business literature on endowments in the West, there is a lot of emphasis on fund manager selection. Endowments allocate capital to various funds, based on fund manager characteristics. “However, we tend to look at it a little differently,” says LAN.

At Azim Premji Foundation, LAN has divided the entire activity into three key operational areas. First, the process of managing the treasury and cash flow needs of the foundation. “We’ve a fortnightly system where I sit with the foundation’s CFO to understand the cash flow need. I actually learnt this while studying Stanford’s approach to managing its endowment fund. The second aspect we look at is liquidity. Do we have enough cash for the next four quarters? The third aspect is, of course, managing return expectations and protecting the corpus for relevant inflation,” explains LAN.

Keeping these operational requirements in mind, the process of asset allocation then starts. In India, there are broadly public equities, private equity, government bonds and corporate bonds. Azim Premji Foundation is invested in all these four asset classes. LAN says, “Globally, several university endowments are also big on real estate and they manage the physical assets around the university. In India, this is not feasible. At least, not yet. Over time, we may be open to the idea of corporatized owning of real estate.”

While constructing portfolios, LAN and his team approach it from both qualitative and quantitative standpoints. “To start with, we’ve a few long-term themes that we’re betting on. Financial inclusion, for example. We’re also betting on India’s consumption story panning out and so on. Once the theme is set, we deep dive into financial models, analysing all aspects from a quantitative aspect. We spend a lot of time on assumptions we make and check back to see if these assumptions pan out or if there is a variance,” explains LAN in detail.

Fund manager selection is a crucial point of analysis, as well. LAN is convinced that a match in value systems and good chemistry with the fund manager is crucial. “It is very similar to hiring an employee. We also like fund managers who have their own wealth invested in the business,” he says.

The initial learning

While we were on the topic of asset allocation, I asked LAN if he had met David Swensen, the renowned Chief Investment Officer of Yale University. In fact, Swensen is widely known for his book – Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment – in which he shares his experience of managing the Yale endowment fund. At the time of authoring the book, Swensen has spent over 14 years at Yale and had added over US $2 billion to Yale’s coffers, by getting an annualized return of 16 per cent. It was unprecedented by endowment fund standards and the book became a must read for various investment managers.

LAN recalls his meeting with Swensen in early 2011 with fondness. “I had read the book before I went to meet him. He also gave me a signed copy. Like all my meetings with leading endowment managers, I learnt a lot from Swensen as well.” One of the points that Swensen mentions in the book is that illiquidity has a risk premium. One of the asset classes that Swensen betted on was risky private equity assets. LAN says, “The point that Swensen makes is that if the only risk you’re taking is illiquidity, an endowment should be able to take that on. However, one of the underlying assumptions is that the private market is cheaper that the public market. So, in addition to illiquidity risk, there is also a valuation risk which has to be considered. In India, for example, the valuation risk in private equity is extremely high. Therefore, one must not blindly copy what works elsewhere in the world.”

The other aspect LAN noticed was that even for endowments, diversification is crucial. “One must certainly have a lot of non-correlated assets. I also learnt that several universities struggled after the 2008 crisis because they didn’t have a credit line. One of the first things we did after starting the fund was to setup a credit line for all our beneficiary organizations,” says LAN.

An ecosystem for philanthropy

From a macro perspective, LAN is witnessing first-hand a big boom for philanthropy in India. He believes that several first generation entrepreneurs want to create philanthropic initiatives with lasting impact. In fact, Mr. Azim Premji is one of the core members that leads the India Philanthropy Initiative, an informal initiative to help figure out the process of philanthropy for the wealthy. LAN says, “Of course, philanthropy is deep rooted in India. But, now, I am noticing that people want to  figure out ways to leave a lasting, multi-generational impact.”

Of course, from an endowment fund perspective, it is still early days. There are no policies or regulations around endowment funds and SEBI does not formally recognize such a fund. LAN believes that this ecosystem will evolve over time, new regulations will be brought in, but the fundamental idea of setting up an endowment structure to fund philanthropic initiatives will catch on.

Beyond Basics is published by  Wealth Advisors (India) to give our readers meaningful insights on investing and entrepreneurship.

Prem Sivakumaran

Prem is founder and editor of The Smart CEO Media Labs, the content creation partner for Beyond Basics@Wealth Advisors. Additionally, he’s also the founder-editor of The Smart CEO, a magazine focused on conducting in-depth, responsible and meaningful interviews with India’s leading CEOs. For Beyond Basics, Prem will lead the Entrepreneur Journeys section, specializing in interviewing senior entrepreneurs and business owners.

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