Texas Private Equity Conference
Authors: Hartzell Jay , Gurley Bill , Hall Rich , Wiles Ken , Khan Farah , Sweeney Drew , Hegi Brian , Loessberg BJ , Nolen Jim 
Published: November 2021

The President of The University of Texas at Austin discusses UTIMCO's investment strategy with its Chief Investment Officer.

As the administrator of a perpetual endowment for the University of Texas and Texas A&M, UTIMCO allocates a substantial part of its equity investments to longer‐term and illiquid assets such as private equity. At present, fully 40% of the 63% of the funds UTIMCO devotes to global equities, and thus 25% of its total portfolio, is allocated to private equity. What's more, UTIMCO's annualized ten‐year return on private equity has been 13.5%, as compared to its 9% return on public equities over the same period.

Along with these high returns, UTIMCO's CIO takes great satisfaction in the large percentage of assets under management, now 10%, in the hands of its minority managers. At the same time, his greatest professed concern is the recent increases in money supply combined with near‐zero bond yields, and the resulting importance of positioning the portfolio for future inflation.

Private equity has had a profound effect on financial markets and companies, including a reduction in the number of U.S. public companies to roughly half of what it was 15 years ago. Given the availability of PE and VC capital, companies stay private longer and, as a result, private investors capture more of the increase in company values. And PE funds are now said to have nearly $3 trillion in “dry powder” that, when levered, gives them about $6 trillion of buying power.

The panelists in this discussion cited a number of major challenges for private equity that go beyond the current COVID epidemic, including: (1) deal pricing and selection; (2) the health of the leveraged loan market; and (3) the search for new and better exit opportunities. All agreed that deal pricing was a perennial challenge, and that PE firms must work to develop a special “edge” in an intensely competitive market, where some firms consider a thousand deals a year to close on just two or three.

The founder of Benchmark Capital begins by mentioning his firm's almost exclusive focus on early‐stage ventures and preference for being “the first money in.” He also notes Benchmark's different ownership structure; perhaps unique among venture firms, it is an equal partnership in which all partners have “the same economics,” the new as well as the oldest.

The main investment advice offered is that, with interest rates so low, and some public company stocks trading at 30 to 50 times revenue, investors should remain as liquid as possible

The recent popularity of SPACs is viewed as a response by issuers to “a broken IPO system” whose main symptom is runaway IPO underpricing and wealthy bankers. Noting that the amount of first‐day underpricing of IPOs has risen from $2 billion in 2016 to $30 billion in 2020, Gurley predicts that direct IPO listings, or DLs, will become much more common in the future.

As for the recent frenzy of retail trading and the rise of Robinhood, Gurley says of the new trading firm's CEO,

He tells the world that he's democratizing investing, but I don't think this is about investing at all. I think he's gamifying speculation… and I strongly suspect that the success rate of retail investors in options is really crappy. It should also scare the Biden administration that a lot of the money in Robinhood accounts came from stimulus checks this summer.