From Lawyer To Institutional Investor | Exclusive Q&A With Kathleen Browne, Managing Director Of Wellesley College
Kathleen Browne is the managing director at Wellesley College. She has been in this role since 2009. Previously, she worked at the Alcatel-Lucent Investment Management Corp. for eight years, most recently serving as the director of alternative investments. She is also a member of the investment committee at Boston Arts Academy and The Foundation for MetroWest. Browne received an MBA from Massachusetts Institute of Technology - Sloan School of Management, a J.D. from Boston College Law School and a B.S. in electrical engineering from Union College.
In this interview, she discusses her career transition from engineering to law, and finally to investment. She also talks about the investment strategy at Wellesley College endowment, where she manages investments across all asset classes, and her insights on opportunities in real estate, in particular.
Ms. Browne was named on Trusted Insight’s Top 30 LPs Investing In Real Assets & Real Estate. She graciously spoke with us on October 27, 2016.
Trusted Insight: You've had a very interesting career. You started with a degree in electrical engineering and then you went on to practice law before eventually joining a pension plan. What was the first thing that sparked your interest in institutional investing?
Kathleen Browne: In my earlier career as a lawyer, I worked in business law and did a lot of private M&A and startup financings. I worked with many venture and growth equity managers helping them invest in new companies.
Then in the later years, I did quite a bit of fund formation work for GPs and represented investors as they were making commitments to private equity funds. So I worked on both sides of the transactions in which private funds were being organized.
I also had represented what was then the Lucent Corporate pension fund (today Nokia) for quite a while and got to know their business needs. I had a close working relationship with the private equity team and had spoken to the head of the team about how it might be interesting to work together at some point. About a year later, a spot opened up on her team. I jumped at the chance to transition to the business side of institutional investing. Over time, I was able to take on responsibility for the real estate and absolute return portfolios as well.
At that time, I did not have an MBA or a formal finance background. I started taking accounting classes and earned my MBA while I was there.
Trusted Insight: Did you find that transition challenging in terms of learning the accounting and doing your MBA at the same time as working?
Kathleen Browne: It was fun, and I loved what I was doing. Once I started working on the investment side, I felt that I had found a position that fit my talents and personality. It was challenging and interesting and just seemed to be the right fit for me. A lot of people thought it was a funny transition to go from engineering to law to investments. However, I think the skills I developed built on each other – particularly with a start in private equity, which is so transactional and relationship-based. Engineering and law are very analytical fields. In legal practice, you also build communication skills; you learn how to listen, gather and interpret information and build trust and confidence with your clients. The skills I developed in those prior roles were very relevant for institutional investing.
It was great experience. We had a really strong portfolio. I had the opportunity to work with sharp people and build a high performing portfolio. I completed the Sloan Fellows program at MIT while working, and my employer worked with me to make sure I could fit that in with my schedule.
Trusted Insight: How does it differ working for a pension compared to your current role now?
Kathleen Browne: In some ways, they are very similar. We look at many of the same assets. My current role at Wellesley though is across all assets, marketable and non-marketable, and we have a much smaller team than when I worked at the pension. Lucent/Nokia had a large team with people dedicated to each of the major asset classes. They used consultants sparingly unlike some large institutions. In that sense, we are similar in that we do all our own portfolio management internally at Wellesley.
The investment committee at an endowment is different than at a corporate pension. Our committee is comprised of a small group of trustees or persons with close ties to the College who have relevant corporate, finance and/or investment experience. In the corporate world, governing boards often consist of senior executives of the corporation from finance, HR, etc. Both groups are quite passionate about the performance of the assets and the mission of the investment pool, but the missions themselves differ between ongoing support for College operations and retiree benefits.
When I was in the corporate world there was a sense that endowments and foundations could be very nimble. They could invest heavily in alternatives at a rate that pensions and retirement plans couldn’t do. When I joined Wellesley in 2009, the financial crisis had caused many endowments and foundations to become very focused on the liquidity constraints created by heavy investments in alternative assets. I was already familiar with that from the corporate world, which focuses on the ability to fund liabilities. Endowments came through the financial crisis with a greater focus on liquidity management.
When I came to Wellesley, I needed to adjust to doing most things myself. That isn’t a hit to your ego, but it is an adjustment. That said, you benefit from really getting your hands dirty – digging into the details of specific managers or data analysis. Also, as part of a small team working across the portfolio, you develop a much better sense of how all the parts work together and you can become more objective about what is best for the portfolio as a whole without being particularly focused on the specific area in which you spend your time.
Trusted Insight: What inspired you to transfer to Wellesley?
Kathleen Browne: I had been at Lucent for about eight years. As I mentioned, it was a great experience, but I was just ready for something else. I also knew it would be beneficial to broaden my skills on the public side and perhaps within a different governance structure. When the opportunity at Wellesley came along, I knew that I could work across the portfolio, I would broaden my network in the endowment and foundation world and I would learn how to work with a different type of investment committee.
Trusted Insight: You mentioned that Wellesley is quite a small team. What kind of changes and opportunities does that present in terms of investments?
Kathleen Browne: When I first came, we had just four people on the investment team. Today we have six, including a senior associate and analyst roles that we added in the past few years, plus two people on the operations side who are quite savvy with respect to investments. We also utilize student and summer interns, which is a great opportunity for Wellesley students. It doesn’t feel as small as it once did. However, at Lucent/Nokia, I had a team of people reporting to me. Although I did plenty of work independently, I had many folks to whom I could delegate.
Trusted Insight: How did your portfolio strategy change before and after the financial crisis?
A lot of people thought it was a funny transition to go from engineering to law to investments. However, I think the skills I developed built on each other – particularly with a start in private equity, which is so transactional and relationship-based.Kathleen Browne: I don’t believe we made any material shifts in our portfolio coming out of the financial crisis. However, we have developed a number of internal tools to help us forecast our cash flows and liquidity; these tools guide our decisions with respect to new commitments to private funds and with regard to investment sizes across asset classes. For example, each year we evaluate an appropriate commitment level for private investments based on our longer term liquidity forecast.
We maintain these models so that we have a view of the portfolio today and over the next five years. Beyond that, the assumptions are less reliable. These tools impose discipline that should reduce illiquidity and other risks when we find ourselves in a significant downturn like we had in 2008-2009.
Trusted Insight: Can you tell me a bit more about your real estate portfolio? What opportunities you see in that area and what challenges you're facing at the moment?
Kathleen Browne: We invest in real estate through private equity partnerships, so the exposure is mostly value add and opportunistic. The endowment is not large enough to buy properties directly as many large institutions will often do. Cap rates are at all-time lows, which has been great for exits but poses a challenge for buyers. Value add cap rates are better, but things are still expensive. We have invested in a varied group of managers - some who provide exposure to the standard property types but seem to have a differentiated sourcing ability, and others who focus on niche areas of the market where the pricing isn’t as competitive. We also have some distressed exposure, which should serve us well.
We could invest in core open-ended funds or REITs but we've chosen not to do that so far. Liquidity restrictions in the open-ended funds have dissuaded us as we would not want to be subject to a queue in a period when everyone was looking for liquidity. REITs, in line with core generally, are highly valued right now, and at the end of the day we would need to decide we want that kind of exposure. For now, we remain focused on value add and opportunistic strategies in the private space.
Kathleen Browne: I don't think so. I wouldn't say that we are out targeting any particular property type to bring into the portfolio. We have existing relationships with a handful of managers whom we really like and with whom we'll likely re-up. If anything, we are looking more for differentiated deal flow or a differentiated sourcing approach.
Trusted Insight: Do you look at any particular class more favorably than others at the moment?
We have a broad real assets target but no individual target for real estate, so we have some flexibility to be more opportunistic about what we look at.
Trusted Insight: You mentioned that you have a committee of investment professionals as well that oversee the portfolio decisions. How does that relationship work?
Kathleen Browne: Our investment committee provides strategic oversight and input to the investment office. It also has authority over asset allocation and certain major decisions with respect to the endowment and organization. Manager selection is the purview of the CIO and investment team. Having a committee of investment professionals, many of whom sit on other investment committees, can be very helpful for the investment team. We have asset class experts on our committee. We can leverage their expertise and networks when we are evaluating a space or a manager. We also receive very insightful feedback from our committee members on analyses we present to them on various investment related topics, as well as investment memos that we share with the committee.
Trusted Insight: What career advice would you give to someone with very little relevant background but looking to make that first step into institutional investing?
Kathleen Browne: I think there are quite a few lawyers who have made it into this part of the investment world; many have come from the fund formation side of legal practice; which is my background. If you're not in that part of the law, that might be a good part of the law to target if you're thinking you want to become an institutional limited partner because you will learn the legal side of the business and you'll understand the business issues that your clients – the limited partners or general partners – care about. I think young lawyers could make initial moves into consulting firms or straight into an LP role. Depending on where they are or the opportunity they can get, they might need to be open to a pay cut, but I think the chance to learn new skills and go down this path is worth it.
Whether you are a lawyer or not, I think people looking to get into institutional investing should cast a wide net for their first job in the industry. We often hear from folks who want to join the endowment and foundation world as their entry point. But there are a limited number of jobs, and I think people can great experience at corporate pensions, public retirement plans, funds of funds, insurance companies and many other places doing similar investing. I always say to people "broaden your search if you're trying to break into this world."
Not all investors are equal and you have to do your homework, but I think there are great places to work outside the E&F space. For folks who are early in their careers, there are a number of places where they can get good training and start making connections.
To learn more about real assets/real estate investing, click here to view the complete list of Top 30 LPs Investing In Real Assets, Real Estate.