Alpha - September 2007 - (Page 54)

Phil Cooper visors in 1990. It was at BIA that he formulated many of the theories about alternative investing that he would later perfect at Goldman. Cooper spent the early 1990s reﬁning those theories by conducting new research, attending conferences and seminars and discussing his ideas with experts in the ﬁeld. He got his ﬁrst chance to put his approach into practice when investment consulting ﬁrm RogersCasey & Associates invited him to join in managing an $800 million portfolio for Colorado-based US West, a regional Bell operating company that was later acquired by Qwest Communications International. RogersCasey created RogersCasey Alternative Investment Corp. to invest the assets of US West and other clients in private equity. Cooper served as president for two years. The strategies worked; returns on the portfolio were regularly in the top quartile, he says. In 1996, former classmate Knox introduced Cooper to John McNulty and David Ford, then co-heads of Goldman Sachs Asset Management. At the time, Goldman’s asset management unit was a small player with undistinguished performance in its main asset class of public — LISETTE COOPER, PRESIDENT, stocks, and McNulty and Ford ATHENA CAPITAL ADVISORS were looking for ways to diversify their business. Although they were impressed by Cooper’s theories about how to build and operate a private equity fund-of-funds business, they knew that establishing such an effort inside Goldman would not be easy. Former Goldman partner Thomas Healey, who ran the Pension Services Group when Cooper joined, says internal skeptics contended that a fund-of-funds business would not only underperform but also create conﬂicts of interest — and possibly cost Goldman key clients by alienating managers who didn’t make the cut. But McNulty and Ford were sold; they backed Cooper all the way to his interview with then–Goldman COO Henry Paulson Jr. The future Treasury secretary gave the project a green light, and Cooper got his chance — but not unqualiﬁed support. When he began organizing the internal start-up, he searched the ﬁrm for quantitative experts to help develop the many models and algorithms that would form the basis of his strategy. There were few takers. So Cooper turned to the one quant he knew he could rely upon — Lisette Cooper, the founder of Lincoln, Massachusetts–based Athena Capital Advisors, who was already a Goldman consultant and also happened to be his wife (see box). The launch was not without its bumps. Some Goldman partners were irked that a 45-year-old outsider had been put in charge of such an important and sensitive new project. Partners also worried about potential fallout from Cooper's selections for the fund of funds. “There were many occasions when I had to answer calls from clients because Phil hadn’t invested in them,” recalls Healey. “My response? ‘Would you invest in yourself if you were in Phil’s shoes?’” Some partners questioned the wisdom of getting into the private equity game at all. Late to alternative investments, Goldman was playing catch-up to ﬁrms like Brinson Partners (now Adams Street Partners) and HarbourVest Partners and to several investment banks that had already built large, successful fund-of-funds platforms. But Cooper thought he had an approach that would give Goldman an edge over established competitors. Former Goldman Sachs senior partner Donald Opatrny, who played a key role in building the private equity group, both as a direct adviser and as a member of the Goldman investment committee, says Cooper was an innovator in applying portfolio theory and principles of risk management to a portfolio of private equity funds. “Phil factored in risk and diversiﬁcation,” he says, “but also applied quantitative theory to understand volatility relative to the portfolio. That was unusual for private equity.” At the time, few people had attempted to quantify the dispersion between the best and worst managers in inefﬁcient markets like private equity. To Cooper doing so was essential. Returns in public markets are normally distributed across managers, but the situation is much different in alternatives. “If you plot the returns of all buyout funds and all venture funds, instead of getting a normal distribution with the mean and standard deviation, you will ﬁnd that only 20 percent of the returns exceed those of an index fund and the rest of the returns fall signiﬁcantly below,” Cooper explains. “As a result, traditional mean-variance asset allocation models are intellectually ﬂawed and wrongly executed. So we developed new models based upon sound theory and observation of how the markets really work.” The Coopers began feeding into their quantitative models publicly available information and proprietary data on hundreds of funds that Phil Cooper had collected through long-standing personal relationships with clients. This inside knowledge helped them take their research beyond a traditional review of past performance. The Coopers sought to answer questions that they thought would be more reliable indicators of future performance. For example, they attempted to pinpoint who at a speciﬁc fund was responsible for performance — be it the fund’s principals or an overlooked and undervalued junior professional. They also tried to determine whether a fund’s returns were skewed upward by a small number of blockbuster deals. By focusing on these and other drivers of performance, the Coopers were able to identify funds that they were convinced would deliver superior returns, including a large number of ﬁrst-time funds that other fund-of-funds managers were avoiding. “The access to the nonpublic data that Phil had in his head and that his clients shared was immeasurably valuable,” says Lisette Cooper. By the time Cooper left Goldman, the private equity group had grown to include the Goldman Private Equity Partners Fund — the ﬁrm’s main fund of funds, which invests in venture capital and private equity funds — a vintage “The access to the nonpublic data that Phil had in his head and that his clients shared was immeasurably valuable.” 54 • INSTITUTIONAL INVESTOR’S ALPHA • SEPTEMBER 2007

Table of Contents Feed for the Digital Edition of Alpha - September 2007

Contents Letter from the Editor Longs & Shorts Pension Corner: Keeping the Faith The Good Guys: Going Public Interview: Barry Bausano - A Delicate Balance Cover Story: Cruel, Cruel Summer Profile: Phil Cooper - Alternative Flight Plan Strategies: Marshall Wace - TOPS in Its Field Profile: Fortis Investments - Banking on Alternatives Research Center: Top Equity Trading Firms Alpha Bytes: Desktop Duel Unhedged: Commentary - The Taxman Cometh

Alpha - September 2007

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.