Just as private-equity (PE) management firms range in size and sophistication, so do the endowments, pension funds and other institutional investors that put their capital to work through the PE firms. The traditional model of a limited partner (LP) writing a check to a general partner (GP) firm and the GP then handling management and direct commitments to operating companies is changing. Increasingly, LPs are stepping up to be co-investors and in a few cases, even co-leads.

Stanford University has an endowment of $23 billion, administered by Stanford Management Co. Of the total assets under management, $1.8 billion is allocated to a natural resources portfolio under managing director Thomas Lurquin.

“The nature of the investment universe today in oil and gas is among the most dynamic in history. The mandate for this portfolio is very flexible, and I consider myself very fortunate,” he said. About 80% of the portfolio is in oil and gas. “Over time that number will grow more diversified, but that is where we like it these days.”

Stanford has been putting its capital into the upstream sector for more than 20 years and has a reputation among PE managers as a knowledgeable investor. “Our strategy has evolved over that time,” said Lurquin. “We are in conventional as well as unconventional, and we are happy to look across basins, on- and offshore. We have companies in most basins because unit economics are most important for us, not geography. We are agnostic about most things except team and asset quality as well as pricing.

If those look good, we are always interested in new ideas and are actually willing to take some risks.”

Indeed, Lurquin said his group is doing more direct investment. “We primarily invest through general partners, but direct investment has had a role for many years. Of the $1.8 billion in the portfolio, $1.3 billion is through GPs and half a billion is direct. There is a lot of focus on growing the direct portfolio.”

This does not put Stanford in competition with its GPs; quite to the contrary, said Lurquin.

“Direct investment takes its place alongside the investment through funds. We work in close cooperation with our GPs to take advantage of attractive opportunities. We have also gotten behind some IPOs. Those have been a compelling story in the past few years.

“Historically our bias has been upstream. We have found the midstream to be extremely competitive. There are huge opportunities, but they are well-known.”

The portfolio also has small positions in oilfield services, midstream and in utilities.

Just as the bulk of the Stanford natural resources portfolio is in oil and gas, the bulk of the oil and gas segment is in private-equity.

“We have a small public-equity sleeve and a small credit sleeve,” said Lurquin. He explained that having those segments is less a matter of asset allocation or diversification, but more the flexibility to work with GPs to take advantage of opportunities.

“Our GPs give us broad exposure, and direct investing gives us the ability to take advantage of compelling opportunities or to overweight certain assets. We think of direct investments as just-in-time investments or thematic overlays where we can be co-investor with a GP.” To be sure, Lurquin and his team are active investors—he has even on occasion brought opportunities to his GPs—but he said that for all their benefits direct investments take a great deal more involvement.

“Some models are moving more to direct investment,” said Lurquin. “The furthest along are the Canadian plans, and also the sovereign funds. Among LPs that is a major trend in the last few years. Here at Stanford it started in our natural resource portfolios but now is into other portfolios as well."

That said, Lurquin stressed the importance of the GPs. “As an LP you are outsourcing some of your risk to people who can hold that for you. Managing assets is a very different skill set from finding investments. There are different resources required and different obligations to yourself and to the operating company. Doing some direct investment, we know firsthand what those varying skill sets are, and we appreciate the GPs we work with. It can be a real challenge to move from one to the other. Not every LP can step out to be a direct investor.”

Returning to his main theme as both an investor and a fiduciary manager of assets for a major global research university, Lurquin emphasized prudence. “We always have to wonder why we are getting any given opportunity, and how does it fit with our objectives and methods. Every play has a cycle, and we always have to have our skeptical spectacles on. We have to be careful not to try to follow too fast in any new play.”

Read the rest of this article in the June 2014 issue of Oil and Gas Investor.