Joe Benevento bid $4,700 on a section mate’s gracious donation of “1% of his gross earnings in 10 years”. Why you might ask? Read on!
The sun wasn’t down yet but the J-Crew (i.e. New J) already had their sunglasses on in preparation for their annual Section Charity Auction.ÿ On Saturday, April 25, 120+ members of the J-Crew, their partners, family and faculty arrived at the Harry Parker Boathouse on the Charles River to answer two questions: ÿhow much could New J raise for 6 deserving charities?ÿ And what would be the most incredible bid of the night?ÿ
The night began with a fun-filled introduction by two of the section’s most exciting characters, Max Roos and Monica Belsito, but that wasn’t all.ÿ The section, faculty and alumni had contributed more than 100 items to be auctioned off in three rounds of both silent and live bidding.ÿ No one could have predicted the result of this evening or the cow and elephant costumes that graced the bodies of two of our auctioneers, Christian Huot and Francois de Lame.ÿ Bidding $200 per person for a champagne brunch with Cordon Bleu-trained Leila Rastegar and Katina Pappas?ÿ Par for the course during this event.ÿ The tally quickly added up as the audience raced to bid for spots at a poker game with Professor Malloy, a week at a vacation resort, and special appearances by the men of section J, all egged on by our final auctioneers Rob Taylor and Matt Arndt.
In 4 short hours, the J-Crew Charity Auction, themed “I Wear My Sunglasses At Night” and accompanied by a custom pair of Blues Brothers sunglasses, raised approximately $34,000.ÿ And in today’s issue of The Harbus, we bring you a spotlight on the night’s biggest bidder and the unique item he took home: Joe Benevento’s winning bid of $4,700 on a section mate’s gracious donation of “1% of his gross earnings in 10 years.ÿ Why, you might ask?ÿ Well, maybe the J-Crew knows something you don’t. ÿSee below for an exclusive highlight:
Joe, you’re co-Portfolio Manager for the Investment Committee of the Alpha Fund for Harvard’s endowment.ÿ Can you explain to us exactly what you were thinking and how you were approaching this unique item at the New J charity auction?
Well my approach to investing is, I always first like to understand simply what’s my downside, what are the risks, how do I lose money…before then asking OK, what is my upside and how much can I make.ÿ There are two famous rules to investing that I think everyone, of all investment skill/experience, should aim to follow:ÿ #1. Don’t lose money. #2. Don’t forget rule number 1.
So the biggest considerations in my mind were related to current liquidity, ability to execute payment 10 years from now, chances donor doesn’t earn sufficient level of income, and ‘hit by a bus’ÿ (huge key man risk obviously).ÿ I was able to reach comfort around these issues however.ÿ For example, I’m going to make sure the donor doesn’t go skydiving anytime soon.
Did you go into the auction just knowing you had to have this item?
No, not necessarily.ÿ Was going to really depend on where bidding reached.ÿPrice you pay is the one thing an investor has full control over, so better get that part right and not overpay for something.ÿ (I also kept thinking back to the all-formidable Valuation Triangle from FIN1…)
But generally, I definitely think any HBS classmate would be a great investment to have and if I had the money to, I would probably invest more if possible.ÿ If I could, I’d offer here in The Harbus to nearly any HBS student $150k cash today, covering practically their entire two years’ full expenses here, in exchange for 10% of their
future earnings.ÿ Any takers?
How do you feel about the donor’s future?
I think the donor’s future is very bright, and he’s going to do very well.ÿ He’s smart, hard working and makes excellent comments in section.ÿ As far as my 1%, the donor’s background is investment banking and private equity/public investing, well-compensated career paths that he plans to continue pursuing post-graduation.ÿ
Warren Buffet has suggested buying a business’ stock as if the stock market might close the next day and not reopen for another 5 or 10 years.ÿ That’s basically what I’m doing here. I’m willing to be patient and truly take a long-term perspective.
So how much do you actually expect to receive on your bid, 10 years from now?
Well, I think in relation to the risk of losing money, the absolute return over a 10-year period IRR will be attractive. It’s also tough to think of a situation where our incentives could not be more aligned. Some people have told me they think he will easily make several million dollars in earnings 10 years from now (auction item by the way includes all inclusive cash and non-cash earnings, pre-tax), in which case I’d earn at least a 20-25% IRR. I hope they’re right, but even if you just assume a more conservative $2m, a figure I think you can place a high % probability on if he’s doing well and achieves a reasonable compensation average at a private equity/hedge fund firm at that stage in his career, then that should produce about a 16% IRR. An unlevered, mid-teens IRR over a consistent 10-year period is a very nice return, and if I compare on a relative basis, it far outpaces many investment funds and S&P index long-term average returns (not to mention the S&P index return over the past 10 years of ~0%). And who knows, but there may be upside to the $2m base case as well.
The nice part about it is that even if things turn out differently, and I’m wrong or unlucky, the donor still needs to make in 2020 only just slightly more than the same level of income I estimate he produced last year – four years out of college and without an HBS MBA – in order for me not to lose any money at all. And if he earns say $1m, half my base estimate, then I should receive about an 8% IRR, still not too shabby for a downside case. So I like my margin of safety a lot.
Were you surprised by the level of bidding?
I actually expected there to be more bidders earlier on in the auction.ÿ There’s a difference between uncertainty and risk.ÿ I think this is a case where maybe the relatively high uncertainty of 10 years into the future inhibited more people from bidding.ÿ But I think the risk that the donor is not earning, 10 years from now, a level of income that would allow at least a modest return or simply break even is low, while the probability that he earns an income level that produces a very good discounted return is quite high.
Next steps, contract agreement?
I think we’re going to put it into a time capsule, bury it in the Section J classroom, come back on our 10-year reunion and dig it up.
However, while the event was a night (…and after-party) to remember for the members of New J, it also helped to create lasting memories for the charities that the section will be supporting:ÿ Partners in Health, Pencils of Promise, USTA New England Wheelchair Tennis Association, Futures and Options, The Harbus Foundation and Hospital for Hope.ÿ We are thankful for the generosity of the HBS community and want to thank J Bell and her entire committee for a great event!
Jessica Bell is the proud Section J Volunteer Coordinator.ÿ She is a Southern girl with a serious 80s addiction (hence the theme), who couldn’t have pulled any of this off without her AMAZING Charity Auction Team (Thank you very much to Clint, Liz, Neha, James, Monica, Emily, Amanda, Rachel, Salvador, Shabrina, Brian P, Maria, Whitney, Kyle, Charlie & Janice).
Jessica Lackey is an RC from Section J who spent more than $335 at the charity auction and is thrilled with all of her purchases.ÿ When not hanging out with her section, you can find her studying at the Grille or working out in Shad.