Ivy League Endowments Brace For Losses With Private Equity Values Tumbling

Jul 22, 2022 | News

Princeton, Harvard and Yale generated robust returns for their endowments in recent years, fueled in part by billions of dollars of investments in private equity and venture capital.

That golden era appears to be over, at least for now.

College endowments across the US are likely to report losses for the fiscal year ended June 30 as valuations for startups and other closely held companies deflate, following a sharp decline in public markets and the end of cheap leverage.

“The magnitude of the drawdown in venture companies and public markets is so much greater than it has been going back to the financial crisis,” said Jay Ripley, co-head of investments at Global Endowment Management, which runs $12bn for colleges and foundations.

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Rising rates and recession risks are threatening startup valuations. The consequences will ripple across private equity, where firms such as Blackstone Inc. made big bets on fast-growing companies in recent years. Markdowns have already bruised other money managers, contributing to record losses at the hedge funds of Tiger Global Management and D1 Capital Partners.

Many are being hit both by writedowns on venture holdings as well as losses on publicly traded stocks. Earlier this year, Coatue Management side-pocketed some assets rather than unload them at depressed prices. The California Public Employees’ Retirement System recently sold about $6bn of privates at a 10% discount.

The richest US colleges have the most exposure. Those with endowments of more than $1bn had about 30% of their holdings in private equity and venture capital as of fiscal 2021, according to TIAA and the National Association of College & University Business Officers.

When colleges report financial results for the year ended June 30, “you’re going to see a large proportion of endowments over-allocated to private equity,” said Karen Rode, head of private equity and infrastructure research at Aon Plc, which helps endowments invest capital.

It’s a stark reversal from fiscal 2021, when endowments generated fat returns and the richest schools faced pressure to increase spending on faculty, facilities and financial aid. But the pandemic dealt a sharp financial blow, crimping revenue from tuition, room and board as students sat out or studied remotely. Now, surging inflation is eroding colleges’ spending power and the stock market decline may further constrain parents’ budgets.

Princeton, with a $37.7bn endowment led by Andrew Golden, has steadily boosted its allocation to private equity. Such investments accounted for 42% of the portfolio — 12 percentage points above target — as of June 2021.

The rationale for the increase?

“Spectacular performance,” the managers said in the endowment’s annual report. Indeed, private equity was Princeton’s best-performing asset for the period, returning 99%.

Source: Financial Advisor

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