Elite US universities have long been private equity trailblazers, plowing billions of dollars into the asset class.
But a chorus of industry leaders has declared an end to the era of easy profit, and that’s pressuring schools to more delicately balance their spending needs as returns on the asset class dwindle.
That’s according to an analysis by Markov Processes International, which studied the private equity portfolios and liquidity positions of 10 premier universities, including the eight Ivy League schools as well as Stanford University and the Massachusetts Institute of Technology.
Given endowments’ high allocations to private equity, “there looks to be more artful navigating ahead,” Markov said in its study. The schools may need to come up with other sources of cash to cover future spending needs, as private equity hasn’t been returning as much money to investors as expected.
Endowments may need to rely more on their liquid holdings of public stocks and bonds to make up for the shortfall, sell some private equity positions at a discount on the secondaries market or even issue debt, according to Markov, a research firm that studies the opaque world of endowments.
For more than two decades, university endowments followed an alternatives-heavy investing style dubbed the Yale Model — for the Ivy League school that first used the strategy. As a result, 25% to 45% of their assets are now highly illiquid. That represents one of the highest allocations to private equity across the broad investor universe. Public pension funds, by contrast, typically have less than 20% of their portfolios in the asset class.
In particular, the endowments of Brown, Harvard and Princeton universities face higher liquidity pain than peers, measured by their levels of unfunded private equity commitments relative to their available liquidity, according to Markov.
“To ensure that Harvard has the resources it needs to maintain its standing as a leading teaching and research university, Harvard Management Co. closely monitors the risk and liquidity of the investment portfolio and is well-prepared to adapt to a wide array of market conditions,” Patrick McKiernan, a spokesperson for the endowment, said in an emailed statement.
Spokespeople for Brown and Princeton declined to comment.
“It’s a situation they haven’t felt to such a degree since the 2008 financial crisis,” Markov co-founder Michael Markov said in an interview. Harvard is in a “curiously similar” liquidity position to where it was that year, he said.
The firm’s analysis found that Brown’s liquidity constraints are significant. The ratio of unfunded private equity to liquid assets is more than 78%, far higher than the other schools in the study. That puts it in a difficult position when it needs to respond to capital calls.
One metric that has become a proxy for satisfying fund backers is distributions, which are at their lowest level since the financial crisis. Distributions by some of the biggest private equity investment managers plunged by almost 50% last year compared with 2021. In a normal year, distributions would be enough for capital calls. With those chopped in half, the pressure and liquidity pain mount, Markov said.
This article was provided by Bloomberg News.