College and university endowments are surging, thanks in large part to investments in venture capital and private equity.
Why it matters: Rich schools, which have elevated access to private alternatives, are getting richer.
Driving the news: Harvard University on Thursday reported that the size of its endowment grew 27% in fiscal 2021, to a market-leading $53.2 billion, while its investment return was 34%. The biggest driver was private equity (inclusive of VC), with a whopping 77% return on investment.
- Harvard’s second-strongest asset class was public equity with a 50% return. Then there’s a steep drop to hedge funds (16%) and real estate (13%).
- Private equity’s value boost caused it to leapfrog public equities in terms of Harvard’s portfolio allocation (34% vs 33%).
- Harvard also said its endowment distributed more than $2 billion toward the school’s operating budget, which represent more than one-third of annual revenue.
This isn’t just about Harvard (unless you went there, in which case it’s always just about Harvard).
- Overall, university endowments are posting their best returns since the mid-1980s.
- Yale, the second-largest endowment, yesterday announced a 40.2% return. It didn’t break out returns by asset class, but it has 23.5% exposure to VC, 17.5% to private equity and just 2.25% to public equity.
- MIT, the country’s sixth-largest university endowment, disclosed a 55.5% return on investment. Penn, which is seventh-largest, hit 41%.
Big picture: In many cases, this is validation of the so-called “endowment model” championed by the late David Swensen of Yale, which over-allocates to illiquid securities.
- Harvard’s Narv Narvekar has been described as a Swensen acolyte, although Harvard said its returns trailed some Ivy League peers because it took less risk.
- Caveat: This comes after many years of net VC and PE returns getting bested by public equity indexes. In other words, fiscal 2021 is the endowment model winning a battle, not yet winning the war.
Look ahead: Expect lots of schools with low alternatives exposure to speed up their chase. It’s what happened in 1998–2000, often with poor results as new entrants got stuck with middling managers (particularly faded brands).
- There also could be denominator effects if paper returns recede.
- These returns also may embolden those who advocate for changing tax treatments of schools with large endowments.
Go deeper: College costs have soared, but income to pay for them hasn’t
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