Yale aims to decrease private equity investments

For the first time in eight years, the Yale Investments Office aims to decrease investments in private equity.

Yale’s investment strategy under Chief Investment Officer David Swensen has traditionally favored private equity investments, which are typically investments in funds that buy ownership interests in companies not publicly traded on the stock market. But for the fiscal year that began July 1, the Yale Investments Office lowered its target allocation toward private equity from 35 percent of the Yale endowment to 31 percent, according to a statement released last month. While financial experts interviewed noted the change was slight, they added that the shift away from a high-risk asset could indicate a long-term trend.

The decrease in private equity allocation may have been caused by the relative success of other asset classes last year or by the fallout of the European debt crisis, said Andrew Lo ’80, a finance professor at the Massachusetts Institute of Technology. He added that the current “crisis-du-jour” financial system is more volatile than before, which may be causing investors to avoid investments that are illiquid, meaning not easily sold for cash, such as private equity.

“In the grand scheme of things, this is a small change, but at the same time, because of the illiquid nature of private equity, small changes tend to indicate significant views,” Lo said. “It’s the kind of thing that does bode some kind of longer-term trend. I would certainly take note and keep a watchful eye on that part of the investment universe.”

Other financial experts interviewed were more cautious, asserting that the change was too small to suggest that Yale is moving away from illiquid investments. William Jarvis ’77, managing director of the Commonfund Institute, said 31 percent of the Yale endowment is still a significant investment in private equity, adding that it would have been hard for Yale to continue increasing its allocation toward that asset class.

A 2012 report by the Commonfund Institute found that in fiscal 2012, institutions with endowments over one billion dollars invested an average of 16 percent of their assets in private equity. The Yale endowment was valued at $20.8 billion as of June 30.

MIT finance professor Jean-Noel Barrot said Yale’s share of private equity has dropped, but only back to its level in 2010.

“Until we see this share going down more, I would be a bit cautious in forecasting a long term shift in strategy,” he said.

However, Wick Sloane SOM ’84 and former chief financial officer of the University of Hawaii said he is still uncomfortable with the level of risk that Yale undertakes in its investments. In the financial world, the “risk-free” benchmark is considered to be U.S. Treasury securities, which have a 30-year return rate of 3.62 percent, he said. In order to achieve returns higher than that number, endowments are investing in more illiquid assets and taking on additional risk, Sloane added.

“Who gave you the right to take this endowment and chase returns nearly four times higher than the risk-free rate?” he wrote in an email to the News. “No one did.”

Sloane added the decrease in private equity asset allocation is “a step in the right direction.”

Several financial experts interviewed said other institutions might follow Yale and decrease their investments in private equity as well. Private equity is a particularly difficult area to invest in because strong returns can take eight or nine years after the initial investment to materialize, Jarvis said.

He added that it is dangerous to look at changes in endowment allocation at a fixed point in time. He cited Yale’s investment in timber, which began in the early 1990s, but did not generate large returns until the early 2000s.

“You’re watching where the puck is, not where the puck is going to be,” he said.

In fiscal 2013, the endowment’s private equity assets returned 14.4 percent. The entire endowment posted a return of 12.5 percent.

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