Despite a Bloomberg News report earlier this month that Harvard is looking to rid itself of roughly $1.5 billion in illiquid private equity investments, Yale appears to remain committed to its holdings in such funds.
While private equity investments bolstered significant growth in higher education endowments over the past decade, the asset class also contributed to the dramatic declines that endowments nationwide experienced when the financial crisis struck in late 2008. As Harvard’s endowment proceeded to plunge 27.3 percent that fiscal year, the Harvard Management Company adjusted its strategy to reduce reliance on illiquid assets — an effort that has continued with the investments team’s recent plan to sell private equity holdings.
Though the Yale endowment also declined during the 2009 fiscal year, the University does not appear to have altered its approach toward private equity, and two financial experts said attempting to sell established private equity commitments can force institutions to accept poor prices and damage relationships with fund managers.
“Yale has established a reputation for being a very patient and intelligent investor in these funds,” School of Management professor Andrew Metrick ’89 GRD ’89 said. “You run some risk of harming that if you dump your shares in the secondary market.”
Harvard has worked to increase the liquidity of its portfolio since Jane Mendillo ’80 SOM ’84 became president and CEO of the Harvard Management Company in 2008. The Harvard Management Company’s policy portfolio is aiming for a 12 percent private equity allocation this fiscal year — a slight decrease from the 13 percent private equity allocation in fiscal year 2005, according to an endowment report released by the university in September.
Over the same period, the amount of Yale’s endowment allocated to private equity has increased steadily, from 14.8 percent in fiscal year 2005 to a targeted allocation of 34 percent in the fiscal year that began July 1.
Yale’s stake in private equity appears to have risen as the University has remained committed to its agreements with external fund managers. While Yale had pledged but not yet invested $4.4 billion with fund managers at the end of fiscal year 2005, that amount rose to $7.6 billion by the end of fiscal year 2009. These types of funding commitments were valued at $5.5 billion at the end of the most recent fiscal year, with private equity accounting for $2.9 billion of that total.
“One of the things that has happened in the aftermath of the downturn is that a good chunk of the private equity market just went away,” said William Jarvis ’77, managing director of the Wilton, Conn. investment firm the Commonfund Institute. “The appetite in the market for private equity diminished.”
Yale follows a nontraditional investment strategy pioneered by Chief Investment Officer David Swensen, which favors illiquid assets such as private equity, gas, oil, timber and real estate. The model has been emulated by many of its peer institutions, including Harvard. Swensen declined to comment for this article.
When Yale’s endowment lost nearly a quarter of its value in fiscal year 2009, much of the decline was due to a 24.3 percent fall in private equity. As Harvard lost an even greater proportion of private equity that year, the school tried to sell some commitments to the asset class but ultimately took them off the secondary market because prices were low.
David Cromwell, an adjunct professor at the SOM and former president and CEO of JPMorgan Capital Corporation, said in a Monday email that investors often get poor prices for private equity commitments they sell in the secondary market before a fund manager is “willing and able” to let go of the assets.
Today, the recovering private equity market may lead to slightly better prices for Harvard. Private equity sold in the secondary market was discounted by an average of 35 percent of asset values in early 2009, according to Triago, a global firm that advises investors on private equity sales. But a report released by Triago in November showed that secondary market discounts have dropped to about 6 percent of what these assets were worth in March.
Metrick speculated that Harvard may be willing to back out on commitments in order to increase liquidity or to decrease the endowment’s exposure to private equity. Though Harvard has not yet committed to selling in the secondary market, Metrick said it may have already harmed its relationship with fund managers by “testing the waters.”
Metrick said he cannot be sure why Yale and Harvard have taken different approaches with their portfolios, but added that he trusts the judgment of Swensen and his team.
“Until David Swensen does it, I don’t think it’s a good idea,” Metrick said.
Harvard’s endowment was valued at $32 billion as of June 30, while Yale’s was worth $19.4 billion.