As chief investment officer of Yale University for more than three decades, David Swensen redefined institutional investing. “Because market players routinely overpay for liquidity,” he wrote in his seminal book, Pioneering Portfolio Management, “serious investors benefit by avoiding overpriced liquid securities, and by embracing less liquid alternatives.” His conviction shaped Yale's strategy: By the time of his death in 2021, half the endowment was invested in illiquid investments, with private equity the largest component.
Four years on, Yale is reportedly preparing to sell up to $6 billion in private equity holdings. (“The university is exploring a sale of private equity fund interests,” a university spokesperson told the Yale Daily News.) That represents almost 15% of the fund’s $41.4 billion of assets, and around 30% of its private equity investments, based on data in Private Equity International’s 2024 rankings.
The scale and timing of such a sale, coming amid an escalating clash between elite universities and Washington, is significant. The Trump administration has blocked $2.2 billion in grants to Harvard University and indicated it would challenge the longstanding protection that keeps university endowments beyond the reach of federal taxation.
It’s not the first such conflict for the storied institution. In 1755, the General Assembly of the Colony of Connecticut voted to refuse Yale’s annual grant, ostensibly due to budget constraints during the French and Indian War but in reality in a religious dispute with Yale president Thomas Clap. Two centuries later, Yale president Kingman Brewster would warn in his 1974-1975 report that “reliance upon government support... may subject the entire university to conditions and requirements which can undermine the capacity of faculty and trustees to chart the institution's destiny.” Its endowment was meant to give the college independence.
The fund contributes more than a third to Yale’s annual operating budget, last year providing $2 billion. But with the markets for initial public offerings and mergers softening, private equity firms’ distributions as a percentage of net asset value have fallen to 11% from an average of 29% between 2014 to 2017 while global buyout assets have tripled, according to consulting firm Bain & Co. On its earnings call last week, Blackstone Inc. warned that policy-driven uncertainty and market volatility would only worsen this exit drought.
This tension between long-term strategy and near-term needs poses a delicate balance. In October 2023, Swensen’s successor as Yale’s chief investment officer, Matt Mendelsohn, affirmed the endowment’s commitment to illiquid investments, noting that its “ability to be patient with long-term, illiquid assets will continue to be one of Yale’s key competitive advantages.”
While the strategy has worked well to date – the endowment returned 10.3% per year during the 20 years ending June 30, 2024 – market conditions are shifting. As Mendelsohn noted, “success over the next four decades will look different than success over the last four” – and the allure of private equity may be fading. Bain & Co. noted that while buyout funds still outperform public markets over longer periods, that edge is eroding. With competition keeping acquisition prices high and debt costs elevated, generating alpha has become increasingly difficult.
Dumping $6 billion of private equity would be a seismic move. Last year, endowments and foundations combined sold just under $9 billion in the secondary market, according to Yale’s adviser, Evercore Inc. And Yale would have to take a hit: In 2024, the average discount for buyout portfolios was 10% to net asset value, although some recent transactions were done narrower.
But if the sale is completed, it could prove prescient in the event of continued market deterioration. In early 2009, Swensen identified “extraordinary opportunities” in distressed credit. If Mendelsohn can stomach the discount now, freeing up billions in dry powder could position Yale to capitalize on similar opportunities ahead.
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