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Weekend Analysis

Ivy League endowments face another rough year in 2024

Endowments at the top universities in the US have had a tough couple of years, and their struggle is far from over. Fiscal years 2022 and 2023 saw the worst returns in the past decade for Ivy League endowments.

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Endowments at the top universities in the US have had a tough couple of years, and their struggle is far from over.

Fiscal years 2022 and 2023 saw the worst returns in the past decade for Ivy League endowments. And as valuation corrections cut through the private markets, it may be a while before these institutional investors see above-average returns.

The Princeton University endowment saw the worst performance in the Ivy League in FY 2023 with a 1.7% loss on its investments. The university’s return is a steep dip from its performance over the last decade, which averaged an annual return of 10.8%.

There’s a similar story among its peers. Out of the eight schools in the Ivy League, Columbia University was the only institution to generate a return above 4%. After a decade ripe with annualized returns averaging around 10%, these measly fiscal year results present the bleak reality of a high interest rate environment, volatility in public equities and a drawn-out valuation correction in the private markets.

 

Looking forward, private market investments are unlikely to prop up portfolio returns next year as they digest public market losses from H1 2022. This is because private and public market returns are correlated; private market returns tend to trail those of the public markets.

Even if H2 2023’s public equity market recovery is sustained through next year, PE and VC won’t be the star asset classes.

“I think there’s a scenario whereby [public] markets start to recover over the next 18-24 months, though it seems unlikely to me that private investments, particularly in VC, will drive portfolio returns,” said Matt Bank, deputy chief investment officer at Global Endowment Management, an outsourced CIO for smaller endowments and foundations.

In a 2023 report, N.P. Narvekar, CEO of the Harvard Management Company, which manages the Harvard University endowment, said he thinks the reporting catch-up in private asset valuations paired with the continued slowdown in exits mean it will take time for endowments to feel the full brunt of private market portfolio markdowns.

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University endowment returns did generally improve in FY 2023. Harvard’s endowment returned 2.9% for the fiscal year, below the 10-year average but up from -1.8% a year before. Columbia’s 4% return was up from -7.6% on assets in FY 2022.

But this fiscal year’s returns were still only slightly positive in PE and mildly negative in VC.

The muted returns are, in part, a product of the lag in the way these assets are valued, a phenomenon I picked apart back in March.

For example, in 2022, the S&P 500, Nasdaq and Dow Jones Industrial Average saw their steepest losses since the 2008 financial crisis, a reaction to the Federal Reserve’s interest rate hike campaign, geopolitical tensions and fears of a recession. The indexes fell 18.1%, 33.1% and 8.9% respectively.

At the same time, prices paid for PE buyouts remained on par with 2021’s peak multiples, according to PitchBook’s Q3 2023 US PE Breakdown. In fact, it took until Q3 2023 for US PE buyout enterprise value multiples to reflect public market losses, plummeting 16.5% from 2022’s trailing 12-month figure.

 

This puts these institutional portfolios in an interesting position because Ivy League endowments, on average, dedicate about a third of their portfolios to private, illiquid investments.

On one hand, the pricing lag can soften the blow of market shocks to portfolio balances. When the public equity portion of an endowment’s portfolio drops, the private portion’s relative stability props up the institution’s overall returns, a buoy saving it from even steeper losses.

“There are some institutions that really value the volatility dampening that comes with having so much in private assets,” Bank said.

On the other hand, some critics believe private equity valuations are a fiction. Hedge fund AQR Capital Management‘s Cliff Asness, writing recently in Institutional Investor, goes as far as to call the illiquidity and lack of mark-to-market valuations “volatility laundering.”

In 2024, investment teams at university endowments will have to grapple with the reality that both sides of the coin are true: Endowment returns in FY 2024 will depend heavily on public market performance and their valuation processes. In addition to continued catch-up declines in private asset valuations, higher interest rates will continue to temper dealmaking.

“We would think near-term returns are more likely to be muted relative to long-term expectations,” Tim Yates, president and CEO of Commonfund‘s OCIO practice, told me in an email.

If the PE and VC dealmaking and exit environments don’t improve in 2024 and public market volatility persists, endowment returns could remain paltry for the foreseeable future.

Featured image by Jenna O’Malley/Pitchbook News


  • jessica-hamlin-headshot.jpg
    Written by Jessica Hamlin
    Senior reporter Jessica Hamlin writes about limited partners for PitchBook News, based in New York. Jessica is also the lead writer of the Capital Pool weekly newsletter. Previously she wrote about private equity for Institutional Investor in New York. Jessica is a graduate of the Grady College of Journalism and Mass Communication at the University of Georgia.
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