It turns out the competitive edge of smaller institutions is more widespread than I thought when I wrote about a single university endowment that outperformed the Ivy League.
In a Commonfund survey of 291 private and community foundations, private foundations with assets over $500 million reported annual average returns of 10% for fiscal year 2023, while smaller private foundations posted higher results.
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Specifically, private foundations with less than $100 million in assets and institutions with between $100 million and $500 million posted annual average returns of 13.4% and 13%, respectively.
The split in annual returns by size is a product of strong performance in public equities and sustained underperformance in private market funds.
“In 2023, the public markets really drove returns, and we know that smaller institutions tend to tilt toward being more invested in the public markets,” said George Suttles, executive director at Commonfund Institute.
Over a 10-year horizon, VC fund IRRs returned an average of 13%, according to PitchBook’s latest Global Fund Performance Report. But, over a one-year horizon, their projected performance declined by 3% as the asset class continues to be plagued by a lack of exits and stifled fundraising. Meanwhile, the S&P 500 and Nasdaq generated returns of 19.6% and 26.1% in FY 2023, respectively.
Larger institutions tend to allocate higher percentages of their portfolios to alternative and private market assets classes. Harvard Management Company, for example, allocated 39% of its $50.7 billion endowment to private equity—which includes VC—in FY 2023.
For larger institutions, the deeper exposure to private markets has lowered annual returns over the past few years.
“Everybody was falling all over themselves to get exposure to venture in that period, and now, we’re on the back side of it,” said Matt Bank, deputy chief investment officer at GEM, an outsourced chief investment office that specializes in endowment-style investing.
Still, Suttles emphasized that, despite year-to-year challenges to asset classes, larger institutional investors aren’t making drastic changes to the long-term allocation plans that have generated outsized returns since the widespread adoption of David Swensen’s “Yale model.” While private foundations with over $500 million in AUM experienced the lowest average one-year returns, their 10-year returns were the highest out of all size brackets at 9.2%.
In the coming months, endowments and foundations will begin to report FY 2024 returns. Both Bank and Suttles foresee a similar story as last year as LPs continue to see their long-term asset allocation and risk-management strategies through.
Featured image by Megan Woodard/PitchBook News
