University endowments including those of Columbia and MIT are blaming poor performance in venture capital for lackluster investment returns, according to reports by treasurers released this month.
Overall endowment performance has been a sunnier picture than in 2022, when many endowments recorded their worst annual performance since the global financial crisis. Still, several large institutions recently marked their investments in the red: MIT and Duke posted one-year returns of -2.9% and -1%, respectively, for the fiscal year ending June 30, 2023.
Meanwhile, several endowments posted modestly positive returns for the fiscal year, including Columbia (4.7%), Stanford (4.4%), Brown (2.7%), Yale (1.8%) and the University of Pennsylvania (1.3%).
It’s a notable bounce-back for Columbia, which swallowed over $1 billion in investment losses in 2022, and Stanford, which recorded a -4.2% investment return last year. But both investment offices said the partial recovery this year was in spite of the results in its portfolio of venture and growth equity funds, rather than because of them.
“Strong results in most asset classes during the past year were partially offset by losses in our venture capital and growth equity portfolios, continuing a correction that began in 2022,” Robert Wallace, CEO of Stanford Management Company, said in a statement.
Similarly, the University of Virginia endowment, whose $13.6 billion in assets place it among the wealthiest universities, recorded a 5.3% decline in its private equity and venture portfolio, despite a 2% positive return on its investments overall.
MIT treasurer Glen Shor cited “retrenchment in the valuations of venture capital portfolio companies” as a contributing factor to its negative return on pooled investment, while Brown’s investment office described a “challenging environment for alternative investments.”
The public tech stock reset in mid-2022 combined with a dry exit market left many LPs overexposed to venture. In the 18 months since, LPs have increasingly exerted pressure on their GPs for cash returns, and in some cases even pushed to secure more favorable terms, like co-investment rights.
VC funds recorded a one-year IRR of -14.51% in the 12 months ending March 31, according to the latest PitchBook Benchmarks. PE funds reported a 1.13% IRR for the period.
A one-year dip in its portfolio is unlikely to cause university endowment treasurers, who think in decades, to reassess their venture strategies—especially when many are predicting 2023 to be a strong vintage year because of heavy markdowns to tech company valuations.
For example, the board of the University of Texas Investment Management Company, the US’s largest public university endowment fund, agreed to up its allocation to private equity from 25% to 30% in June for its $68 billion portfolio, in a vote of confidence for the asset class.
However, if negative returns persist, managers will likely look more closely and possibly reassess their private positions, which had largely boomed over the last 20 years as universities took after the lauded “Yale Model.”
The Yale Model, pioneered by longtime Yale CIO David Swensen, favors greater allocation to alternative investments spanning PE, VC, hedge funds and real estate. That strategy, which has been replicated by many of the country’s largest school endowments, culminated in extraordinary investment returns in 2020 and 2021 at the height of the tech market.
The strategy has simultaneously been the envy of institutional investors like Calpers, which has historically invested a much smaller share of its assets in venture and growth equity. Earlier this year, the public pension scheme said it was upping its venture allocation after missing out on a “lost decade” of investing in the private markets.
Related read: PitchBook Benchmarks (as of Q1 2023)
Featured image by Maddie Meyer/Getty Images
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