College endowments favor private equity, venture capital in portfolios

Endowments with over $1bn in assets invest and benefit the most from exposure to private funds.

Private equity and venture capital rank as the most popular asset classes for college endowments, according to a new report from an organization representing college financial officers.

Institutional investors of all stripes have increased their allocations to private equity over the past two decades. But college endowments, especially, have grown their private equity and VC portfolios over the years.

Colleges on average allocated 30 percent of their portfolios to private equity and venture capital, according to the 2022 NACUBO-TIAA Study of Endowments.

NACUBO stands for the National Association of College and University Business Officers and represents business and financial officers from more than 1,700 colleges and universities. TIAA provides financial services for people and institutions with a focus on the not-for-profit sector.

“Private equity is a very interesting asset class that has gained importance and taken up bigger percentages of portfolios across endowments of all sizes,” said Ivy Flores, a managing director at Nuveen, which is a company owned by TIAA, at a press briefing discussing the report.

However, there is a large divide in allocation strategies between universities with endowments over $1 billion in size and their smaller peers.

On average, colleges with endowments of more than $1 billion allocate 18 percent of their portfolios to private equity and 14.5 percent to venture capital, according to the study.

Brown University’s portfolio stands with the highest allocation to private equity, having dedicated 43 percent of its endowment to private equity in FY 2022, according to a recent presentation from Massachusetts Pension Reserves Investment Management.

Smaller endowments allocate much less to private equity and venture, according to the study. Endowments between $251 million and $500 million – think Gonzaga University or Rhode Island School of Design – on average invested 18 percent combined to private equity and venture capital in FY 2022 (12 percent to PE and 6 percent to VC), the study said.

“Smaller institutions may not have the same approach because of liquidity requirements. It is a consideration of their liquidity and risk profile as well as fees,” Flores said.

Anecdotally, many smaller endowments rely on funds of funds for their private investments. In addition, smaller endowments frequently lack the number of staff, and the expertise, needed to effectively manage a private markets portfolio.

According to the study, endowments of all sizes lost an average return of 8 percent in FY 2022, down sharply from a gain of more than 30 percent the previous year. Endowments with more than $1 billion in endowments fared the best, with an average loss of 4.5 percent.

Endowments fared the best due to their outsized exposure to private asset classes, the report said.

But private equity and venture capital funds are valued at a lag compared to public markets.

Valuations have become a polarizing and much discussed topic throughout the industry.

One of the first people to bring the question of lagged valuations and their outsized impact on portfolio returns was NP Narvekar, the CEO of Harvard University’s endowment.

In his annual letter, Narvekar said managers would have their portfolios audited at the end of the year, which would result in “meaningful adjustments” likely reported in March.