PE, VC drive return as Harvard endowment treads cautiously

  • Private equity returns 11.8 pct in fiscal 2015
  • Venture returns 29.6 pct
  • Harvard not “over-committing” to illiquids in frothy market

Harvard endowment’s chief executive officer sounded the alarm on high valuations in private equity and venture, even while reporting the private asset classes helped drive the endowment’s overall return.

“Private equity valuations are now, on average, at higher levels than in 2007. There are over 80 ‘unicorns,’ as many as in the last three years combined,” Harvard Management Company CEO and President Stephen Blyth said in his annual endowment performance letter, published this month.

“Venture capital continues to receive ample funding, and private company valuations are also bolstered by public mutual funds entering later stage funding rounds in significant size. This environment is likely to result in lower future returns than in the recent past,” Blyth wrote.

In response to this environment, Harvard is not “over-committing” to illiquid investments, “while still ensuring we will be involved if market dislocations arise,” he wrote.

Venture capital proved to be a huge driver of performance for Harvard’s endowment in fiscal 2015, producing a return of 29.6 percent, according to Blyth. Overall, private equity returned 11.8 percent in fiscal 2015, beating its 10.8 percent benchmark.

“Several of our venture capital partners delivered outsized returns, in particular in the technology and biotech sectors,” Blyth wrote.

Managing Director Richard Hall leads the endowment’s private equity portfolio.

The endowment overall returned 5.8 percent, beating its 3.9 percent benchmark. The return is far lower than it was in fiscal 2014, when the endowment posted a 15.4 percent overall return, Reuters reported at the time. The value of the endowment as of June 30 hit an all-time high of $37.6 billion, Blyth said.

Going forward, Harvard endowment investment team will explore opportunities around “cross-asset class collaboration,” Blyth wrote. Increasingly, Blyth sees opportunities “on the border” of traditional asset classes, like the real estate market for laboratory space for life sciences companies, which brings in real estate and venture capital focuses.

The team also will remain open to new managers and platforms that include transparency, flexibility in investment decisions and reduction in fees, he wrote.

Blyth took over as the endowment’s CEO from Jane Mendillo last year. He formerly headed public markets for the endowment.