PE, VC helped bigger endowments generate better returns in 2018: study

  • Why this is important: Endowments with higher allocations to alternatives performed better than others

Private equity and venture capital helped bolster returns for U.S. colleges and universities, even as returns for their endowments fell by almost 33 percent in 2018.

While the 10-year average returns increased by 1.2 percentage points to 5.8 percent in 2018, endowments still fell short of their target of 7.2 percent, raising concern about their ability to support financial aid and student success.

That was the upshot of the 2018 NACUBO-TIAA Study of Endowments, which gathered data from 802 U.S. colleges and universities. The participating institutions had $616.5 billion in total endowment assets as of June 30, 2018.

Of all asset classes, only alternative strategies, including PE, VC, hedge funds, real estate, energy and natural resources and distressed debt, returned higher in 2018 compared with 2017.

Alternative strategies returned 8.3 percent in 2018, compared with 7.8 percent in 2017.

All other asset classes showed declines. U.S. equities fell to 13.6 percent in 2018 from 17.6 percent in 2017, fixed income fell to 0.5 percent from 2.4 percent and non-U.S. equities posted the sharpest decline, to 6.8 percent in 2018 from 20.2 percent in 2017.

Overall, endowments returned 8.2 percent in 2018 compared with 12.2 percent in 2017.

Consequently, while asset allocations didn’t change significantly, the portfolio mix affected the performance of larger and smaller endowments in 2018.

For instance, larger endowments (assets over $1 billion), with almost 58 percent allocation to alternatives, returned 9.7 percent while smaller endowments (assets under $250 million), with 22 percent allocation to alternatives, returned 7.9 percent over the year ended June 30, 2018.

The higher returns were driven by the endowments’ PE and venture portfolios, the report said.

Specific PE numbers for 2018 were not made available; private equity returned 11.7 percent, according to the 2017 NACUBO-Commonfund Study of Endowments.

While all sizes of endowments had private equity in their portfolios, the allocation percentages differed significantly, the report said.

Endowments with more than $1 billion in assets had an 11 percent allocation to PE, and those with between $251 million and $1 billion in assets had an 8 percent allocation to PE in 2018.

The smaller endowments, with assets under $250 million, had smaller allocations to PE, ranging from 4 percent to 1 percent.

Action Item: Get more on the study here