Private equity funds return 9.1 pct for endowments in 2013, lag others

  • PE lags overall investment return
  • Public equities led asset class with average return of 20.6 pct
  • Endowments of more than $1 billion turned in stronger PE performance 

Boosted by a roughly 30 percent gain in the S&P 500 in 2013, equity portfolios delivered the highest return in the survey of 835 U.S. colleges and universities with an average gain of 20.6 percent. International equities placed second with a 14.6 percent rise, followed by an 8.3 percent increase for alternative strategies, which include hedge funds and private equity funds. Fixed income rose an average of 1.7 percent.

Within the alternative universe, distressed debt produced a return of 14.8 percent, followed by 10.5 percent for marketable alternatives – hedge funds, absolute return, market neutral and others – followed by a 9.1 percent gain by private equity. Private equity real estate delivered an 8.5 percent return, while commodities and managed futures lost 6.1 percent.

Checking back on the prior two years, private equity outperformed the overall portfolios of colleges and universities in 2012 with an average return of 5.1 percent compared to a loss of 0.3 percent for total investments. In 2011, private equity investments jumped 18.7 percent, but lagged the 19.2 percent overall return for U.S. higher learning institutions. (See accompanying chart).

Turning back to 2013, private equity provided a better return for the largest category of university and college endowments with fund sizes of more than $1 billion or more. For these higher-dollar investors, private equity delivered a 12.5 percent return. For endowments of $501 million to $1 billion, private equity rose 9.8 percent; for programs in the $101 million to $500 million range, private equity gained 7.3 percent; for endowments of $51 million to $100 million, private equity rose 8.9 percent, and for programs of $25 million to $50 million, private equity rose 11.8 percent.

Learning institutions allocated 12 percent of their investments to private equity, on average, in 2013. Breaking down the numbers, larger programs of more than $1 billion allocated 15 percent of their investments to private equity, while endowments of $501 million to $1 billion allocated 8 percent of their investments to the asset class; endowments of $101 million to $500 million allocated 6 percent to private equity, while endowments of $51 million to $100 million and $25 million to $50 million both allocated 2 percent to the asset class.

Overall, allocation levels fell slightly. The study showed that participating institutions allocated 53 percent of their portfolios to alternative strategies, a decline of 1 percent.

Several large institutions reported significant increases in their allocations to private equity, John Griswold, Commonfund executive director, said in a prepared statement. This helped balance out a drop in allocations to alternative investments by many smaller programs.

 “This relative pause in the decade-long growth of alternative strategy allocations will bear watching in future years,” Griswold said.