Several university endowments nationwide announced substantial drops in their endowments in the last month—as high as 30% in a couple of cases—leading to concerns over whether the universities can meet their funding commitments to venture firms and whether they will be willing or able to invest in new funds.
Collectively, Harvard, Yale, Stanford, Princeton, Columbia and Brown universities and the Massachusetts Institute of Technology (MIT) have invested billions of dollars in private equity and other illiquid assets.
But their endowments were all hit when the stock market tanked last year during the financial crisis. They are now slashing budgets, postponing capital expenditures and laying off staff in an effort to keep their campuses running and meet their other obligations with the money they have left.
Yale reported a 30% drop in its endowment to $16 billion while Harvard, located said its endowment contracted 27.3 percent. The University of Pennsylvania, in Philadelphia, lost only 15.7% after it put more of its assets into fixed income securities.
Columbia University said that its endowment lost 16.1% in its last fiscal year as it shrank to $5.7 billion as of June 30, 2009, from $7.2 billion a year earlier.
Meanwhile, MIT said that its endowment shrank 20.7% in its last fiscal year as its investments were badly battered by the financial crisis. The school, known for its strength in the sciences, said its endowment is now worth $8 billion, down from $10.1 billion a year ago.
However, there is little danger of any of these universities defaulting on their commitments, partly because the penalties for doing so are so high.
“It’s better for them to sell something than to renege on the LP-GP relationship,” says Mark Heesen, president of the
Stanford, whose endowment dropped 27% in the last year, is currently trying to sell some of its private equity portfolio on the secondary market, according to two sources, and has hired Cogent Partners to assist, although it’s not clear exactly what Stanford hopes to get out of the deal.
One source says that Cogent told him the deal was “so big I shouldn’t even bother thinking about it.”
The source assumes the portfolio is being shopped to a list of very large investors. Another source says Stanford wants some kind of “joint venture” arrangement in which it will continue to hold a stake in its private equity notes. If Stanford has a commitment that is 50% called down, the source says, it would rather sell 25% of its assets than the full 50%.
Princeton, meanwhile, is exploring “marginal, not radical” changes in how its investments are allocated, according to a letter published by President Shirley Tilghman.
She adds that if Princeton over the last 10 years had adopted a more traditional investment strategy, its endowment would be about half the size it is today.
One venture capitalist who has investments from one of the universities—he declined to disclose which one—says that he’s noticed no change in his relationship with his LP, which he described as so steady “it’s almost eerie.”
“The numbers are what they are…” says Bo Peabody, managing general partner of
Still, fund-raising for the rest of this year and in 2010 for VCs will be more of a challenge, according to Heesen.
“A lot [of limited partners] are much more gun-shy now, and although they may be continuing in the asset class, they’re investing in fewer VC firms and asking, rightfully, a lot more questions than they have in the past,” Heesen says.
Venture capitalists “are scratching their heads,” adds Heesen, who wonders if VCs must look to a new group of LPs for future fund-raising. And if so, should they look overseas, go to public pension funds, visit different colleges and universities, or go to other endowments.
“Colleges in particular are under a lot of pressure from their boards to make sure they’re able to keep a healthy fund balance so they don’t have to raise tuition like so many universities are doing now,” Heesen said.
Several venture firms with Ivy League LPs—including Delphi Ventures, Greylock Partners and Tallwood Venture Capital—either declined to comment or were unavailable for comment.
But one overseas venture capitalist says that the drops in university endowments merely add to the problems that VCs already have when raising funds in the toughest economic climate many have ever seen.
Mark Edwards, a partner at New Zealand-based
“Until the IPOs, and hence the returns, come back, I don’t see things changing,” Edwards says. He adds that his firm may not raise another fund. No 8 raised a $23 million seed stage fund in 2002, according to Thomson Reuters (publisher of PE Week).
Jon Fisher, an adjunct professor at the University of San Francisco’s business school, agreed.
“All but the top 25 VC funds are treading water or losing money, i.e. the VC model is broken,” he said. “Endowment problems are just more near-term pain for them.”
Additional reporting by Lawrence Aragon