Yale Bucks Trend, Cuts PE Investments

Bucking a trend that has pulled nearly $1 billion from new limited partners into the private equity arena, Yale University’s $10.5 billion endowment has scaled back its private equity allocation by $800 million to $1.84 billion.

After two years of write-downs and only a handful of commitments to new funds, the 30-year old private equity program has reduced its private equity allocation target from 25% of the university’s investment portfolio to 17.5% of the portfolio’s total assets.

Still, only 14% of Yale’s assets are currently committed to private equity funds, leaving the endowment $370 million short of its target – and room to invest in new funds.

“Yale has been pruning the roster for high performance going forward,” says one source familiar with Yale’s private equity portfolio who said the university would continue to actively seek new investments, but would not re-up its commitments to under-performing funds. Yale Chief Investment Officer David Swensen would not comment for this story.

Yale is an investor with at least 40 private equity firms, stuffing its portfolio with an even mix of buyout and venture capital funds. It is a limited partner in funds managed by Benchmark Capital, Clayton, Dubilier & Rice, Crosspoint Venture Partners, Draper Fisher Jurvetson, Kleiner Perkins Caufield & Byers, Madison Dearborn Partners, Oak Investment Partners, Sequoia Capital, and Venrock Associates (for a complete list of Yale’s private equity holdings see PE Week 11/25/02 “Yale Gets Squeezed To Disclose Returns”).

In recent years the performance of Yale’s private equity portfolio has sagged below its historical average, although the endowment has not disclosed its 2001 or 2002 returns. Since inception in 1973, the portfolio has returned 31.4% annually, but fund performance has deteriorated industry-wide since 1999, according to Venture Economics. Private equity funds lost 16.5% of their value for the year ending June 30, according to Venture Economics’ most recent report.

Yale’s endowment has set a 12% return target for the private equity portfolio going forward. It announced the new asset allocation targets in its annual financial report released last week.

“The deluge of capital entering the private equity sector, the relentless transformation of moderate-sized funds into mega-funds, the increased competition for deals and personnel, and the reduced ability to use public markets to exit private investments combine to diminish expectations for the asset class,” the report said.

Email Carolina Braunschweig