Latest news with #endowments
Reuters
08-07-2025
- Business
- Reuters
Breakingviews - The new Yale model is both obvious and hidden
NEW YORK, July 8 (Reuters Breakingviews) - The Ivy League's secret sauce is curdling. Elite university endowments that once boasted market-beating returns are now paying premium fees for pedestrian results. It couldn't come at a worse time, as the Trump administration slashes research grants and pushes tax changes that will hit campus coffers. The $838 billion collegiate investment machine faces a stark choice: embrace the public markets they once scorned, or venture into the wilds of still-nascent investment ideas. As colleges' enrollment, tuition and subsidies grew throughout the 20th century, so too did their pots of money set aside for ongoing spending and emergencies. How they invested those funds changed, in large part, thanks to David Swensen. A postgraduate Yale alumnus who returned to manage his alma mater's investments in the 1980s following a stint on Wall Street, he championed diversification across both liquid and illiquid investments. As his disciples spread the word, endowments' public equity allocations fell, dropping from 49% to 37% of their portfolios over the two decades ending in 2024. Private equity and venture capital, meanwhile, quadrupled to 23%, according to asset manager Cambridge Associates. Results were spectacular—at first. Pioneers secured access to exclusive funds run by buyout barons like Blackstone (BX.N), opens new tab or technology investors like Sequoia, back when their playbooks were less commonplace. Extraordinary returns from this period cemented the 'Swensen model.' Between 1999 and 2009, Yale returned, opens new tab an annualized 13.4%, while a traditional portfolio split 60/40 between stocks and bonds would have turned in a relatively anemic 2.3%, according to Breakingviews analysis, opens new tab. The trade-off made sense: while it's harder to quickly turn private investments into cash, the inconvenience promised a greater reward. Harvard, Princeton, Stanford and others followed Yale's example. Yet overcrowding is now breaking the formula. Endowments compete not just with each other, but sovereign wealth funds, pension plans, family offices and even retail investors for a slice of private equity, credit and real estate funds. As they swell with assets, these strategies must look beyond the most tantalizing opportunities for less lucrative filler. The effect is already visible. In 2023 and 2024, the average endowment lagged a simple stock-and-bond portfolio by 2 percentage points, according to Neuberger Berman. The CFA Institute finds that, for each percentage point increase in exposure to so-called illiquid alternatives, the average endowment now sees a 0.3-point decrease in excess returns. Worse, President Donald Trump's agenda may force colleges to draw down from their endowments while taxing them more heavily. The administration is slashing $33 billion in annual federal grants and contracts that flow to schools. Gargantuan tax-and-spending legislation recently passed by Congress will raise the tax on endowment income for the wealthiest private universities from 1.4% to as much as 8%. Sinking performance and a need for cash may stall the years-long rush into illiquid markets. Yale is looking to sell up to, opens new tab $6 billion worth of its stakes in private equity funds, the New York Times reported. The Massachusetts Institute of Technology, Notre Dame and others are exploring similar moves. Endowments constituted 10% of the $89 billion in secondary sales of buyout stakes, opens new tab in 2024, according to Evercore. For panicking investment officers, there is a glimmer of hope. Smaller endowments with more money in publicly traded assets are now outperforming their giant, less liquid brethren. Institutions under $50 million averaged 13% annual returns over the past two years, while those over $5 billion earned 9%, data from Commonfund and the National Association of College and University Business Officers show. Performing an about-face and re-embracing public markets requires admitting that paying hefty fees for mediocre performance no longer makes sense. The case for rebalancing, meanwhile, has grown more compelling. The S&P 500 Index (.SPX), opens new tab has returned 11.8% annually since the end of 2009, while the Nasdaq (.IXIC), opens new tab delivered a whopping 15.4%. Furthermore, high interest rates mean that short-term Treasury bills and money market funds are offering yields of 4% to 5% with virtually no risks. Complicated alternatives struggle to match this precise combination. To boot, turning to outsourced chief investment officers for these straightforward strategies, as small colleges are increasingly, opens new tab doing, can further save on fees. The other option for the still-ambitious endowment chief is to explore what Swensen termed 'dark corners': places where information gaps and structural barriers restrain copycats. Infrastructure remains one such frontier, particularly in emerging sectors like data centers, where the U.S. market is expected to nearly double to $411 billion by 2028, say Bank of America analysts, driven by artificial intelligence and cloud computing demands. Along those lines, renewable energy project financing offers fertile ground for institutions capable of navigating complex regulations and multi-decade developments. Private investments in U.S. renewable energy and grid-enabling technologies are projected, opens new tab to reach $1 trillion by 2030, a 65% increase over 2021 levels, according the American Council on Renewable Energy. Catastrophe bonds allow endowments to take advantage of the fact that they can be more patient than an individual investor. Essentially a form of insurance, these notes offer yields of anywhere from 8% to 15% in exchange for taking on the risk of major hurricanes, earthquakes, or pandemics. Modeling the ever-changing risks of this trade seems a neat fit for collegiate intellectuals. Better yet, though it has reached over $55 billion in size, according to Artemis, opens new tab, the market remains dominated by a small group of sophisticated investors. Either way, though, the crisis facing endowments calls for stricter, opens new tab rebalancing, or an overhaul perhaps on the scale of the transformation wrought by Swensen. The clearest paths forward: on the one hand, simplicity; on the other, once again finding the strategies that the common investor would struggle to replicate. Follow Sebastian Pellejero on LinkedIn, opens new tab.
The Independent
05-07-2025
- Business
- The Independent
Colleges will soon have to fork over millions of dollars as Trump's bill extends a tax on their endowments
President Donald Trump 's "big, beautiful bill" has passed and is causing panic for the heads of America's top universities. The bill — which was unanimously opposed by Democrats in the House and the Senate — was sold by Trump as a method for providing tax relief and expanding American wealth. Among its various provisions, the bill levies a tiered tax on university endowments, which previously were not taxable. The new tax is justified by the Trump administration as a way to prevent universities from "[abusing] generous benefits provided through the tax code". The taxes range from 1.4 percent to 8 percent at the wealthiest institutions. Universities rely on their endowments to fund essential operations and to provide services to their students. In 2017, during Trump's first term, Congress started taxing universities with endowments of $500,000 or more per student at 1.4 percent. The new bill expands that. Harvard and Princeton both have endowments of $2 million or more per student. They will be subject to an 8 percent tax on their investment income. It could be worse; the original House bill set the tax at 21 percent, and Vice President J.D. Vance — himself a product of a wealthy school and its endowment funding — wanted to set the tax at 35 percent, according to the New York Times. Harvard has the largest endowment of any U.S. university, with an estimated $53.2 billion. At an 8 percent tax rate, the school will be paying approximately $4.24 billion to the federal government. Only nine U.S. universities qualify for the highest tax rate; Harvard, Yale, Princeton, MIT, Stanford, CIT, Juilliard, Amherst and Pomona. Schools with endowments of between $750,000 and $2m per student will be taxed at 4 percent. That tier includes universities such as Notre Dame, Dartmouth, the Mayo Clinic College of Medicine, Baylor, Northwestern, Johns Hopkins, Duke, Vanderbilt, the University of Chicago, Columbia and Brown. In the case of a school such as the University of Chicago, the college has an endowment of $850,000 per student, so it will be taxed at the 4 percent rate. With an endowment estimated at $10.4 billion, the university will pay $416 million each year. The University of Notre Dame's endowment is approximately $18 billion, so it will pay around $720 million each year. All other schools that qualify — meaning they have at least 500 tuition-paying students — will be taxed at 1.4 percent. The tiered endowment taxes aren't the only changes to higher education that the "big, beautiful bill" has introduced. Student loans are also being re-tooled. A lifetime borrowing cap of $100,000 for graduate students and a $200,000 cap for law and med school students is now in place. The bill also set a $65,000 cap on Parent PLUS loans, which are unsubsidized loans that parents can use to support their dependent undergraduate students. Those loans will no longer be eligible for repayment programs. Repaying student loans has also changed. The new bill puts limits on deferments and forbearances and replaces existing income-based payment plans — aimed at helping lower-income borrowers — with two ways to repay. One plan is a standard repayment plan that lets borrowers pay over 10 to 25 years based on their loan amounts, regardless of their income. The other is labeled at a "Repayment Assistance Plan" that is based on a percentage of a borrower's discretionary income. The approximately eight million borrowers enrolled in former President Joe Biden's SAVE repayment plan will have to wait a little longer for a judge to rule on the program's legality.
Bloomberg
16-06-2025
- Business
- Bloomberg
Rich Colleges Would Face Lower Tax Hike Under Senate Bill
Wealthy US colleges scored a win on Monday with the release of Senate Republicans' tax bill, which would institute a lower tax hike on endowments than what GOP House members have backed. Private universities with at least 500 students that have endowments of $2 million per pupil or more would pay an excise tax of 8% under the new bill released by the Senate Committee on Finance. That's much lower than the 21% rate that was included in the House proposal, which passed the chamber in May.
Yahoo
15-06-2025
- Business
- Yahoo
As Harvard's and Yale's private equity holdings go on sale, buyers can use this technique for 1,000% windfalls. ‘It makes your brain melt'
The secondary market for private equity stakes is booming as buyers are eager to snap up assets being shed by investors. There's reason to believe Harvard, Yale, and other elite institutions might be getting a good deal, even as they sell their holdings at a discount to current valuations. Some of the country's most elite institutions are offloading parts of their private equity portfolios. As funds take longer to return money to investors, Harvard and Yale are selling at a discount with endowments looking for more liquidity and flexibility amid economic turbulence. But both sides of such deals can make surprising gains. This portfolio maintenance doesn't appear linked to President Donald Trump's attack on university finances, including a possible tax hike on endowments. Industry skeptics think these sales, however, highlight growing concerns that returns in the opaque world of private equity aren't always all they're cracked up to be. 'With elite universities' private equity investments on the auction block, the big reveal is coming,' Nir Kaissar, founder of asset management firm Unison Advisors, wrote in a Bloomberg opinion column on Thursday. University endowments typically make for ideal investors in alternative assets—with virtually infinite investment horizons, they can ride out wild gyrations in the public markets by locking up billions of dollars over several years. On its face, that move has been a no-brainer. As Kaissar noted, Bloomberg's weighted index of U.S. PE funds returned 9.4% year over year from 2007 to 2024. The index's annualized standard deviation, a common measure of volatility, was just 7.2%. The S&P 500 gained 10.5% in that span with a standard deviation of 16.8%, a much worse return on a risk-adjusted basis. These numbers, however, may not reflect the underlying picture. Unlike stocks trading on public exchanges, the prices of private assets don't change based on the whims of investors day-to-day. Instead, valuations of most private companies, real estate properties, and other assets PE firms hold are typically based on subjective assumptions that don't fluctuate like public equity markets do, Tim McGlinn, an investment veteran and former adjunct finance professor at Seton Hall, told Fortune. 'There's nothing intrinsically wrong with that,' said McGlinn, who blogs about the alternatives industry at But when investors or prospective investors believe the holdings can actually be sold at those prices, 'that's when things become problematic.' Ultimately, private equity firms make money for investors by exiting their investments, when they attempt to turn notional valuations on paper into cash. Therefore, there must be some correlation between the performance of public and private assets, said Jason Reed, a finance professor at the University of Notre Dame. 'If the market's doing really well broadly, well then you're going to have lots of opportunities for businesses to buy your company, other private equity companies to buy your company, to take them public and IPO them,' he told Fortune. 'But if the economy is not doing great, businesses are struggling, then you're not going to have as many opportunities overall to sell.' Billionaire hedge fund owner Bill Ackman, a Harvard alumnus, has claimed his alma mater's $53 billion endowment, almost 40% of which is allocated to private equity, is significantly overstated. 'I believe that a substantial part of the reason why many private assets remain private despite the stock market near all-time highs is that the public market will value private assets at lower values than they are being carried at privately,' Ackman, the CEO of Pershing Square Capital, wrote in a social media post last month. The Harvard Management Company, which oversees the university's endowment, declined to comment. It recently agreed to sell roughly $1 billion of its PE stakes, following a similar move in the summer of 2021. That came at a time of 'significant ebullience,' the university noted in its 2022 financial report, allowing the school to avoid discounts the funds would have faced just over a year later. Yale, meanwhile, is negotiating a nearly $3 billion sale of private equity holdings at a discount of less than 10%, a spokesperson for the Yale Investments Office told the school's newspaper. The university pioneered the institutional push into alternative assets, with 95% of its $41 billion endowment allocated to growth-oriented assets like PE, venture capital, real assets, and global equities. 'Following a months-long review, the University is in process to sell select private equity fund interests,' Yale said in a statement to Fortune. 'Private equity remains a core element of our investment strategy, and we continue to commit significant capital to our existing world-class partners, while pursuing new private equity opportunities to support the long-term growth of the Endowment.' This doesn't appear to be a distressed sale, McGlinn said, but the deal is otherwise hard to evaluate. More mature funds trade very differently than newer ones, and various positions are typically packaged together in these types of transactions. 'Yale being Yale, you can assume they're getting the best price they can,' McGlinn said. Still, investors in PE funds, known as 'limited partners,' sold their stakes at an average discount of 11% compared to the net asset value, or NAV, of these holdings on their balance sheets, according to Jeffries. It may seem odd that universities are looking to sell when valuations are likely down across the board this year as borrowing costs remain elevated. But demand in the secondary market is booming. Secondary sales increased 45% to $162 billion last year, per Jeffries. As a result, Yale, Harvard, and other universities could take much less of a haircut than they might have feared while also booking gains on their initial stakes. That's because there is reason to believe many buyers are willing to overpay, McGlinn said. Regardless of what secondary funds dish out to acquire these stakes, he explained, they are allowed to then mark these investments up to the old net asset value. McGlinn calls this process 'NAV squeezing.' As The Wall Street Journal reported last year, it can result in one-day windfalls of 1,000% or more, gains that McGlinn said secondary funds report as real returns. 'It makes your brain melt,' he said. Comparing NAV squeezing to a Ponzi scheme might go too far, said Jeffrey Hooke, a senior lecturer in finance at Johns Hopkins Carey Business School and a longtime critic of PE. But he agrees it looks quite shaky, even if the technique is permissible according to generally accepted accounting principles, or GAAP. 'It's almost like a full wash and rinse cycle,' said Hooke, formerly the principal investment officer of the World Bank's International Finance Corporation. Universities, of course, get to be on the other side of these deals. Even though they are selling their PE stakes at a discount to NAV, they could be getting more than the capital they had committed to those investments up until this point. In other words, endowments might still be escaping with a profit. 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Bloomberg
12-06-2025
- Business
- Bloomberg
Harvard and Yale Will Finally Lift the Veil on Private Assets
If I told someone with even a little investing experience that I own an asset that pays like stocks but is stable like bonds, they would probably think I was a huckster or a fool. Yet many of the most sophisticated investors claim to own such a thing. I'm referring to private assets, a broad group that includes stakes in companies, loans to businesses and physical commodities, which are often the biggest holding in pension and university endowment portfolios. The allure of private assets isn't necessarily superior performance relative to comparable investments in public markets. Rather, it's that, because they don't trade on volatile public markets, portfolio managers can pretend that their private investments don't fluctuate much in value — and that any changes are mostly to the upside.
