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University endowments see uncertain success in returns from alternative assets

October 14, 2021
By: Ashwin Shenoy

Across the United States, universities’ endowments have seen a large return in their portfolios in the past year, according to a recent PitchBook report. This trend was most notable in well-known universities with large endowments. The University of North Carolina reported a 42.3 percent return, Duke University reported a 56 percent return, and Washington University in St. Louis reported a 65 percent return. These gains are largely attributed to their investments in alternative assets like venture capital and private equity.

Lesser-known universities with smaller endowments, however, have not seen substantial investments into alternative assets at the same level. Unlike universities with large endowments, these smaller institutions have a limited network of alumni employed at top funds, and will likely have to settle for low performing and unproven fund managers, according to the report’s author. This may be the case because smaller endowment institutions tend to lack access to high performing managers that invest through bigger funds. They may not have the resources to efficiently manage a portfolio of investments in venture capital. PitchBook cites data showing that endowments with allocations over $1 billion see over 25 percent of their portfolio in alternative assets. That percentage drops to under 8 percent when it comes to endowments with allocations less than $250 million.

Additionally, the gains that universities have been reporting may be artificially inflated on paper. These valuations may not hold in the public market in the long-term, as the COVID-19 pandemic has increased the prices of private assets due to low-interest rates, according to the report. Regardless, the desire for universities to diversify their endowment portfolios through venture capital investments continues to increase, due to the potential long-term high returns. Additionally, the report points out that there is large demand from students and activists to divest university endowments away from fossil fuels and towards more equitable solutions — especially towards diverse founders and institutions in the wake of racial justice movements across the United States.

The PitchBook report on this topic can be found here.

higher ed, investing