Are Endowments At “Peak Private Equity” ?

These are tough times for university endowments — there’s the difficulty of producing consistent results; the questionable love of investments in hedge funds and private equity amid high fees and underperformance; and the challenge of having to respond tocompeting constituencies. These issues are not going away anytime soon. If anything, they are becoming more pronounced and complicated in a time of low interest rates and volatile markets.

In that context, this doesn’t come as shocking news: Harvard Management Corp., the entity that runs Harvard University’s endowment, is considering the sale of part of its private-equity investments.

HMC declined to comment, so we don’t have precise numbers on exactly what funds it is looking to sell. What we do know is that, according to HMC’s most recent annual report, about 20 percent of the $35.7 billion it manages is in private-equity assets. Those holdings returned 2.6 percent during the past fiscal year, a bright spot relative to the endowment’s overall minus 2 percent performance.

Harvard’s endowment report made it clear that a reorganization of the private-equity holdings was in the works:

We are actively concentrating the portfolio by scaling our commitments to a core group of top managers, and selectively adding new relationships to address gaps in the portfolio.

Presumably that doesn’t just mean sector gaps but gaps in performance, since a 2.6 percent annual return isn’t really something to boast about.

Harvard isn’t the only underperformer among college endowments. As Bloomberg News reported last month, “College endowments are poised to take the worst slide in performance since the 2009 recession.” Preston McSwain of Fiduciary Wealth Partners asked if college endowments in their effort to beat the competition, are “ending up with portfolios that are so complex that they’re hard to get their heads around.”


Continues here: Harvard’s Lesson in Private Equity