Amid high interest rates and slowed dealmaking, elite universities face potential liquidity headaches, new analysis finds.
Dive Insight:
MPI's analysis of private equity holdings in endowments at Ivy League institutions, MIT, and Stanford University highlights growing concerns. Private equity has struggled with high interest rates and slowed dealmaking, affecting the strategy of debt-financed buyouts.
Impact on Elite Endowments:
Elite universities' endowments, worth hundreds of billions of dollars, are heavily invested in private equity. Harvard University's endowment is nearly $50 billion, and Yale University's is over $40 billion in fiscal 2023. These amounts equate to $2 million or more per student but represent endowment value, not cash.
Endowment value is tied up in complex investment portfolios that cannot be quickly converted to cash. At the same time, institutions need more cash to manage rising expenses.
Historical Context and Strategy:
Endowments have diversified and boosted returns by investing in private equity funds, targeting undervalued and growing companies. Yale revolutionized the modern university endowment in the mid-1980s by investing heavily in alternative investments, including private equity. This strategy has been adopted by other elite institutions and smaller colleges.
Current Challenges:
By 2023, 45% of endowment funds sector-wide were in alternative investments, per a Commonfund and National Association of College and University Business Officers study. MPI's analysis notes that endowments with less mature private equity portfolios might face fewer distributions and higher capital calls, requiring cash for unfunded commitments.
For instance, 40% of Brown University's $6.2 billion endowment is allocated to private equity, with 34% unfunded. This could lead to lower distributions and higher capital calls in the near to mid-term.
Yale, with older private equity portfolios, often experiences fewer unfunded commitments and higher distributions, mitigating some risks.
Liquidity Concerns:
When fund managers issue capital calls, endowments typically generate cash from more liquid portfolio parts or cash distributions from private equity funds. MPI highlights that both funding sources pose liquidity risks.
Mitigating Liquidity Pressures:
To address liquidity pressures, some universities, including Harvard and Princeton, have issued new debt this year to raise cash, incurring additional liabilities.
Conclusion:
As private equity faces challenges, elite universities must navigate complex liquidity issues to maintain their financial stability amidst rising operational expenses.
Related Posts
