Should Endowments Continue to Commit to Private Investments?

Abstract

For more than 30 years, endowments have committed ever-increasing allocations to private equity, venture capital, and private real estate—all based on expectations of returns superior to those available in the public markets. For decades, this belief was rewarded with above-market returns. However, evidence indicates that the claimed benefits of private investing as well as the returns reported might be exaggerated. In addition, the performance of private investments relative to public investments has diminished in recent years and, for the average endowment, no longer delivers compensation for the illiquidity, serial commitments, and other risks that investors are required to assume. Moreover, even for the largest endowments, evidence suggests that continued investing in future vintage years of private equity might produce disappointing results. The inability of private investments to outperform public market equivalents over the last decade could prove to be the new norm.

TOPICS: Private equity, portfolio management/multi-asset allocation, foundations & endowments, real assets/alternative investments/private equity, performance measurement, equity portfolio management, fundamental equity analysis, real estate, manager selection, volatility measures

Key Findings

• • Over the last 15 years, in most time periods reviewed, the returns for the average endowment in private investments underperformed private market indexes; large endowments; and the S&P 500, adjusted to a modified public market equivalent (mPME).

• • Private investments have not compensated the average endowment for the illiquidity, delayed pricing, and misleading performance accounting during the last 15 years.

• • Endowments are well advised to reconsider future commitments to private equity in light of the dry powder, debt multiples, and price multiples extant today. Fiduciaries should carefully evaluate whether private investments are likely to provide adequate compensation for the illiquidity and risks assumed.