Top academic institutions like Harvard and Yale are selling parts of their private equity (PE) portfolios amid concerns over liquidity and economic uncertainty. These sales come as PE funds take longer to return capital, prompting elite endowments to offload assets even at a discount. Despite speculation, this shift doesn’t appear to be politically motivated, such as in response to Donald Trump’s proposed tax hikes on university endowments, but rather stems from strategic portfolio rebalancing.
Historically, university endowments have favored PE due to their long investment horizons and tolerance for illiquidity. With consistent returns and lower volatility than public markets, PE has appeared attractive. However, these reported returns may not tell the full story. Unlike public stocks, PE valuations rely on subjective estimates rather than market prices, raising questions about the reliability of performance data and the true value of holdings.
Universities Reevaluate PE Strategies Amid Valuation Gaps and Challenging Market Exit Conditions
As investors look to convert PE holdings into cash, discrepancies between notional valuations and market realities are surfacing. Finance experts warn that the gap between reported NAV (net asset value) and actual sale prices could be problematic, especially during economic downturns. Successful PE exits depend heavily on favorable market conditions, suggesting that public and private asset performance are more correlated than many assume.
Harvard and Yale Sell Discounted Private Equity Stakes as Liquidity Pressures Reshape Endowment StrategiesHarvard has recently agreed to sell around $1 billion in PE assets, and Yale is negotiating a $3 billion sale, both at discounts. Despite these markdowns, the universities maintain that private equity remains a key part of their strategies. With significant portions of their endowments tied up in alternative investments, these sales reflect a tactical shift rather than a crisis, allowing them to redeploy capital and manage risk more effectively.
Secondary Market Surge Spurs NAV Squeezing, Enabling Gains Despite Discounted PE Sales
The market for secondary PE transactions is surging, with a 45% increase to $162 billion in volume last year. This demand allows sellers like Harvard and Yale to secure better prices than expected, even while selling below NAV. Buyers, known as secondary funds, are often willing to pay premiums because they can mark the assets up to old valuations on their books, creating short-term paper gains that enhance reported performance.
This practice of “NAV squeezing” lets secondary funds record massive gains based on accounting practices rather than actual performance. Critics argue that, while technically GAAP-compliant, the approach borders on financial manipulation. Nonetheless, universities may still profit from these deals despite selling at a discount, benefiting from a system that favors savvy institutions in a complex and opaque investment environment.
