Harvard Defeated by Unicorns

Venture capitalists shouldn’t be blamed for Harvard’s loss to Yale and Princeton. No this isn’t football, but it’s the season of the year when Ivy League Endowments release their annual returns and Harvard hasn’t been beating the second and third largest endowments. Harvard loses – as seen below – because it hasn’t fully participated in the rise of the unicorns.

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Source University Reports

Back in the early 1980s, Yale Endowment’s David Swensen began investing in private equity assets, such as venture capital and leveraged buyouts, and away from traditional stocks and bonds. Over the years, David Swensen taught others the “Yale Model”, including Andrew Golden who now manages the Princeton Endowment.  As seen in the graph below, private equity makes up more of the endowments’ of Yale and Princeton, than Harvard.

private-equity-allocation-image
Source University Reports

Private equity allocations can grow from additional investments, but also from unrealized gains especially in venture capital assets. Princeton in FY 2015 reportedstrong performance within our venture capital portfolio (that) further boosted” returns of its private equity assets to 21.8%. Yale devoted its FY 2015 annual report to its venture capital investments which had a twenty year weighted return of 32.3%.

Harvard has also benefited from venture capital. For FY 2015, Harvard reported increased returns in private equity were due in part to “the strong performance of 29.6% produced by our venture capital investments.” But Harvard loses because the endowments of Princeton and Yale include more private equity assets and thus have benefited from the recent rise of unicorn valuations.

Unicorns and endowments returns are somewhat works of fiction. Endowments returns are based on limited partner financial statements provided by the venture capital firms. These firms use different methods to value portfolio companies since public market prices don’t exist. So the valuations and hence endowment returns are more estimation, than reality.

Unicorn valuations may also be fantasy. For FY 2015, Harvard Endowment’s former investment manager, Steve Blyth, wrote that:

Venture capital continues to receive ample funding, and private company valuations are also bolstered by public mutual funds entering late stage funding rounds in significant size. This environment is likely to result in lower future returns than in the recent past.

Harvard, Yale, and Princeton have yet to fully report on their endowment for FY 2016. But in the long run, Harvard may still win if unicorn prices don’t materialize along with the paper gains of venture capital portfolios.

 

Spilling the Beans on the Yale Endowment

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The Yale Endowment had spectacular year in venture capital; in fact many decades worth of happy returns. The 2015 annual report is dedicated to…

“Yale’s successful entrepreneurs, technologists, and investors, who strive to transform markets, develop new products and processes, and change the world”.

But why dedicated a whole report to a subset of an asset class (private equity) to trumpet the Yale Endowment’s grand returns?

Get Lucky.  Since taking over Yale endowment in the early 1980s, David Swensen shifted the endowment away from traditional stocks and bonds towards illiquid securities found in private markets.  Higher returns can be found in private markets since the market is not efficiency: there is a lack of information. This in part lead to the spectacular returns.

Another contributing to Yale’s success is timing or just luck. David Swensen’s change in portfolio allocation paralleled the boom in tech beginning in early 1980s. And given the endowment’s long-term perspective, the fund benefit from internet bubble of the 1990s.

Social Network. Yale’s alumni network also contributed the endowment stellar performance. Of the many Yale alums profiled in annual report, two are pioneers: Leonard Baker and William Draper III.

Mr. Draper besides founding Sutter Hill Partners in 1964 is responsible for Tim Draper of DJF. Tim Draper is also responsible for Valley Girl, Jessie Draper. Leonard Baker became a Sutter partner in 1973. Besides sitting on many boards, Mr. Baker belongs to GIC, Singapore’s Sovereign Wealth Fund.

It’s alumni connections which bring investment ideas and opportunities to Yale.  Yale’s investment office also produces which goes onto to work in venture capital. Profiled in the annual report was Nick Shalek who graduated from Yale in 2005 and when to establish Ribbit Capital. In addition, the current head of Stanford’s endowment, Robert F. Wallace, also work at Yale’s investment office and graduated from Yale.

Spilling the Beans. After two decades, why now is Yale reporting its success in venture capital? The secrets of Yale’s success are well known after the publication of David Swensen’s Pioneering Portfolio Management.

Given the outcry over high college tuition and tax-exempt status of university endowments, the Yale 2015 annual report is more marketing than investing. Yale wants to appear to be doing good, rather than just making lots and lots of tax-free money.