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.
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 allocations can grow from additional investments, but also from unrealized gains especially in venture capital assets. Princeton in FY 2015 reported “strong 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.
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.