University endowments post 12.8% returns on alternatives

The University of Michigan and the University of Vermont have private equity secondaries funds in their portfolios.

University endowments are increasing their allocations for alternative strategies because of high returns, according to a recent report from the National Association of College and University Business Officers (NACUBO) and educational research group Commonfund Institute

This year university endowments are expected to generate returns of 12.8 percent for alternative strategies (including private equity, venture capital, natural resources, distressed debt and private equity real estate), according to preliminary data from the report. In 2013, endowments only generated an 8.3 percent return on alternatives.

Venture capital produced the highest returns across the endowments, at an average of 21.2 percent. Energy and natural resources followed generating 18.4 percent and private equity returned 17 percent.

“The greater diversification practiced by the largest endowments and their emphasis on a variety of sources of return, both public and private, tends to result in higher long-term investment performance,” Commonfund director John Griswold said in the report.

These returns include performance from secondaries funds, mostly in private equity, and many endowments have been active limited partners in secondaries funds recently.

The University of Iowa Foundation committed to Landmark Private Equity Partners XV, which is nearing a final close on $3.2 billion. Michigan State University committed to Ardian’s $10 billion AXA Secondary VI and both the University of Michigan and the University of Vermont committed to HarbourVest Partners’ Dover Street VIII, according to PEI’s Research and Analytics division.

Endowments invest in secondaries funds to re-balance the portfolio and improve liquidity.

“Secondaries is an opportunity-driven market for endowments as returns have been good compared to other alternative asset classes,” said George Hanley, president of the George and Amanda Hanley Foundation, which supports education and environmental sustainability.

University endowments are also increasing their allocation to alternatives. The average allocation edged up to 58 percent of the total investment fund from 53 percent in 2013. The average private equity allocation (including secondaries) also increased, according to the report.

Endowments with substantial allocations to the asset class include the Stanford Management Company, which has a 22 percent allocation and Harvard Management Company, which allocates 16 percent. The University of Michigan has a 14.7 percent allocation, according to PEI data.