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ICYMI: Yale University’s Annual Endowment Report Strengthens Support for Private Equity

Yale Endowment Update 2017: “The alternatives of absolute return, private equity, venture capital, natural resources, and real estate provide not only diversification benefits, but also abundant opportunities for astute managers to add value in the investment process. [Warren] Buffett notes that alternative assets often carry high fees, but net returns matter, not gross fees. The top performers clearly overcame the fee burden to post extraordinary results.”

Buyouts: Yale Rebuts Buffett, Defends Performance of Alternative Investments [Excerpts]

Yale’s endowment is making waves with its annual report, in which it defends the high fees of private equity because of what it says has been strong performance.

“The alternatives of absolute return, private equity, venture capital, natural resources, and real estate provide not only diversification benefits, but also abundant opportunities for astute managers to add value in the investment process. [Warren] Buffett notes that alternative assets often carry high fees, but net returns matter, not gross fees. The top performers clearly overcame the fee burden to post extraordinary results,” the report said.

Over 20 years, the endowment’s leveraged buyouts portfolio earned 12.6 percent per annum, and the venture capital portfolio earned 106.3 percent per annum, the report said. Venture’s huge return is partially accountable to homeruns during the Internet bubble; its 20-year, time-weighted venture return is 25.5 percent, the report clarified in a footnote.

Yale is all-in on committing to private equity, intending over the long-term to allocate half of the endowment’s investment portfolio to leveraged buyouts, venture capital, real estate and natural resources. (Though in 2017 Yale’s investment committee reduced the target allocation to LBO to 14 percent from 15 percent.)

This has been a gradual shift over 30 years. In 1987, around 80 percent of the portfolio was committed to U.S. stocks and bonds, the report said. Today, target allocations to domestic marketable securities and cash stand at 11.5 percent, the report said.

“The heavy allocation to nontraditional asset classes stems from their return potential and diversifying power,” the report said. “The endowment’s long time horizon is well suited to exploit illiquid, less efficient markets such as real estate, natural resources, leveraged buyouts and venture capital.”

Over 20 years, Yale’s endowment produced a 12.1 percent return, beating the 7.5 percent return of the Wilshire 5000 stock index, the report said.