Venture Capital Drove Big Returns at Yale, Duke, MIT, and Other University Endowments

“U.S. equities have done terrific, and venture has done even better,” says Margaret Chen, global head of the endowment and foundation practice at investment firm Cambridge Associates. “You can see the outperformance for those who had long-standing, higher allocation to private investments.”

The big numbers buttress the “endowment model” championed by Yale University, which advocates big allocations to illiquid assets, such as venture capital and private equity, and much less emphasis on stocks.

Big weightings in alternative investments, however, did comparatively poorly over the past decade, in which stocks had a great run. Endowments rose an average annualized 7.5% in the 10 years through June 30, according to a 2020 study by the National Association of College and University Business Officers and TIAA—about half the S&P 500’s 14.8%.

“It’s the revival of the endowment model,” says Larry Kochard, the former chief investment officer at the University of Virginia Investment Management Co. who now oversees investments at Makena Capital, which has $20 billion in assets. “The endowment model has taken a lot of pushback in the past decade, but this reinforces that you are going to get see bigger returns if you are long-term-oriented.’’

Harvard University on Thursday said its now $53.2 billion fund—the biggest in U.S. academia—gained 33.6%, boosted by a 77% return in its private-equity portfolio, which includes venture capital, and a 50% gain in its public equities. Harvard’s fund trailed its peers because of its more conservative approach. Since N.P. “Narv” Narvekar took over as CEO of Harvard Management in December 2016, he’s increased its private-equity allocation to 33%, from 20% in fiscal 2019.

According to preliminary data by Cambridge, college endowments of all sizes gained a median 33.3% in fiscal 2021. The median return for funds with assets of more than $1 billion was 36%. Many individual endowments, however, easily beat the S&P 500, which returned 41% with reinvested dividends.

In contrast, endowments got hammered early in the pandemic, rising just 1.8% on average in the 2020 fiscal year, according to the study by Nacubo and TIAA, versus the S&P’s 7.5%, including reinvested dividends.

Yale’s fund gained 40.2%, boosting its value by $12.1 billion to total $42.3 billion. David Swensen, Yale’s longtime endowment chief who died in May, favored more illiquid asset classes like private equity, venture capital, natural resources, and real estate over public equities—an approach that was widely imitated. Yale recently named Matthew Mendelsohn, who has worked at the endowment since 2007 and was running its venture-capital portfolio, to succeed Swensen as chief investment officer.

Some other fiscal 2021 endowment results: Northwestern University’s $15 billion endowment gained 42.2%. “A lot of things worked,’’ Amy Falls, who was named chief investment officer of the endowment in February, said in an interview. “We are happy with the performance of our equity managers, and venture capital blew the doors off.” She said the venture portfolio gained 115% in the fiscal year.

Washington University in St. Louis Chancellor Andrew D. Martin, in a statement last month, said the endowment’s 65% return was a “game-changing moment for us as an institution” in support of its academic initiatives. The return added more than $5 billion to the endowment, now valued at $15.3 billion.

Chief Investment Officer Scott Wilson, who took over the fund in 2017, said in an interview that the global equity portfolio gained 71.5%, and investments in buyout, venture-capital, distressed-debt, and growth equity investments rose 82%.

Vanderbilt University’s fund rose 57.1%, or $4 billion, boosting its value to $10.9 billion. Duke’s $12.7 billion endowment gained 55.9%, while Bowdoin College’s endowment rose 57.4%, to $2.7 billion.

Among Ivy League funds, the University of Pennsylvania’s $20.5 billion fund advanced 41%. Cornell University’s endowment gained 41.9%, pushing the value of its fund to a record high of $10 billion. Dartmouth College’s $8.5 billion fund returned 46.5%.

Venture capital is on track to see its greatest returns since the dot-com boom of the late 1990s, The Wall Street Journal reported. Fast-growing companies have attracted investors, particularly in technology, where advancements were accelerated during the pandemic as more people worked remotely. Companies are staying private longer, and initial public offerings are bigger than ever.

“Technology touches every single thing we do in our lives,” Chen says. “Technology development has grown leaps and bounds from the pandemic.”

The last time university endowments saw these kinds of returns was in the era of the dot-com boom of the 1990s—and just before the bust. The median return for endowments in 1999 was 37.7%, according to Cambridge.

Endowments with more than $1 billion in assets had an average allocation to venture capital of 15%, according to the 2020 study by Nacubo and TIAA.

That allocation dropped significantly for smaller funds—those managing $101 million to $250 million had 6% in venture capital. “You can see the potential for outperformance for those who have had longstanding, higher allocation to private investments,” Cambridge’s Chen says.

Another indication of strong results is that schools are also broadly outpacing U.S. endowments, which posted a median 27.2% for fiscal 2021, before fees, the strongest performance since 1986, according to data from Wilshire Trust Universe Comparison Service. College endowment returns are net of fees.

Harvard’s return lagged other school funds because over the past decade, the endowment “has taken lower risk than many of our peers and establishing the right risk tolerance level for the university in the years ahead is an essential stewardship responsibility,” Narvekar wrote in Harvard’s annual report, published Thursday.

“Given the extraordinarily strong performance of the overall market this past year, a meaningfully higher level of portfolio risk would have increased HMC’s returns dramatically,” he wrote.

Narvekar, like other endowment managers, pointed out that the performance stems from investments made years ago in more-illiquid alternatives.

“Building venture capital portfolios is a multi-year effort for several reasons: vintage year diversification, highly prudent manager selection, and the years it takes for these exceptional managers to competently invest our capital,” Narvekar wrote. “Perhaps not surprisingly, a very large share of the tremendous gains from venture funds over the last year related to investments made over a decade ago.”

Many school endowment managers cautioned against expectations that such stellar performance will continue annually. “As experienced investors understand, Harvard’s endowment won’t produce 33.6% returns each year,” Narvekar wrote. “Indeed, there will inevitably be negative years, hence the importance of understanding risk tolerance.” The fund gained 7.3% in 2020.

One-year investment gains like fiscal 2021 “are rare, and markets tend to average out over time,” Cornell’s Chief Investment Officer Kenneth Miranda said Thursday in a statement.

“It was an extraordinary year, partly because of a unique constellation of events,” said Miranda, who cited the market rebound from pandemic lows, bolstered by U.S. monetary and fiscal policy. “We have a multiyear, almost infinite time horizon, and this money must be stewarded over generations of Cornell students, faculty, staff and research goals, through bull markets and bear markets.”

Write to Mary Romano at mary.romano@barrons.com