University endowments soar in the golden age of venture capital
Large college endowments recorded their biggest investment gains in decades, thanks to portfolios boosted by huge returns from venture capital and booming stock markets.
The University of Minnesota endowment gained 49.2% for the year ending June 30, while the Brown University endowment saw a return of more than 50%, said people familiar with their returns, which are not yet public.
Meanwhile, Duke University said over the weekend that its endowment had increased by 55.9%. Washington University in St. Louis last week announced a 65% return, the school’s biggest ever gain, bringing the size of its managed endowment fund to $ 15.3 billion. The University of Virginia endowment registered a gain of 49%. University returns may include portions of endowments, as well as other long-term investments.
The chain of successful returns is likely to continue when other endowments with significant risk capital exposure report their performance.
Venture capital funds invest in start-ups, often at an early stage when companies need financing to grow their businesses. A few years ago, venture capitalists were elated when companies went public with valuations in the billions of dollars. Today, the biggest hits are often companies worth tens of billions of dollars, generating staggering profits for early investors.
“You had this unique environment where there’s this phenomenon of more money coming in, more fundraising rounds and a ton of IPOs. It all worked out, ”said Nolan Bean of Cincinnati-based investment advisory firm Fund Evaluation Group, which advises clients, including endowments, on their portfolios.
But it’s unclear whether universities will be able to hang on to these gains. Part of the internal rates of return of venture capital funds often comes from unrealized gains, and a growing number of venture capitalists and their clients fear the market may be overheated. The valuations of startups have recently grown much faster than revenues or profits. Endowments could return some of those returns, if valuations collapse.
Soaring stock markets around the world supported the one-time gains. The MSCI All Country World Index and the S&P 500 posted total returns of nearly 40% and 41% for the period, according to FactSet. These gains are reflected in the median return of 36% over that period for endowments managing more than $ 1 billion, according to preliminary data from Cambridge Associates.
Schools with large allocations to venture capital have been further bolstered with funds at almost every stage of their lifecycle, recording large returns on realized and unrealized gains.
Venture capital is on its way to seeing its best returns since the dot-com boom of the late 1990s. This golden age of business is fueled by an extraordinary investor appetite for fast-growing companies, as the valuations of startups and newly listed tech companies have skyrocketed, although profits remain scarce. Low interest rates and the scarcity of other attractive opportunities have also helped.
Buzzy startups have seen their valuations soar particularly quickly. Corporate credit card company Ramp, which launched early last year, has already raised two rounds of funding this year, with the company’s valuation reaching nearly $ 4 billion, an extraordinary race for a two-year startup.
The average valuation of an early stage U.S. startup reached $ 96 million in the first half of 2021, up more than 50% from $ 61.7 million at the end of 2020, according to PitchBook.
Recipients include top venture capitalists like Sequoia Capital, which has invested less than $ 500 million between the two DoorDash Inc.
and Airbnb Inc.
Today, those two investments alone are worth more than $ 23 billion. Many of those gains are split between two of Sequoia’s leading US venture capital funds, each of which has raised less than $ 600 million from investors.
Although Sequoia is silent on its specific investors, a securities filing in 2014 revealed that its flagship fund’s investor list was filled with academic endowments. These schools included the University of Notre Dame, Harvard University, Vanderbilt University, the University of California system, Princeton University, Bowdoin College and Brown.
Inordinate earnings are likely to be concentrated among large endowments. Those managing over $ 1 billion had an average venture capital allocation of 11%, according to a 2020 study by the National Association of College and University Business Officers and TIAA. This share fell to 5% for endowments managing from $ 501 million to $ 1 billion.
Some schools have much more.
Yale University, which made its first venture capital investment in 1976, recently spent more than a quarter of its endowment on venture capital, up from 16.2% in 2016. Yale in August appointed the Foundation’s director of venture capital, Matthew Mendelsohn, as the foundation’s new director of investments. .
Far from making the round of victory, investment managers downplay their performance.
“The past year represents a unique and very unusual moment in time,” wrote Robert Durden, chief investment officer for the University of Virginia Investment Management Company, in the September Endowment Annual Report, “and the performance of UVIMCO’s investments over the past few decades is really what matters. “
Mr Durden went on to write: “We don’t know what lies ahead. “
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Endowment leaders say they want to avoid focusing on short-term gains when investing for the long term. Endowments, which fund financial aid, faculty salaries and capital projects, often aim to generate a school’s annual spending rate, inflation, plus a small supplement to support current and future generations. of students.
But the reluctance of staffing heads could be driven in part by concerns about their ability to hold these returns if valuations collapse.
Huge returns could also highlight the growing divide between rich and poor during the pandemic. Booming stock markets have benefited wealthy individuals and institutions at the same time as low income groups struggled, leading to an uneven recovery.
The numbers could also rekindle the debate around a sensitive topic: whether and how many wealthy universities should be taxed. Some universities have come under fire for not spending more of their money to reduce tuition fees and support low-income students. A 1.4% tax on college endowment income was enacted in the 2017 Tax Cuts and Jobs Act signed by President Donald Trump, affecting private schools with at least 500 students and at least minus $ 500,000 in investment per student.
Democrats are now aiming to soften the tax hit. The House Ways and Means Committee recently approved a provision that would phase out the tax for schools based on the financial aid they give to students as a share of tuition fees. This provision is part of the larger spending and climate legislation that lawmakers are still debating.
—Richard Rubin contributed to this article.
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