Private and community foundations, which enjoyed massive returns from venture capital last year, anticipate increasing their allocations to private equity at higher rates than other asset classes over the next three years, according to fresh research from Commonfund Institute.
“Private equity and venture capital have been doing quite well. If you have a sizable exposure to private equity in your portfolio, you’ve experienced a nice alpha generation boost and have been rewarded for locking in capital,” said George Suttles, executive director of Commonfund Institute.
A total of 231 foundations representing $119.7 billion in assets participated in the 2021 Council on Foundations-Commonfund Study of Investment of Endowments for Private and Community Foundations.
The study found that about 30 percent of respondents from private foundations with more than $500 million in assets said they planned on increasing allocations to private equity and venture capital over the next three years. A similar percentage of respondents from institutions with assets under $101 million also intend on upping their private equity and venture capital allocations in the coming years, the study said. Mid-sized foundations also plan on following suit.
Out of eight alternatives strategies, venture capital was the best performer for foundations last year, the study found. Private foundations earned an average one-year return of 51.4 percent and community foundations notched an average gain of 44.8 percent. Private equity ranked second, with private foundations averaging one-year returns of 35.8 percent and community foundations earning 34.7 percent.
“We’re seeing returns coming in for larger private and community foundations who started incrementally ramping up their private equity and venture capital allocations over the past 10 years. They’re definitely getting those returns from investments they started making a decade ago,” Suttles said.
While strong returns for venture capital and private equity have drawn increased interest from foundations, the coming months may cause some pain as new valuations for private equity and venture capital start to come in, warned Mark Hoeing, Commonfund Capital’s head of private equity.
“Generally speaking, we are seeing a downdraft,” Hoeing said. “If you have a venture capital portfolio, you probably have a lot of unrealized investments that are public that declined in the first quarter.”
Unlike most public pension systems, hedge funds and other “marketable alternative strategies” rank as the most popular alternative asset class for foundations, the study said. Suttles said this was due to the need for liquidity preferred by many foundations.
“Middle and smaller sized foundations usually start with marketable alternatives first. Then they dip their toe in private equity over a period of time,” Suttles said.