Why college endowments are betting big on VC and PE

Private equity and venture capital rank as the most popular asset classes for college endowments, according to a new report from an organization representing college financial officers.

Institutional investors of all stripes have increased their allocations to private equity over the past two decades. But college endowments, especially, have grown their private equity and VC portfolios over the years.

Colleges on average allocated 30 percent of their portfolios to private equity and venture capital, according to the 2022 NACUBO-TIAA Study of Endowments.

NACUBO stands for the National Association of College and University Business Officers. It represents business and financial officers from more than 1,700 colleges and universities. TIAA (the Teachers Insurance and Annuity Association of America) provides financial services for people and institutions with a focus on the not-for-profit sector.

NACUBO and TIAA surveyed 678 colleges, universities and other education-related foundations from July 2021 to June 2022. The respondents collectively represent more than $800 billion in AUM, with an average endowment size of $1.2 billion and median endowment size of $203 million.

“Private equity is a very interesting asset class that has gained importance and taken up bigger percentages of portfolios across endowments of all sizes,” said Ivy Flores, a managing director at Nuveen, which is a company owned by TIAA, at a press briefing discussing the report.

However, there is a large divide in allocation strategies between universities with endowments of more than $1 billion in size and their smaller peers.

On average, colleges with endowments of more than $1 billion allocate 18 percent of their portfolios to private equity and 14.5 percent to venture capital, according to the study.

Brown University’s portfolio stands with the highest allocation to private equity, having dedicated 43 percent of its endowment to private equity in FY 2022, according to a recent presentation from the Massachusetts Pension Reserves Investment Management.

Smaller endowments allocate less to private equity and venture, according to the study. Endowments between $251 million and $500 million — think Gonzaga University or Rhode Island School of Design — on average invested 18 percent combined to private equity and venture capital in FY 2022 (12 percent to PE and 6 percent to VC), the study said.

“Smaller institutions may not have the same approach because of liquidity requirements,” Flores said. “It is a consideration of their liquidity and risk profile as well as fees.”

Many smaller endowments rely on funds of funds for their private investments. In addition, smaller endowments frequently lack the staff and expertise needed to effectively manage a private markets portfolio.

According to the study, endowments of all sizes posted a loss of 8 percent in fiscal 2022, down sharply from a gain of more than 30 percent the previous year. Endowments with more than $1 billion in endowments fared better than their smaller peers, with an average loss of 4.5 percent for the year.