Yale University’s investment office in March disclosed that it had voted last June to increase its target private equity allocation from 21% to 26 percent. This came amid mounting private equity losses, but was portrayed by many media outlets as “contrarian” investment chief David Swenson sticking to his guns. In reality, however, Swenson didn’t have much of a choice.
As of last June, Yale’s actual exposure to private equity was at 24.3 percent. That’s a major climb from 20.2% the prior year, and nearly 10 percentage points higher than Yale’s private equity allocation just four years earlier. In other words, raising the target allocation was largely an effort to reflect reality.
The allocation increase was reported in Yale’s “Annual Endowment Report.” Separately, Yale’s “Annual Financial Report” notes: “Under the terms of certain limited partnership and limited liability company agreements for private equity and real estate investments, the University is obligated to remit additional funding periodically as capital calls are exercised. At June 30, 2009, the University had uncalled commitments of approximately $7.6 billion.”
For context, Yale’s entire endowment was valued at $16.3 billion as of June 30, 2009.
Yale’s actual exposure to private equity stood at 24.3% last June, above its 21% target. It’s no surprise, then, that the university boosted its target to 26 percent.
The annual financial report goes on to state: “The University has various sources of internal liquidity at its disposal, including cash, cash equivalents and marketable debt and equity securities. If called upon at June 30, 2009, management estimates that it could have liquidated approximately $3.6 billion (unaudited) to meet short-term needs.”
In other words, if all of the uncalled commitments came due last July 1, Yale would not even have been able to meet half of them.
Yale’s hope here is that distributions from its private equity portfolio will outpace new capital calls. The only problem, of course, is that a PE firm has more time to distribute than it does to call. As such, the school apparently felt the best strategy was to increase its target allocation to create wiggle-room when the PE exposure inevitably grows. —Dan Primack