Venture Capital Spurs Endowments’ Record Returns

University endowments have one-upped their pension fund counterparts, as the average college foundation investment portfolio has risen by nearly 30% in 2021.

The 300 largest pension funds in the world grew their assets under management (AUM) by an average 11.5% to reach a collective $21.7 trillion in 2020, according to research from the Thinking Ahead Institute. But the median endowment gain of 27% blew that away during fiscal year 2021, according to Wilshire Trust Universe Comparison Service data.

While the average returns hovered around 30%, many endowments easily surpassed this, including Washington University in St. Louis (65%), Duke University (55.9%), the University of Virginia (49%), Boston College (46%), Boston University (40%), the University of Kansas (37.1%), the University of Nebraska (32.3%), and Clemson University (31.3%), among others.

For more stories like this, sign up for the CIO Alert newsletter. 

The University of Virginia endowment’s 49% investment return for the year ending June 30 helped raise the total value of its investment portfolio to $14.5 billion. The University of Virginia Investment Management Company (UVIMCO) reported that the gains were led by private equity investments, which returned 98.7% for the fiscal year, while public equity and real assets returned 51.4% and 49%, respectively. Private equity is the endowment’s second-largest asset allocation at 26.4%, behind its 29.9% asset allocation to public equity.

“Private equity benefited from the substantial shift to online activities, resulting in dramatically accelerated growth for many software and internet businesses,” UVIMCO said in its annual report.

Dartmouth College’s endowment portfolio returned 46.5% for fiscal year 2021. According to last year’s annual report, the university increased its exposure to private equity and venture capital investments, which, as of June 30, 2020, represented 29% of the total portfolio. Only global equity, at 30%, has a higher allocation for Dartmouth.

The University of North Carolina’s endowment gained a record 42.3% for the fiscal year to raise its value to $10 billion. Chief Audit Officer Dean Weber said the record highs were driven by strong investment in private equity as more companies went public during the past fiscal year than had been expected. He said schools with the highest allocation to venture capital received the highest returns, adding that UNC was “in good company,” according to student newspaper The Daily Tar Heel.

But financial data and software firm PitchBook warns that the short-term high returns of venture capital investments could prove to be a double-edged sword.

“On one hand, news of this bonanza bolsters the case for the endowment model that prioritizes alternative investments,” PitchBook said. “But the returns may become a headache for asset managers of endowments: The growth could be more mirage than oasis, and it provides ammunition to the endowment system’s varied critics.”

PitchBook said many of the gains that universities are reporting from venture capital and private equity investments “are likely to be juiced by private valuations rising on paper only,” adding that the price of today’s startups “may not stand up to public market scrutiny in years to come.”

The firm also said the strong performance from the private markets has exposed the disparity of returns between large and small endowments, as most smaller endowments lack access to the best private equity and venture capital managers, “raising a question of fairness.”

How Endowments and Foundations Can Energize Flagging Returns

Global Equities Spur Endowment Index 6.17% Higher in Q2

Tags: Alternative Investments, Boston College, Boston University, Clemson, Duke, Endowments, Kansas, Nebraska, North Carolina, Private Equity, Venture Capital, Virginia, Wilshire Trust Universe Comparison Service

The pension risk transfer (PRT) market is expected to be “robust for years to come,” according to a MetLife report that says the current interest rate environment, market volatility, an increase in retirees, and improved annuity buyout pricing are driving de-risking interest among corporate defined benefit (DB) pension plan sponsors.

Companies are increasingly looking to reduce some or all of their pension plan’s liabilities—and the risks that come with them—by offering lump-sum distributions to participants and/or by using an annuity buyout to transfer pension liabilities to an insurer, the report finds.

While the overall PRT market grew by more than 25% between 2017 and 2019, according to Willis Towers Watson, MetLife says there is still $3.4 trillion in plan assets held by private-sector DB plans, the majority of which is expected to be de-risked within the next decade.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

According to the MetLife report, 93% of plan sponsors with de-risking goals say they expect to completely divest all their plan liabilities in the next five years, which is up sharply from the 76% that had the same expectations in 2019. Among plan sponsors that expect to fully divest their defined benefit plan liabilities, 32% have plan assets of $1 billion or more, 35% have assets of $500 million to $999 million, and 33% have assets of $100 million to $499 million.

The Milliman Pension Buyout Index, which estimates the average cost of a pension risk transfer strategy, shows that it has become increasingly affordable to de-risk a pension plan over the past decade. According to the index’s most recent results, for August, the estimated cost to transfer retiree pension risk to an insurer was 102.2%, down from 103.2% during the same month a year earlier, and down from 111.4% in 2010. This means the estimated retiree PRT cost for the month is 2.2% more than those plans’ retiree accumulated benefit obligation.

The decreasing costs of risk transfers were reflected in the $5 billion in US single premium buy-out sales recorded during the second quarter of the year—a 119% jump from the same period last year, according to the Secure Retirement Institute (SRI).

Total single premium buy-out assets increased 9% for the quarter to $169.4 billion, while buy-in assets totaled $5.9 billion, which is more than 214% higher than it was the same quarter last year. The SRI also said overall group annuity risk transfer sales were $9 billion in the first half of 2021, a 30% increase compared with the first half of 2020.