ResearchFebruary 17, 2023

Private Equity, Venture Capital Outpace Public Equities in 2022 Higher Education Endowments

Despite negative investment performance and a drop in asset values in 2022, endowments provided $25.85 billion in financial support in fiscal 2022, a NACUBO-TIAA study found.

Reported by Dusty Hagedorn

The largest endowments in higher education weathered the investment challenges of early 2022 better than the overall universe, according to the 2022 National Association of College and University Business Officers-TIAA study of endowments.

For the 12 months ending June 30, 2022, all endowments returned -8.0% on average. Although endowments with more than $1 billion in assets averaged a return of -4.5%, while endowments with less than $25 million in assets, posted average returns of -11.5%.

Even after the 30.6% average returns in fiscal 2021, the overall negative returns in fiscal 2022 significantly depressed endowments’ long-term annualized performance. In all but one period, endowments have posted annualized returns below the generally accepted target return of 7.5% annualized returns over one-year, three-year, five-year, 10-year, 15-year, 20-year and 25-year periods, the study found.

The most obvious explanation for the largest endowments’ outperformance relative to their smaller peers is their substantial exposure to private equity. Endowments with less than $25 million allocated roughly 1% to private equity assets; endowments ranging from $25 to $50 million, 4.5%; endowments ranging from $51 to $100 million, 6.25%; endowments ranging from $101 to $250 million, 11.8%; endowments ranging from $251 to $500 million, 18.3%; endowments ranging from $501 million to $1 billion, 21.6%; and endowments with more than $1 billion, 32.6%.

“The most notable asset allocation difference [from the prior year], was that private equity and venture capital allocations exceeded those of public equities at the end of FY2022,” said Ivy Flores, managing director at Nuveen, a TIAA company. “This shift from public equities toward private equity and venture capital reflects the willingness and ability of larger institutions to reach for higher return targets.” The dollar-weighted asset allocations of endowment portfolios as of June 30, 2022, were 28% in public equities (U.S., non-U.S., and global), 30% in a mix of private equity and venture capital, 17% in marketable alternatives, 11% in fixed income, 12% in real assets and 3% in other asset classes.

“The larger endowments have the opportunity to leverage [these private asset classes] that the smaller endowments aren’t afforded,” said Jill Popovich, senior managing director of wealth management and head of field advisory services at TIAA, during the presentation of the study’s findings. “Smaller endowments may not be able to pursue such an approach due to greater fee sensitivity, lower risk tolerance, and different liquidity requirements, among other factors.”

The market value of endowments also fared better than their raw overall investment returns.

“Negative returns were offset by elevated gifting levels in FY22,” Popovich said. “Gifting levels were strong in 2022, rising 22% from FY21. Donations over a million dollars fell in 2022, as 2021 data was skewed by high-figure donations by Mackenzie Scott to multiple four-year colleges and universities.”

Additionally, in terms of gift-giving, nearly two-thirds of respondents indicated that some level of gifting was specifically tagged to diversity, equity, and inclusion initiatives.

Return Rate Takeaways

The 2022 version of the NACUBO-TIAA study included 678 endowment institutions, with a total of $807 billion in assets, with the average asset size of endowments in the survey at $1.2 billion and the median endowment at about $203.4 million. Of that $807 billion in total assets, 84% was held by endowments with more than $1 billion in assets, while more than half of participating endowments held less than $250 million in assets.

Private energy and infrastructure were the strongest-performing asset classes for endowments in 2022, driven by the spike in oil and natural gas prices caused by Russia’s invasion of Ukraine and increasing demand for commodities as the global economy continues to recover from the COVID-19 pandemic. In addition, private equity, venture capital, private real estate and other private real assets posted strong returns on the year for endowment portfolios.

The generally accepted return target rate for endowments includes three primary categories: spending requirements, inflation expectations and fees and expenses. Participant data verified that spending as a portion of total assets fell year-over-year, from 4.79% in fiscal 2021 to 4.17% in fiscal 2022, despite the $1.96 billion nominal increase in financial support provided by these endowments to their institutions year-over-year.

While returns have failed to meet their traditional targets, over the past two years, the total of the target return’s three primary components has increased to 8.23% from 7.5%.

“For years, 7.5% has been considered the standard target for return for endowments. In 2022, the implicit hurdle rate rose to 8.23% driven by large increases in long-term inflation projections and projected fees and expenses,” said Flores. Participants’ long-term inflation expectations increased 37 basis points to 2.45% in 2022, according to the study.

Top 10s

The study provided a dataset including the Fall 2021 enrollment count, the fiscal 2022 endowment market value, the fiscal 2021 endowment market value, the change in total endowment value year-to-year (expressed as a percentage) and the endowment value per full-time student enrolled.

According to the study, the top ten endowments by total market value for fiscal year 2022 were Harvard University with $49.4 billion in assets, followed by the University of Texas System ($42.7 billion), Yale University ($41.4 billion), Stanford University ($36.3 billion), Princeton University ($35.8 billion), MIT ($24.7 billion), the University of Pennsylvania ($20.7 billion), the Texas A&M University System & Related Foundations ($18.2 billion), the University of Michigan ($17.3 billion) and the University of Notre Dame ($16.7 billion).

The 10 largest endowments by endowment value per full-time student enrolled were Princeton with $4 million per student, followed by Yale ($2.9 million per student), Stanford ($2.15 million per student), MIT ($2.1 million per student), Harvard ($2 million per student), Amherst College ($1.7 million per student), Swarthmore College ($1.65 million per student), Williams College ($1.6 million per student), Pomona College ($1.55 million per student) and the California Institute of Technology ($1.5 million per student).