Practical Applications of Should Endowments Continue to Commit to Private Investments?

Abstract

In Should Endowments Continue to Commit to Private Investments?, from the December 2020 issue of The Journal of Investing, author Dennis Hammond (of Veriti Management in Boston) analyzes whether private equity, venture capital, and private real estate provide superior investment returns for nonprofit endowment funds. Endowments have increasingly allocated assets to private investments, due to their superior historical returns. However, these returns have slowed over the past 10 years–leading the author to question whether private investments are still worth it.

Hammond uses publicly available data to calculate whether endowments have earned higher net returns from private or public investments–and whether private investments held by large or average endowments (those with more or less than $1 billion) have done better or worse. He finds that large endowments’ private investments have outperformed those of average endowments and have outperformed the S&P 500 stock index, while average-size endowments’ private investments have underperformed the S&P 500. He says this difference stems from the fact that only large endowments can afford to hire the best private investment managers. He says average-size endowments therefore should consider reallocating assets to publicly traded investments–and offers reasons why large endowments might do the same.

TOPICS: Private equity, equity portfolio management, foundations & endowments, volatility measures, fundamental equity analysis, real estate, manager selection