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University Endowments Bleed Money – Can Venture Save Them?

大学捐赠榨干钱 – 风险投资是否能解救它们?

US college endowment returns have sunk to an average -1.9 per cent in the 2016 fiscal year, while endowment spending on financial aid, research, and other programs increased by 8.1 per cent.

These returns, reported at the NACUBO-Commonfund Study of Endowments (NCSE), are the lowest since the 2008-2009 financial crisis, and much lower than the modest 2.4% average gain in FY15.

805 US institutions participated in the survey, holding collectively $515.1 billion in endowment assets – however, nearly half the participants had endowments below $100 million.

In tables released from the NCSE survey, it is evident that the 1,3,5 and 10-year average returns of university endowments are significantly lower than relative US indices (e.g. S&P 500 or Russell 3000), due to a “careful” investment approach in most endowments.

However, in larger endowments, especially those valued over $1 billion, the asset allocation to alternative investment strategies (PE, VC, and others) tends to be higher and averages 58% of the total portfolio. This allocation leads to higher average returns than the smaller endowments (under $100 million) with less than 25% allocated to alternative strategies and average returns lower than the US aggregate bonds.

An exemplary case for that matter is the case of Yale University. In FY 2015, the Yale Endowment Fund’s returns soared high due to an investment strategy allocating up to 30% of the endowment’s assets to PE (16% of the assets) and VC (14%).

Nowadays, public money and tuition are no longer enough to support the day-to-day activities of public universities, and endowments must bleed money to make up for the deficit. However, this spending cannot be sustainable in the long term when unsupported by significant returns on the endowment funds’ investments.

As governments, taxpayers and students start asking difficult questions on the future role of universities in a world of ubiquitous knowledge, leading to a withdrawal of public money, mergers, and decrease in college enrollment, universities must reconsider their strategies for the future in order to survive. A PE/VC oriented investment strategy seems to be a key component in the recipe for a university’s survival, and venture will play a crucial part in it in the years to come.

Our conference, #CIV2017HK (22-26 April 2017 | Hong Kong), will focus on the future of venture in universities and the keys to their survival. Join us there!

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