In a recent Yale Endowment Update for 2015, venture capital investments seem to have played a significant role in the Endowment’s success of over-performing the average investment portfolios of other academic institutions. Yale prides itself at placing a large stake of its portfolio (14%) in VC, compared to an average of 4.6% in other universities’ endowment investments. According to the update, “Yale’s VC program focuses on premier firms that are likely to generate superior returns by emphasizing a value-added approach.”
And indeed, Yale’s VC portfolio has demonstrated average returns of 18% per annum along the past 10 years (2005-2015), almost doubling its composite passive benchmark (avg. 9.4% p.a.) and largely exceeding the Cambridge Associates pool active benchmark (avg. 11.5% p.a.) and the S&P 500 (avg. 7.9% p.a.) – thus being the most profitable assets of the Endowment. In the recent years, Yale has partnered with several major VC players to invest in start-ups considered today as “unicorns”, including Facebook, LinkedIn, Twitter, Uber and Snapchat, among others – yet while some of these companies have indeed generated enormous market buzz leading to IPO’s at gargantuan valuations (e.g. LinkedIn), they have not yet been successful at demonstrating net profits. E.g., LinkedIn’s GAAP net loss for 2015 amounted to $165 million, amortized largely by fluctuations of its stock price.
Yale’s VC portfolio is indeed a source of pride for the Investment Office, and its returns serve Yale’s research and education well. Nevertheless, Yale’s venture capitalists should exercise prudency, as unrealistic valuations may lead to a development of a new bubble. In 2009, the Harvard Management Company reported a decline of 29.5% of its endowment value following the 2008 financial crisis, eliminating 4-year profits; while the dot-com bubble bursting of 2000-2002 led to a median loss of 10% among university endowments, with a quarter of schools losing 14% or more. Only time will tell whether Yale’s VC’s would be able to cash out before the big bang.