For decades, private equity was considered essential for above-average returns on long-term investments. Now, the benchmarks of this model, the American endowments, are reviewing this strategy and considering whether the golden age of this asset class is over, and revising its percentage in the portfolio.
This February, Princeton's endowment published in its annual letter that it had reduced its long-term return expectation from 10.2% to 8%. The reason was attributed precisely to the weaker performance of private equity.
Princeton's move carries more weight because it is not an isolated incident. Yale, the university that helped transform private equity into a global benchmark, has also begun to reduce its allocation, with the partial sale of approximately US$3 billion, equivalent to 15% of its exposure to the asset class, by 2025.
To understand how much return private equity is bringing, the family office Longview Capital analyzed the results of Yale, which still has the largest allocation at somewhere between 35% and 40%, with Norges, Norway's sovereign wealth fund, which decided to have zero exposure, and Maple Model, the Canadian pension fund model, which has a 20% allocation.
Yale had an annualized return of 11.1% in the last year and 9.4% over ten years. Norges, from Norway, showed 15.1% in the last year and 8.5% over ten years. Meanwhile, Maple Model, from Canada, had a return of 7.1% in the last year and 6.9% annualized over the last ten years. This result shows that the asset class has not been providing the best return – especially considering the risk it entails.
“The fact that Yale and other endowments reduced their allocation to PE last year is perhaps the best indication of their view on prospective returns for the investment class as a whole, in line with Norges’ decision not to allocate to PE, but rather to listed equities,” says Enio Shinohara, founding partner and managing director of Longview Capital.
The study's analysis also cites work by Ludovic Phalippou of Oxford to support the claim that the effective returns obtained by Yale and other private equity endowments, especially in buyouts , were only slightly above the indices of listed stocks. It also shows that this asset class consumes 5% to 6% annually in fees.
That's precisely why Norges, the world's largest sovereign wealth fund, is currently betting on beta, liquidity, and low costs. After discussing the issue, it concluded that the additional return promised by private equity did not compensate for the risks, and maintained a zero allocation in the asset class.
According to Shinohara, another difference between them is in terms of transparency. Yale stopped disclosing asset allocation and performance details by asset class in 2021, when David Swensen died. Norges, on the other hand, has a policy of almost total transparency.
And this difference is curious, given that Yale manages US$44 billion and Norges, more than US$2 trillion, when the exact opposite would be expected - unless they want to hide the source of the results.
Bringing these results to family offices and considering the appropriate allocation to private equity, Longview emphasizes that having no exposure to private equity can be a mistake, especially in a market where the gap between the best and worst managers is enormous.
But it also makes an equally important point: family offices are not endowments. Without recurring income, they tend to need more liquidity, more cost control, and less of a fetish for outsourcing asset management.
Therefore, they shouldn't have such a large exposure to illiquid assets like Yale, and the portion they do have could be distributed across other asset classes that have yielded higher returns, such as Special Situations.
"It certainly seems like the time has come to assess how much of this asset class to hold in the portfolio, in a scenario where its golden age has passed," says the founding partner and managing director of Longview.
