Why Yale boosts Venture Capital?
David F. Swensen announced in the new 2019 report of Yale University’s U.S. Endowment Fund that he will increase the allocation ratio in venture capital from 18% to 21.5%. [1]
I take the new record rate as an opportunity to go a little deeper into Yale’s asset allocation.
Yale has been investing in venture capital for more than 20 years.
The average performance is 20.2% p.a.
Furthermore, the allocation ratio for VC has fluctuated sharply over the past 20 years. This can also be seen in the money-weighted return for the VC sector: the performance was 241.3% p.a. (two hundred forty-one percent).
All foundation fund reports from 2001 onwards are published on Yale’s website [2]. For the years 1996 to 2000, Yale University’s financial reports must be consulted [3].
Since 2013, venture capital has been reported in an extra line of business, previously VC was subsumed under private equity and requires extra research.
In fact, the allocation ratio in venture capital has changed considerably over time. Before the dot.com bubble burst, Yale had an allocation peak of almost 9% in VC. In the crisis from 2000 to 2005, the ratio fell to 4%. Only since 2006 has the allocation quota risen again [4].
Yale took advantage of the stock market crises in 2008, 2009 and 2011 to continue investing in VC. Dean Takahashi, until recently second Chief Investment Officer and designated successor to Swensens, played a major role in driving the shift away from the stock markets and towards investments in non-listed companies.
Yale University is said to have excellent contacts in the start-up scene. The level of venture capital is outstanding among all universities. However, Yale does not invest directly. This makes the selection of managers all the more important, as the investments are made via VC funds.
In 2015, there was a major discussion regarding the fees paid in the venture capital and private equity sectors. It had become known that Yale had paid around USD 480 million in management fees in 2014 [5]. The foundation’s total assets increased by more than USD 4 billion in 2014, or 20.2% after all fees [6]. Good managers cost money, says David Swensen. Building in-house teams is inefficient. The excellent performance of the foundation fund justifies the high fees. In Yale’s 2016 report, management states that if Yale’s assets had been invested in a portfolio of 60% of US equities and 40% of US bonds over the past 30 years, the capital stock would have been more than $28 billion lower than now. They would have saved fees, but put the future of the university, students and teachers at risk [7].
For the 10-year period (2010 to 2019), Yale claims to have achieved a performance of 20% p.a. with venture capital [8].
Since the 20-year performance is practically the same, I come to two conclusions.
#1
Yale may assume that VC will outperform the other asset classes relatively by 20%. Then the allocation ratio automatically rises from 18% to 21.5%. That’s why Yale is already making provision and increasing the target allocation.
#2
If #1 does not apply, then Yale at least assumes that 20% p.a. will not be achieved by the other asset classes in the medium term. This is why the overweight is applied.
Since VC is an illiquid asset, an increase in allocation strengthens my assumption that the prospects for VC must be excellent. Issues such as block chains as classic early-stage investments are only at the beginning of their development. The USD 400 million allocation in blockchain at the end of 2018 is also to be understood under this aspect [9].
Sources
[1] https://news.yale.edu/2019/09/27/investment-return-57-brings-yale-endowment-value-303-billion
[2] http://investments.yale.edu/reports
[4] https://starmagnoliacapital.com/outlook/2016/06/20/analysis-of-yales-asset-allocation/
[5] https://www.vox.com/2015/8/19/9178913/yale-endowment-private-equity
[6] https://news.yale.edu/2014/09/24/investment-return-202-brings-yale-endowment-value-239-billion
[7] https://www.ai-cio.com/news/yale-endowment-defends-high-management-fees/
[8] https://news.yale.edu/2019/09/27/investment-return-57-brings-yale-endowment-value-303-billion
Fotos: shutterstock.com
