A recent Financial Times reports highlight the problems faced by leading institutional investors that overcommit to private asset classes.
The Harvard Management Company (HMC) may be unable to fund the private equity commitments in its US$57 billion portfolio. According the FT, HMC had a US$7.9 billion backlog of unfunded commitments to private equity funds last year. These would normally have been funded by returns from previous fund investments, but the slowdown in distributions from private equity investments has hit this recycling process.
HMC’s commitments to private equity more than doubled from 16% of its portfolio in 2017 to 41% in 2025. It is, in any portfolio, a level of commitment that would seem extraordinary for a single asset class, let alone to a risky, illiquid and expensive one like private equity.
This raises questions about risk management and prudential oversight at HMC. What sharpens these questions is that the endowment has been here before, and within living memory too.
Back in March 2009, the European Molecular Biology Organisation (EMBO), which promotes excellence in life sciences, issued a report warning that the global financial crisis threatens private and public university funding in the US and Europe. It noted that as of December 2008, the Harvard endowment had lost $8 billion, or 22% of its entire value.
The report emphasised particularly the drift of university endowments away from traditional mainstream asset classes towards alternatives, which proved during the financial crisis to be far less uncorrelated than hoped; universities on average lost 23% of their investment value, according to the EMBO.
Harvard is hardly alone this time either. An analysis from Adams Street Partners published a year ago noted that US universities are facing significant financial uncertainty thanks to potential federal policy changes, including higher taxes and limits on grant funding. Some endowments are looking to secondary sales of private equity commitments to gain liquidity and reduce duration risk.
For secondary funds and their investors this could be a great buying opportunity. For the original endowments, however, this will exacerbate depressed returns.
To be fair to the HMC and its peers, private equity can boost portfolio performance impressively — under certain conditions. The FT cites a 33.6% return on the Harvard portfolio in 2021.
However, the role of higher interest rates in depressing performance ever since raises serious questions about the endowment’s strategy, and the asset class as a whole.
Private equity’s great returns would have probably continued if interest rates had stayed rock bottom forever. But rates have begun rising ever since the Covid-19 pandemic.
Furthermore, duration risk is implicit in the long-dated structure of private equity. The long illiquid holding periods mean that it’s almost certain to encounter changed circumstances, sooner or later.
