University Endowments Mint Billions in Golden Era of Venture Capital

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Some schools, including Washington University and Duke University in St. Louis, received over 50%.

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Meanwhile, over the weekend Duke University said it had increased its endowments by 55.9%. Washington University in St. Louis reported a 65% return last week, the school’s biggest gain to date, increasing the size of its managed endowment pool to $15.3 billion. The University of Virginia Endowment reported a 49% gain. Universities’ returns may include portions of the endowment, as well as other long-term investments.

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Blockbuster returns are likely to continue as other endowments with significant enterprise risk report their performance.

Venture-capital funds invest in startup companies, often in the early stages when companies need funding to grow their businesses. A few years ago, venture-capital investors were excited when companies with multibillion-dollar valuations went public. Today, the biggest hits are often companies worth tens of billions of dollars, which deliver staggering profits to early investors.

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“You have this unique environment where there’s this phenomenon of more money coming in, more financing rounds and a ton of IPOs. Everything has worked out,” said Nolan Bean of Fund Evaluation Group, a Cincinnati-based investment consulting firm that offers clients their services. Provides advice on portfolio including endowment.

But it’s not clear whether universities will be able to hang on to those benefits. Part of the internal rate of venture funds often stems from unrealized profits, and a growing number of venture capitalists and their clients worry that the market has overheated. Startup valuations have recently grown far faster than revenue or profits. If valuations decline, the endowment may pay back some of those returns.

The boom in the stock markets around the world passed the gains from generation to generation. According to FactSet, the MSCI All Country World Index and the S&P 500 had total returns of approximately 40% and 41%. Those gains are reflected in an average 36% return over that period for endowments in excess of $1 billion, according to preliminary data from Cambridge Associates.

Schools with significant allocations to venture capital were further fueled by funding at almost all stages of their life cycle, seeing large returns from both realized and unrealized profits.

Venture capital is on track to see its biggest returns since the dot-com boom of the late 1990s. Fueling this golden age of enterprise is the extraordinary investor appetite for fast-growing companies, as valuations of startups and newly-listed tech companies have soared—even though profits remain in short supply. Low interest rates and the lack of other lucrative opportunities have also helped.

Buzzy startups have seen their valuations grow particularly rapidly. Corporate credit-card company Ramp, which launched early last year, has already raised two rounds of financing this year, raising the company’s valuation to nearly $4 billion, for the two-year-old startup. An extraordinary run.

According to Pitchbook, the average valuation of early-stage US startups reached $96 million in the first half of 2021, up more than 50% from $61.7 million at the end of 2020.

Beneficiaries include top venture firms such as Sequoia Capital, which have invested less than $500 million between the two DoorDash Inc.

and Airbnb Inc.

Today those two investments alone are worth more than $23 billion. Many of those gains are split between Sequoia’s two main US venture funds, each of which has raised less than $600 million from investors.

Although Sequoia is silent on its specific investors, a securities filing in 2014 revealed that the roster of investors in its flagship fund was filled with university endowments. Those schools included the University of Notre Dame, Harvard University, Vanderbilt University, the University System of California, Princeton University, Bowdoin College, and Brown.

Massive gains are likely to be concentrated amidst large endowments. Those managing more than $1 billion had an average enterprise allocation of 11%, according to a 2020 study by the National Association of College and University Business Officers and TIAA. That share dropped to 5% for a management endowment of $501 million to $1 billion.

Some schools have more than this.

Yale University, which made its first venture investment in 1976, had more than a quarter of recent venture endowments, up 16.2% in 2016. In August, Yale named the endowment’s head of enterprise, Matthew Mendelsohn, as the endowment’s new chief investment officer. .

Far from adopting victory, investment majors are playing with their performance.

“This past year represents a single, highly unusual point in time,” Robert Durden, investment chief at the University of Virginia Investment Management Company, wrote in the endowment’s annual report in September, “and UVIMCO’s investment performance over the past few decades has really What matters is what.”

Mr Durden continued, “We do not know what will happen next.”

Endowment heads say they avoid focusing on short-term gains when investing for the long term. Endowments – which fund financial aid, faculty salaries and capital projects – are often intended to generate a school’s annual spending rate, inflation, as well as a little extra to support current and future generations of students.

But endowment heads’ austerity may be partly driven by concerns about whether they’ll hang on to those returns when valuations drop.

The huge returns could also highlight the growing gap between the rich and the poor during the pandemic. The booming stock markets have benefited wealthy individuals and institutions at the same time that lower-income groups are struggling, resulting in uneven recovery.

The numbers may also rekindle the debate around a poignant topic: whether and how wealthy universities should be taxed. Some universities have been criticized for reducing tuition and not spending more of their money to support low-income students. A tax of 1.4% on college endowment income was enacted in the 2017 Tax Cuts and Jobs Act signed by President Donald Trump, affecting private schools with at least 500 students and investments of at least $500,000 per student. Was.

Democrats are now aiming to ease the tax shock. The House Ways and Means Committee recently approved a provision that would eliminate the tax for schools based on how much financial aid they provide to students as part of tuition costs. The provision is part of a broader spending and climate law that lawmakers are still debating.

write to Juliet Chung at [email protected] and Eliot Brown at [email protected]

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