Private equity is on academic probation.
Princeton University is lowering expectations for its endowment’s returns because its private-capital investments have disappointed. Yale trimmed its portfolio of leveraged buyouts for the first time in a decade. Harvard says cashing out of some private-market investments early is now part of a long-term strategy.
Private equity has counted America’s wealthiest universities among its largest and most-loyal clients since the industry’s formative years. But the market for private-company investments has turned more crowded, and returns now struggle to match broader stock-market benchmarks such as the S&P 500.
University endowments grew to lean on the once-juicy returns of private equity to cover a larger slice of their overall budget. That strategy faltered when the long lockup investments returned an annualized 7.4% in the three years ended June 30, according to Cambridge Associates—much of it paper gains. Over that same period, the S&P 500 rose 19.7% a year.