Elite School Endowments Stumble in FY 2023: Alternative Investments Take the Blame
Bold Bets Backfire: Elite Schools’ Endowments Falter in FY 2023
In an unexpected turn of events, the richest schools in the nation saw their endowments underperform in the fiscal year 2023. The average performance was a mere 2.1%, a significant drop compared to previous years and lagging behind smaller endowments that opted for traditional portfolios of public securities.
Venture Capital and Private Equity: The Double-Edged Sword
The culprit behind this underperformance? Alternative investments, particularly venture capital and private equity. These bold bets, once praised for their potential to generate outsized returns, have now left elite schools with disappointing results.
Venture capital investments plummeted by 10.2%, while private equity investments managed to eke out a 6.1% gain. The wide disparity in performance among elite schools can be attributed to their varying allocations to venture capital or private equity.
Who Fared the Worst? Brown, Dartmouth, Princeton, and MIT
Brown, Dartmouth, Princeton, and MIT suffered the most, with the highest exposure to venture capital contributing to their lower returns in 2023. While private equity and venture capital investments showed less volatility than traditional stock and bond portfolios, which experienced dramatic swings in performance between 2022 and 2023, this stability came at a cost.
As elite schools grapple with the consequences of their alternative investment strategies, they must now reassess their approach to managing their endowments. The lessons learned in FY 2023 serve as a reminder that even the most prestigious institutions are not immune to the risks inherent in the world of finance.
In a nutshell: Elite school endowments stumbled in FY 2023 due to their investments in alternative assets, such as venture capital and private equity. This resulted in an average performance of 2.1%, underperforming smaller endowments that stuck to traditional portfolios of public securities. The use of alternative investments contributed to this underperformance, with venture capital investments losing 10.2%, while private equity investments were up 6.1%. The dispersion in performance among elite schools was determined by their allocations to venture capital or private equity. Brown, Dartmouth, Princeton, and MIT had the highest exposure to venture capital, contributing to lower returns in 2023.
