U.S. Higher Education as a Growing Asset Class: Reassessing Endowment Strategies and Private Equity's Role

The U.S. higher education sector has long been a cornerstone of institutional investing, but recent trends reveal a complex interplay between endowment performance, private equity allocations, and evolving market dynamics. As college endowments navigate a shifting financial landscape, their strategies—and the asset classes they favor—are under renewed scrutiny.

Endowment Performance: A Tale of Two Scales

In fiscal year 2024, U.S. college endowments achieved an 11.2% net return, a marked improvement from the 7.7% return in FY 2023 and a rebound from the -8.0% loss in FY 2022 College Endowments Saw 11.2% Return In FY 2024; Harvard Still …^[2]. However, this progress masks a stark divide between institutions of different sizes. Smaller endowments (under $50 million) outperformed their larger counterparts, averaging 13.0% returns, while those with over $5 billion in assets returned just 9.1% College Endowments Saw 11.2% Return In FY 2024; Harvard Still …^[2]. This disparity stems from divergent investment strategies: smaller institutions allocated more capital to public equity markets, which outperformed private alternatives during the period College Endowments Saw 11.2% Return In FY 2024; Harvard Still …^[2].

Conversely, large endowments—despite their historical reliance on illiquid alternatives—underperformed indexed portfolios. A constructed market index based on typical endowment exposures returned 18.7% in FY 2024, while large endowments lagged by 9.1 percentage points Big Funds, Small Gains: Rethinking the Endowment Playbook^[4]. Over the long term, large endowments have underperformed low-cost indexed strategies by an annualized 2.4%, leaving them with 70% of the value they would have achieved had they adopted such strategies since 2008 Big Funds, Small Gains: Rethinking the Endowment Playbook^[4]. This gap has prompted a reevaluation of traditional endowment models, particularly those championed by institutions like Harvard and Yale.

Private Equity's Declining Allure

Private equity (PE), once the bedrock of endowment strategies, is now facing a reckoning. Large endowments with significant PE allocations have struggled with return smoothing—a practice where private assets' net asset values lag behind public market valuations, distorting annual returns Big Funds, Small Gains: Rethinking the Endowment Playbook^[4]. For example, Ivy League endowments, heavily invested in alternatives like venture capital, underperformed a 70–30 global equities-bonds portfolio in FY 2023, with the benchmark portfolio's return more than doubling that of Columbia and far exceeding Princeton's performance University Endowment Returns Don’t Measure Up – CEPR^[1].

This underperformance has spurred a strategic shift. Harvard and Yale, with endowments of $50.7 billion and $40.7 billion respectively, have begun divesting from PE holdings, selling stakes on secondary markets at significant discounts Harvard and Yale Selling Off Private Equity Stakes^[5]. These moves reflect growing concerns over liquidity constraints, rising operational costs, and the alignment of investments with institutional missions Harvard and Yale Selling Off Private Equity Stakes^[5]. Meanwhile, public universities like Clemson and the University of Utah are increasing their PE exposure, betting on long-term gains in a muted public market environment Harvard and Yale Selling Off Private Equity Stakes^[5].

Broader Private Equity Trends and Liquidity Challenges

The private equity industry itself is evolving. Global PE assets under management (AUM) are projected to reach $5.8 trillion by 2025, driven by the sector's relative appeal compared to overvalued public markets University Endowment Returns Don’t Measure Up – CEPR^[1]. However, traditional AUM metrics mask structural challenges. Closed-end funds saw a 1.4% decline in AUM from late 2023 to mid-2024, while innovation in capital-raising—such as separately managed accounts and co-investments—has offset this with multitrillion-dollar inflows University Endowment Returns Don’t Measure Up – CEPR^[1].

Liquidity pressures are also reshaping the industry. Continuation vehicles (CVs), which allow sponsors to extend fund lifespans and offer LPs exit options, now account for 20% of private equity exits in 2025 5 Private Capital Insights from Q3 2025 and What They Mean to You^[3]. This trend underscores a broader shift toward flexibility, as firms grapple with extended holding periods and constrained exit markets.

Implications for Investors

For institutional investors, the lessons are clear. Smaller endowments' success in public markets suggests that agility and diversification can outperform concentrated bets in illiquid assets. Meanwhile, the PE industry's pivot toward liquidity solutions—CVs, secondary sales, and hybrid capital structures—highlights the need for investors to balance long-term growth with short-term flexibility.

As U.S. higher education endowments continue to adapt, their strategies will likely reflect a hybrid approach: leveraging public markets for liquidity while selectively deploying capital in private assets with strong exit potential. For now, the sector remains a dynamic asset class, but its future success will depend on aligning investment choices with both financial and institutional priorities.