American Universities Dive Out of Private Equity Amid Liquidity Crunch

American universities, led by Harvard and Yale, are increasingly looking to exit private equity funds due to liquidity pressures and policy changes. This shift is part of a broader trend where institutional investors are seeking to reduce their exposure to illiquid assets.

Princeton University's endowment fund has been exploring the feasibility of selling private equity stakes over the past few weeks. Similarly, Texas Tech University, with an endowment exceeding 2 billion dollars, has faced challenges due to slow returns and infrequent capital distributions. The university's private equity investment manager, Christopher White, has indicated plans to reduce some of their private equity exposure.

Harvard University, which has allocated nearly 40% of its 53 billion dollar endowment to private equity, is in advanced negotiations to sell approximately 1 billion dollars worth of private equity fund stakes. Yale University, an early adopter of shifting from traditional stocks and bonds to more illiquid assets, is also exploring the possibility of selling private equity stakes on the secondary market, with potential transaction sizes reaching 6 billion dollars.

Gaurav Patankar, the chief investment officer for Highland Consulting Company, likened the situation to planning an escape from a movie theater fire that is unlikely to happen, with everyone wanting to be the first to leave. The prolonged return of capital by private equity firms has created liquidity pressures for endowment funds, pension funds, and family offices. This has led to a sense of urgency among American university endowments, traditionally reliable clients of private equity firms.

The shift in investment strategy is driven by the realization that universities have over-exposed themselves to hard-to-value assets, disrupting the balance of their endowment funds. These funds are crucial for building libraries, providing financial aid, and paying faculty salaries. The situation has been exacerbated by the Trump administration's promise to cut federal funding to universities like Harvard and Princeton, adding further strain.

In April, the Trump administration announced the suspension of over 2 billion dollars in funding to Harvard and is reviewing additional funds. Other universities, including Columbia, Princeton, Northwestern, and Cornell, have also had their federal funding frozen. This has prompted endowment fund managers to consider selling private equity stakes as a last resort to raise cash.

However, institutions looking to sell on the secondary market may find numerous potential buyers, but some investors are concerned that selling in an uncertain market could result in greater losses. Billionaire Bill Ackman criticized Harvard's allocation to relatively illiquid investments, suggesting the university is in a financial crisis and can only sell private equity stakes at a significant discount.

Texas Tech University has ruled out selling its entire fund stake due to volatility, which has driven prices down to unacceptable levels. The university is considering more unconventional options, such as selling preferred stock through special purpose entities to alleviate the pressure.

The trend of universities exiting private equity funds highlights the broader challenges faced by institutional investors in managing liquidity and risk in an uncertain market environment. As universities seek to balance their endowment funds, they are exploring new strategies to ensure financial stability and sustainability.