Elite Colleges Lead a Rush for the Exits of Private Equity

The quiet halls of elite universities are echoing with a financial reckoning. In 2024–2025, institutions like Yale and Harvard are liquidating private equity holdings—a cornerstone of their endowment strategies—to confront a perfect storm of federal funding cuts, looming tax hikes, and political antagonism. This shift, though framed as a temporary measure, underscores a broader reevaluation of risk, liquidity, and long-term resilience in an era of fiscal uncertainty.

The Catalysts for Exit: Funding Cuts and Tax Threats

Elite colleges face unprecedented financial headwinds. Federal grants, once a reliable revenue stream, have been frozen by the Trump administration’s Task Force to Combat Anti-Semitism. Harvard, for instance, lost $686 million in federal funding—68% of its sponsored revenue in 2023—while Columbia’s grants were slashed by over $400 million. These cuts have forced institutions to prioritize liquidity over long-term gains.

Simultaneously, proposed legislation threatens to raise the endowment tax on private universities from 1.4% to as high as 21%. Even the lower proposed rate of 10% could drain billions from endowments, prompting institutions to shift toward illiquid assets that defer taxable income. Advisors like Alexander Anderson of O’Melveny note that universities are “rebalancing toward liquidity to survive the fiscal squeeze.”

Universities in Action: Yale, Harvard, and Beyond

Yale University:
Yale is exploring the sale of up to $6 billion in private equity stakes—nearly 15% of its $41.4 billion endowment—via secondary market transactions. This marks a stark departure from its legendary “Yale Model,” which emphasized illiquid, high-risk assets under former CIO David Swensen. The move, advised by Evercore, could fetch discounts of 10% or more on net asset values. Yet Yale’s spokesperson insists the sale is contingent on “attractive pricing,” underscoring its reluctance to abandon private equity’s long-term potential.

Harvard University:
Harvard has already sold $1 billion in private equity stakes through a secondaries deal with Lexington Partners and raised $1.2 billion via taxable bonds in early 2024. These moves come amid a $2.2 billion suspension of federal grants, which once accounted for 39% of its endowment’s income. Harvard’s actions signal a sector-wide trend: Princeton issued $320 million in taxable bonds, while Brown secured a $300 million loan at 4.86% interest.

Strategic Shifts in the Endowment Playbook

1. Liquidity Over Long-Term Gains:
   Endowments are prioritizing cash reserves and income-producing assets. Yale’s 10.3% annualized return on private equity over 20 years pales against immediate cash needs. Advisors like Colin Hatton of NEPC recommend “safe-haven” assets and credit lines, though restricted funds limit flexibility.

2. Tax Mitigation Tactics:
   Universities are shifting away from fixed income (10.2% of endowments in 2024) toward private equity and venture capital, which defer taxable income. However, private equity distributions have plummeted to 11% of net asset value—down from 29% in 2014–2017—complicating exit strategies.

3. Performance Pressures:
   Softening IPO markets and policy uncertainty have reduced exit opportunities. Blackstone warns that private markets face “prolonged volatility,” yet universities like Yale see these sales as tactical rather than strategic pivots.

Broader Implications and Risks

• Political Vulnerability:
  The use of federal funding as a political weapon has turned endowments into bargaining chips. Universities now walk a tightrope between compliance and independence, fearing further cuts over campus speech or diversity policies.

• Tax Policy Uncertainty:
  If enacted, a 21% tax could deter investments in taxable assets like U.S. equities (13% of endowments). Legal challenges loom, with experts like Jeffrey Tenenbaum arguing the tax’s constitutionality hinges on congressional action—not executive fiat.

• Market Risks:
  Selling private equity at discounts risks short-term losses. Yet history offers hope: Yale’s 2009 distressed credit investments, made during the financial crisis, returned 20% annually over five years.

Conclusion

The exit from private equity by elite colleges is a pragmatic response to existential pressures, not a rejection of its long-term value. With $53 billion in Harvard’s endowment and $41 billion at Yale at stake, the sales of $1 billion and $6 billion respectively represent tactical liquidity measures. However, the broader trend reveals a sector-wide recalibration: liquidity is now paramount, tax mitigation is a priority, and political risks are reshaping financial strategies.

As Brian Galle, a tax policy professor, notes, the endowment tax remains “poorly targeted,” yet its threat has forced universities into uncomfortable compromises. The data is clear: federal grants once fueled 68% of Harvard’s sponsored revenue, while private equity distributions have halved in a decade. The rush for exits may be temporary, but the financial independence of elite institutions hangs in the balance—a cautionary tale for all endowment-dependent organizations.