Elite Universities Sell Private Equity Stakes at Discounts Amid Economic Uncertainty

Harvard and Yale, along with other elite institutions, are currently offloading portions of their private equity portfolios. This move is driven by the need for greater liquidity and flexibility amidst economic uncertainty, as funds take longer to return money to investors. The sales are occurring at a discount to current valuations, which could still result in significant gains for both buyers and sellers.

This trend is not linked to President Donald Trump’s attacks on university finances, including potential tax hikes on endowments. Instead, it highlights growing concerns about the transparency and reliability of returns in the private equity sector. Nir Kaissar, founder of asset management firm Unison Advisors, noted that while university endowments are ideal investors in alternative assets due to their long-term investment horizons, the actual returns may not always match the perceived benefits.

Private equity investments are typically valued based on subjective assumptions rather than daily market fluctuations. This can lead to discrepancies between notional valuations on paper and actual cash returns when investments are sold. Jason Reed, a finance professor at the University of Notre Dame, explained that the performance of public and private assets must correlate, as the market's overall health affects the opportunities for selling private equity holdings.

Billionaire hedge fund owner Bill Ackman has claimed that Harvard’s $53 billion endowment, with nearly 40% allocated to private equity, is significantly overstated. He believes that private assets remain private because public markets would value them at lower prices. Harvard recently agreed to sell roughly $1 billion of its private equity stakes, following a similar move in 2021. Yale is also negotiating a nearly $3 billion sale of its private equity holdings at a discount of less than 10%.

Despite the discounts, buyers in the secondary market are eager to acquire these stakes, leading to a booming market. Secondary sales increased significantly last year, and universities could be taking much less of a haircut than anticipated. This is due to a technique known as “NAV squeezing,” where buyers mark up the investments to the old net asset value, resulting in substantial one-day windfalls. This practice, while permissible under generally accepted accounting principles, has been criticized for its shaky foundations.

Universities, on the other hand, benefit from these deals as they sell their private equity stakes at a discount to NAV but could still be escaping with a profit. This highlights the complex dynamics of the private equity market, where both buyers and sellers can make surprising gains despite the economic turbulence.