Yale Sells $25B in Private Equity at 10% Discount Amid Tax, Liquidity Pressures

Yale University's endowment fund is currently engaged in an unprecedented operation, selling 25 billion dollars worth of private equity assets at a discount. This move marks a significant shift for the Ivy League institution, which has long been a model for the late investment guru David Swensen's strategy of reducing stocks and bonds in favor of illiquid assets. The transaction, codenamed the "Gatsby Plan," reflects a changing landscape in the investment world.

Faced with delayed distributions from private equity, high interest rates, and narrowing exit channels, secondary market buyers are eyeing Yale's investment portfolio. The expected discount is anticipated to be within 10%, a relatively small price for institutions like Yale to gain liquidity. This move is not isolated; other institutions, including the Massachusetts Institute of Technology, the University of Notre Dame, and the University of Illinois, are also exploring similar secondary market transactions for private equity. Some universities have already reduced their new investment commitments.

Driving this abrupt change is a surge of political and financial pressures. Proposed tax legislation could raise the tax rate on endowment fund investment income from 1.4% to 21%, with top-tier universities like Yale, Harvard, and MIT being the first to feel the impact. Additionally, threats to revoke tax-exempt status and reductions in federal education funding have exacerbated the situation. As private equity distributions dry up, these endowment funds face a difficult choice: hold on and wait, or cash out and restructure. Despite Yale still holding nearly 200 billion dollars in private equity and venture capital, this move sends a strong signal.

Swensen's model has been highly successful over the past few decades, but even he has warned that the strategy could collapse under liquidity pressure. Recent research indicates that portfolios heavily invested in alternative assets have an average annual return 2.4 percentage points lower than simple stock and bond portfolios over a 16-year period. This may prompt more chief investment officers to reassess the costs and complexities of "dark corner" investments. Simplicity, liquidity, and adaptability may be regaining prominence, and Yale's sale could be the first domino to fall.