The Ivy League Stumbles: What GP Playbooks Need to Steal from the 70/30 Portfolio

As endowments hit some real turbulence, first-time fund managers see opportunity, and seasoned GPs are rethinking private market bets. Here's what it means for your next (or first) endowment pitch.

In case you didn’t see it the other day, university endowments faced significant challenges in 2024. John Authers did a cool writeup of what’s happening in this space in Bloomberg, and shared some cool MPI analysis on it.

They grappled with underwhelming returns and political pressures to divest from Israel. (While divestment from Israel has been a topic of discussion and activism on various campuses, the actual implementation of such measures by university endowments appears to be limited.)

Ivy League endowments, which largely follow the Yale Model (a strategy emphasizing private markets for long-term gains), lagged behind a simple 70/30 stock-bond portfolio for the second consecutive year—a rare occurrence.

Key Highlights:

1. Performance Trends:

   • Despite improving from last year, Ivy League endowments trailed the average endowment and the 70/30 benchmark for a second year.

   • This underperformance is linked to low exposure to U.S. tech stocks (like the "Mag Seven") and high reliance on private equity and venture capital. 👀

   • Smaller endowments, which typically stick to public markets, outperformed due to greater exposure to stocks and bonds.

2. The Yale Model's Approach:

   • To explain long-term illiquidity premiums to an eleven year old - imagine you have $100. You can either:

     1. Keep it in your pocket so you can use it whenever you want (like buying snacks or toys).

     2. Lend it to a friend for a long time, but you won't be able to use it until they give it back, which could take years.

     3. Now, because you're letting your friend use your $100 for a long time and you can't spend it, they say, "I'll give you more money when I pay you back!"

   • The Yale Model prioritizes private markets to leverage long-term illiquidity premiums and unique return opportunities.

   • Currently, less than 20% of Ivy League endowment assets are allocated to U.S. equities and bonds, favoring private equity and venture capital instead.

   • While long-term performance (e.g., Yale’s 20-year average return of 10.3%) validates this strategy, recent results highlight the advantages of simpler portfolios, especially during short-term market shifts.

3. Individual Endowment Performance:

   • Harvard, the largest U.S. endowment, achieved a 9.6% return this year, ranking third among Ivies. Its raised exposure to public tech stocks contributed to the strong performance.

   • MIT, a non-Ivy, outperformed with a 10.7% average return over the last 20 years, exceeding both Yale and Princeton.

Despite short-term challenges, endowments that stuck with the Yale Model are unlikely to shift strategies. They held confidence in private market allocations for long-term gains.

However, the recent success of simpler, tech-focused strategies raises questions about the Yale Model's short-term resilience.

We’ve included a very thorough analysis below with specific recommendations for:

1. Early stage VC fund managers

2. Late stage VC fund managers

3. Private equity fund managers

4. Real Estate (early and late stage) fund managers

5. Hedge fund managers (early and late stage)

6. Infrastructure fund managers (early and late stage)

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