Endowments see worst PE returns since financial crisis

The US and Canadian college and university endowments posted an average 4.5% net return in fiscal year 2016, the worst performance since 2009.

The North American college and university endowments’ private equity investment portfolios had the worst year in 2016 since the financial crisis.

According to a joint study of 805 educational institutions by the National Association of College and University Business Officers (NACUBO) and non-profit asset manager Commonfund, the average net investment return for private equity was 4.5 percent for the fiscal year ended 30 June.

This was the lowest since a net -19.4 percent return posted in the 2009 fiscal year, according to the NACUBO-Commonfund study. It is also below the 9.3 percent return realised in the 2015 fiscal year, which had already seen a dramatic decrease from the 16.5 percent in the preceding year.

The study, which defined private equity as buyouts, mezzanine, mergers and acquisitions funds and international private equity, noted that the private equity strategy was the second-best performing asset class within the alternatives bucket in the 2016 fiscal year, behind private equity real estate, which posted a 7.1 percent return.

Broken down by size, endowments within the range of $25 million to $50 million in assets under management saw the best private equity performance, returning a net 7.8 percent. The second-best private equity performance of 6.3 percent was achieved by the group of endowments with over $1 billion in AUM, the study said.

The study also found that best-performing endowments across all asset classes tended to have the largest allocations to alternative strategies, which included private equity, venture capital, energy and natural resources, private equity real estate, distressed debt and commodities and managed futures.

The top decile in terms of performance allocated an average 62 percent to alternatives, and the top quartile allocated an average of 59 percent, versus an average 53 percent for all endowments.

The overall investment performance for the endowments also posted the worst return since 2009, at an average loss of 1.9 percent. This, according to the NACUBO-Commonfund study, contributed to a decline in the long-term, with 10-year average annual returns at 5 percent, from 6.3 percent in 2015.

This is below the median 7.4 percent in 10-year annualised returns that most endowments are said to require in order to sustain their endowments, the report said.

The 805 endowments observed in the study represented a total endowment value of $515.1 billion, as of 30 June.