Harvard endowment increases PE allocation, reduces other illiquids

'Parts of the legacy portfolio do not have a prospect of generating a return commensurate with the risk and the illiquidity entailed, and may not provide a return at all,' CIO Narv Narvekar wrote.

Harvard Management Company’s private equity allocation increased by 4 percentage points to 20 percent in fiscal 2019 ending 30 June, up from 16 percent the previous fiscal year. The endowment plans to significantly increase its private equity and venture allocation over the next seven to nine years, according to a letter from chief executive officer Narv Narvekar included in Harvard University’s fiscal year 2019 financial report.

“Today, our central concern is that HMC’s allocation to buyouts, growth and venture capital continues to be low relative to what likely makes sense for Harvard,” Narvekar wrote in the report. “We are early in the process of making this allocation transition.”

The endowment is still assessing its current risk profile, and discussions are focused on determining whether its approach – taking lower risk that generates lower returns than its peers over a market cycle – is the appropriate one. The discussions are expected to conclude in the next 18 months and will “help inform allocation decisions in future years”, Narvekar wrote.

Harvard is about halfway through a five-year execution plan to improve its performance under Narvekar, who joined the endowment in December 2016. That has included cutting staff and spinning off its internal real estate portfolio to Bain Capital, sister publication Active LPs has reported.

While much work has been done, many illiquid anchors continued to weigh down Harvard’s portfolio, and “parts of the legacy portfolio do not have a prospect of generating a return commensurate with the risk and the illiquidity entailed, and may not provide a return at all”, Narvekar wrote.

“Greater exposure to venture capital (a high-risk/high-reward asset class) would have resulted in a significantly higher return,” he continued. “Harvard’s exposure to venture capital is notably small in the context of leading endowments.”

As of 30 June, private equity had a one-year return of 16 percent; it was the top-performing asset class, despite a lower return than fiscal year 2018, when it returned 21 percent.

The total portfolio returned 6.5 percent in fiscal 2019, down from 10 percent in fiscal 2018 and 8.1 percent in fiscal 2017. As of 30 June, it was valued at $40.9 billion.

Among illiquid assets, natural resources were especially weak, returning -12.3 percent in fiscal 2019. Other real assets returned -8.3 percent.

“Prudently increasing the size of certain portfolios takes years to complete, as does reducing the size of others,” Narvekar said. “We can only have limited impact on performance in a short period of time.”

But Narvekar appeared to also warn that even newer PE investments may not pay off right away. In a section sub-titled “A Sobering Thought”, he said: “For the next few years, we will suffer the impact of the private equity ‘J-curve’…where short-term losses precede long-term gains.”

“Many peers dealt with these growing pains years, if not decades, ago,” he added.

Preeti Singh contributed to this report. This article was first published by sister publication Buyouts