Chain reaction begins: After Yale, Harvard begins selling off private equity assets

Source: Wall Street News

After Yale, Harvard can't bear it anymore? The "new subprime" bomb is slowly coming to the surface.

According to media reports, Harvard Endowment Fund Management Company, which manages up to $53 billion in assets, is working with Jefferies to sell its private equity fund portfolio worth about $1 billion to Lexington Partners.

According to people familiar with the matter, the negotiations have entered the late stage, but the terms of the transaction have not been finalized and there are still variables.

Lexington Partners, a subsidiary of Franklin Resources Inc., is one of the largest players in the secondary market transaction field and just completed a record-breaking $22.7 billion secondary market fund last year. The person also mentioned that Lexington may eventually introduce other partners to jointly complete the acquisition.

Previously, there were reports that Yale University was also seeking to sell its private equity portfolio on a large scale, with the transaction size possibly as high as $6 billion, which highlights the liquidity dilemma commonly faced by large institutional investors (LPs).

01 Liquidity dilemma: slowing returns from private equity and huge unpaid commitments

Harvard University's sale reflects the grim reality facing the current private equity market.

According to its annual report (as of June last year), nearly 40% of Harvard's endowment fund's assets are allocated in the private equity sector. However, in recent years, investment companies have found it increasingly difficult to sell their holdings and return funds to their limited partners (LPs). The delay in investment returns has brought liquidity pressure to institutions such as endowments, pensions and family offices.

What is more noteworthy is that according to data from Harvard University's financial statements cited by X platform users, as of June 30, 2024, Harvard University's unpaid investment commitments in non-liquid assets such as private equity amounted to as much as $12.4 billion.

This means that Harvard not only needs to cope with the cash needs of current operations, but also needs to reserve a large amount of funds to meet possible capital calls in the future - this huge potential liability has undoubtedly increased the urgency of its search for liquidity.

Slowing returns from private equity and tight liquidity have become common challenges faced by top university endowment funds. The report also mentioned that a Yale University spokesperson has confirmed that the school is working with Evercore Inc. to seek secondary market sales, and the process has been going on for several months.

02 Under Trump's pressure, the risk of "subprime mortgage crisis" has increased

The report pointed out that Harvard University's sales efforts began last year, earlier than the recent significant pressure from the Trump administration, including the suspension of federal funding and threats to impose taxes on it.

As one of the countermeasures, Harvard University announced a hiring freeze in March this year and issued $750 million in bonds this month. Although the direct motivation for the private equity sale is more due to the market's own liquidity problems and high unpaid commitments, external political and financial pressures may also have added additional considerations to this decision.

Wall Street Journal previously pointed out that as the conflict between Trump and universities becomes more intense, the Ivy League's huge endowment fund investments have become the "eye of the storm." These universities have large endowment funds and use them for high-risk investments such as private equity.

With risks accumulating in the current private equity industry, this storm is likely to trigger a bigger crisis - a new "subprime mortgage crisis" and may trigger a chain reaction: hedge funds preempting transactions, private equity discounts and revaluations, and even affecting venture capital departments supported by endowment funds.