Yale University’s investment office yesterday disclosed that it had voted last June to increase its target private equity allocation from 21% to 26 percent. This came amid mounting private equity losses, but was portrayed by many media outlets as “contrarian” investment chief David Swensen sticking to his guns.
In reality, however, Swensen didn’t have much of a choice.
As of last June, Yale’s actual exposure to private equity was at 24.3 percent. That’s a major climb from 20.2% the prior year, and nearly 10 percentage points higher than Yale’s private equity allocation just four years earlier. In other words, raising the target allocation was largely an effort to reflect reality.
“But wait,” says rhetorical reader. “Why is Swensen raising the target even above current exposures, other than because he really believes in the asset class?” Well, I’m glad you asked.
The allocation increase was reported yesterday in Yale’s Annual Endowment Report, which you can read here. But Yale also publishes something called the Annual Financial Report, which notes the following:
Under the terms of certain limited partnership and limited liability company agreements for private equity and real estate investments, the University is obligated to remit additional funding periodically as capital calls are exercised. At June 30, 2009, the University had uncalled commitments of approximately $7.6 billion.
For context, Yale’s entire endowment was valued at just $16.3 billion as of June 30. And then it gets worse:
The University has various sources of internal liquidity at its disposal, including cash, cash equivalents and marketable debt and equity securities. If called upon at June 30, 2009, management estimates that it could have liquidated approximately $3.6 billion (unaudited) to meet short-term needs.
In other words: If all of the uncalled commitments came due on July 1, Yale would not even have been able to meet half of them.
Yale’s hope here is that private equity distributions will outpace new capital calls. The only problem, of course, is that a PE firm has more time to distribute than it does to call. As such, the school felt its best hedge is to increase its target allocation, in order to create wiggle-room — and an aura of calm — when the PE exposure inevitably grows.
Makes perfect sense. But it shouldn’t make for headlines about faith in private equity.