Yale University Investments office

Matthew Kinney

Yale University Investments Office: August 2006

Question: The Yale University Investments Office is faced with a decision on whether to continue with the investment strategy that had been so successful in the preceding years or to reevaluate given changes in the market and the changes in risk and liquidity of the endowment.

Relevant Factors: Liquidity of endowment, Yale’s previous experience and success, Annualized returns on investments, Precise valuation, Saturated private equity markets, and adherence to current investing strategies

Recommendation: Despite the increased popularity of the domestic private equity market following Yale’s success, it doesn’t make sense for the investments office to reduce its allocation of funds in the private equity sector or to dramatically shift its allocations in most of the other sectors. That being said, Yale needs to stick to its core strategy which emphasizes a very strict selection of firms and managers that it chooses to invest in. Private equity may be becoming increasingly competitive, but the investments office should try to continue to maintain its high allocation in private equity. That being said, if the Yale isn’t able to identify firms they have complete confidence in, they shouldn’t seek to invest in other firms simply to maintain their allocation levels. Private equity investments have yielded an annualized return of 27.8% over the past 20 years and there is no reason to artificially reduce the allocation rate for these investments. By continuing to maintain a competitive advantage through strong relationships with managers and by hedging against potential downfalls in price, the endowment should continue to see strong returns.

Any natural decrease in investments in the domestic private equity sector should be reallocated to foreign equities in emerging markets. Given the high growth potential in these markets and their relatively lower demand, the Yale investments office is in the position to do exactly what it did in the US market. Focused research and a strict selection process that emphasizes the same core values in the US firms will allow Yale to enter these underdeveloped markets in an efficient and smart way. The nature of an emerging market is that the economy will continue to grow and early investors will have more to gain.