Cambridge: Private Investment Exposure Key to Foundation and Endowment Outperformance

Jul 26 2016 | 10:58pm ET

A key distinction between the performance of top endowments and the industry median has been a 15% or greater allocation to private alternative investments like venture capital, private equity and distressed assets, according to new research from Cambridge Associates.

The research, part of a new Cambridge report entitled "The 15% Frontier", involved 453 university, college and foundation endowments. The results showed that endowment portfolios with more than 15% allocated to private investments have outperformed their peers consistently, and for decades, Cambridge said.

For the fiscal year ended June 30, 2015, the median return of the endowment universe was 1.3%, but climbed to 3.6% if one looked only at endowments with 15% or more of their assets in private investments, according to the research. 

"The performance impact of substantial allocation to private investments is striking. And it's not just a recent, or occasional, phenomenon," said Philip Walton, president of Cambridge Associates. "It has been true with significant consistency over the long term, based on data we've collected since the 1970s."

"Not only did institutions with more than 15% in private investments outperform over the past five and 10 years, but they also outperformed by similar margins over the past 15- and 20-year periods,” he added.

“In fact, over the 20-year period, endowments with over 15% allocated to privates outperformed those with less than 5% in privates by a cumulative margin of 182 percentage points, or 180 basis points per year," said Walton.

For the ten years through June 30, 2015, venture capital, private equity and distressed securities were the three best performing asset classes, with annualized returns of 12.6%, 11.4% and 10.4% respectively, each outperforming the equity and bond markets on an equivalent basis. Unsurprisingly, the top-performing quartile of endowments had, in the same timeframe, an average private investment allocation of 24.1%, while the bottom quartile only had a 6% allocation, according to the paper.

The report also highlighted the trend for smaller investors to engage private alternative investments. For the 2015 fiscal year, almost 40% the report's endowment universe, or 174 institutions, were in the 15%+ category. 48 of which had assets below $500 million, Cambridge said, and 26 under $250 million.

"The view that private investing requires access to a very small group of tightly closed top-tier firms is a somewhat dated view of the private investment industry,” Walton said. 

Founded in 1973, Boston-based Cambridge Associates is a provider of independent investment advice and research to institutional investors and private clients worldwide. The company serves over 1,000 global investors with investment advisory, outsourced investment solutions, research, tools, and performance monitoring across global asset classes.

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