Harvard predicts looming markdowns to private assets

The managers of Harvard University’s $51bn endowment have warned of substantial markdowns to come in its private equity and venture capital portfolio, predicting heavy losses for institutional investors.

The largest US university investment fund expects “meaningful adjustments” to its private fund holdings at the end of the year, it said on Thursday, as annual audits force private equity and venture capital funds to cut the valuations of unlisted assets.

Harvard’s endowment lost 1.8 per cent for the year ended June 30 2022, although it still outperformed the S&P 500, which fell 11 per cent, as its portfolio of private assets mitigated a sharp drop in public stock markets.

The outbreak of war in Ukraine and surging interest rates have caused publicly listed stocks to plunge in value this year, creating big holes in the portfolios of large endowments and pensions. Private funds, however, have not been adjusted to reflect new market conditions, and many have gained in value through to the end of mid-year — a disconnect Harvard predicts will hit portfolios later.

“[Private] managers have not yet marked their portfolios to reflect general market conditions,” Narv Narvekar, chief executive of Harvard Management Corporation, said in a message to the university. “We expect that the end of the current calendar year might present meaningful adjustments to these valuations, as investment managers audit their portfolios.”

Buyout and venture capital funds were Harvard’s best-performing asset, said Narvekar. He highlighted the endowment’s venture capital holdings, which gained “high single digits” for the fiscal year, as particularly prone to markdowns.

Managers’ convention of marking venture investments at their most recent financing round “may slow the process of moving existing valuations to fair value”, said Narvekar, who noted the endowment was “cautious about forward-looking returns in private portfolios”.

Harvard sold $1.1bn of private equity funds in the summer of 2021 amid a market it characterised as having “significant ebullience”, a manoeuvre it believes avoided what will now be large discounts.

While Harvard’s endowment lost ground, the Yale endowment gained 0.8 per cent for the year ended June 30. The endowment for Columbia University lost 7.6 per cent, it said on Wednesday.

Harvard blamed some of its losses on a decision the university made to divest of fossil fuel-based investments.

Narvekar said a number of large investors “leaned into the conventional energy sector” in a strategy that added “materially to their total return”.

He said Harvard “did not participate in these returns given the university’s commitment to tackling the effects of climate change, supporting sustainable solutions, and achieving our stated net zero goals”.