How
did the University find itself in this position? The endowment
has had an unconventionally high commitment to equities of 75
percent since 1974. By 1999, the allocation to equities was raised
to 80 percent, but the commitment to the long-only domestic equity
market had shrunk precipitously over the intervening twenty-five
years as international equities, hedge funds and private equity
and real estate were added to the mix. The 100 percent commitment
to the traditional markets (domestic stocks and bonds) in 1974
has now fallen to 40 percent.
Endowments,
having a long horizon and a predictable and fairly low spending
level, are particularly well positioned to take advantage of investments
in private equity. These markets tend to be less efficient and
carry a premium return for their inherent illiquidity. In addition,
information in this arena tends to be less available, transactions
are less frequent, and pricing is less efficient. Returns are more
dependent upon a manager's experience and judgment, and historically
there has been a wide dispersion of returns among managers with
seemingly similar styles. At $1.8 billion, the endowment's
moderate size coupled with U.Va.'s reputation allows for
entry into some of the best funds.
U.Va.'s
investment in private equity began in 1988 with $1.3 million invested
in five funds. At that time, the focus was on seed, start-up and
early-stage venture, as the board felt that this area offered
the most potential for return given the risk entailed. Over the
past decade, we have continued to add premier partnership groups
to our fund and have continued to fund those with whom we have
a long-term relationship. In addition to the venture funds, we
have added some traditional, later stage private equity in cases
where we believed that the manager could add value to the transaction
for sources other than financial leveraging. Currently, we are
focusing on European funds, which are participating in the consolidation
process, and cross-border transactions that are beginning to occur
throughout Western Europe.
