The chain reaction has begun! After Yale, Harvard begins selling private equity assets

Source: Wall Street Insights

After Yale University, can Harvard University no longer hold on? The big "new subprime mortgage" bomb is slowly emerging.

According to a report by Bloomberg, Harvard Management Company, which oversees assets worth as much as $53 billion, is collaborating with Jefferies and plans to sell its private equity fund portfolio worth about $1 billion to Lexington Partners.

According to sources familiar with the matter who revealed to the media, the negotiations have entered the late stage, but the terms of the transaction have not been finally determined yet, and there are still variables.

As a subsidiary of Franklin Resources Inc., Lexington Partners is one of the largest players in the secondary market trading field. It just completed the raising of a record-breaking $22.7 billion secondary market fund last year. The source also mentioned that Lexington may eventually bring in other partners to jointly complete this acquisition.

Previously, there were reports that Yale University was also seeking to sell its private equity investment portfolio on a large scale, and the transaction size could be as high as $6 billion, highlighting the common liquidity dilemma faced by large institutional investors (LPs).

**Liquidity Dilemma: Slowdown in Private Equity Returns and Huge Unpaid Commitments**

Harvard University's current selling move reflects the harsh reality faced by the current private equity market.

According to its annual report (as of last June), nearly 40% of Harvard's endowment assets are allocated to the private equity field. However, in recent years, investment firms have found it increasingly difficult to sell the companies they hold and return funds to their limited partners (LPs). The delay in investment returns has brought liquidity pressure to institutions such as endowment funds, pension funds, and family offices.

What is more concerning is that, according to data from Harvard University's financial statements cited by users on the X platform, as of June 30, 2024, Harvard University's unpaid investment commitments in illiquid assets such as private equity amounted to as much as $12.4 billion.

This means that Harvard not only needs to meet the current cash requirements for its operations but also needs to set aside a large amount of funds to meet possible future capital calls. This huge potential liability undoubtedly intensifies the urgency of its search for liquidity.

The slowdown in private equity returns and the tight liquidity have become common challenges faced by the endowment funds of top universities. The report also mentioned that a Yale University spokesperson has confirmed that the university is collaborating with Evercore Inc. on seeking a secondary market sale, and this process has been going on for several months.

**Under Trump's Pressure, the Risk of the "Subprime Mortgage Crisis" Intensifies**

The report pointed out that Harvard University's current selling efforts began last year, earlier than the significant pressure exerted on it by the Trump administration recently, including suspending federal grants and threatening to impose taxes on it.

As one of the countermeasures, Harvard University announced a hiring freeze in March this year and issued $750 million in bonds this month. Although the direct motivation for this private equity sale stems more from the market's own liquidity issues and high unpaid commitment amounts, external political and financial pressures may also have added additional considerations to this decision.

As previously analyzed by Wall Street Insights, as the conflict between Trump and universities becomes more intense, the investments of the huge endowment funds of Ivy League universities have become the "eye of the storm." These universities have large-scale endowment funds and use them for high-risk investments such as private equity.

With the risks in the current private equity industry accumulating, this storm is likely to trigger a larger crisis - a new "subprime mortgage crisis," and may trigger a chain reaction: hedge funds making preemptive trades, private equity being revalued at a discount, and even affecting the venture capital departments supported by endowment funds.

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