By Andy Serwer and Abby Schultz

Legendary Yale University endowment head David Swensen loved to riff on Benjamin Franklin's line about life's only certainties being death and taxes. True, Swensen would say, but the adage didn't apply to university endowment managers, because for one thing, educational institutions aspire to exist in perpetuity, and secondly, endowment assets enjoy exemption from taxes.

Now it looks like Franklin was right. Turns out no man, nor wealthy college or university, can escape the long arm of the taxman, who looks pretty certain to dramatically increase the levy on large endowments. As for "existing in perpetuity," it's probably an overstatement to say threats are existential to universities -- for now, at least.

Endowments -- the money engines of our nation's premier institutions of higher learning -- and those who run them are taking it from all quarters these days. The proposed tax hike, Trump administration cuts in federal funding, bans on foreign students, as well higher interest rates and stalled capital markets are all putting pressure on university budgets and, by extension, their endowments.

Though Swensen died in 2021, he's a central character in this drama. As the creator of the so-called Yale Model, Swensen argued endowments shouldn't allocate only into public equites and particularly bonds, but maintained that portfolios should be broadly diversified, with a heavy weighting in investments like private equity, venture capital, hedge funds, and real estate.

Swensen, an Iowan who adored Vince Lombardi, began running the Yale endowment in 1985. Private investments, he believed, fit well into the university's endowments because they had infinite holding periods and were less obligated to be transparent. Swensen also contended these investments generated higher returns with the same or less risk as public markets -- a bit of a free lunch, if you will.

During Swensen's salad days, Yale's endowment was the gold standard. In his book Pioneering Portfolio Management, which codified his research and thinking, he noted that in 2007, Yale's 10- and 20-year returns soundly beat the S&P 500 index. It was the No. 1-performing university endowment over the same time periods. As word spread and his acolytes followed -- 15 former members of Swensen's team went on to lead investment offices at other institutions -- the Yale Model became de rigueur.

The degree to which the Swensen way became consensus is manifested by the allocation of private equity in endowments. Cambridge Associates notes that Harvard, Princeton, Notre Dame, and Yale have allocations of 39% to 48% in private equity in their portfolios.

But as with any investment that generates alpha -- above-market returns -- an overweighted allocation of private equity worked wonders until it worked less well. Selling has ensued. "We may have been like drunken sailors drinking private markets...but we tapered down in 2023 and 2024," said Jagdeep Singh Bachher, the University of California's chief investment officer, at his investment committee meeting on May 13. "We sold down a lot of our privates," says a member of Brown University's committee on budget and finance. ( As of last June, Brown had 42% of its endowment in private equity.)

Other large universities like Harvard -- which has sold private equity stakes previously -- are looking to offload, too. Yale, with its $41 billion endowment, had been adverse to selling its PE positions. "I think some of that was from David," says a finance professional who worked with Swensen. "He thought selling private-equity stakes was a sign of bad faith and hurt relationships with general partners."

Then in mid-April came news that should have shocked no one. Yale's chief investment officer, Matthew Mendelsohn, who succeeded Swensen, had put billions of Yale's PE position out for bids. Barron's has now learned, from two people familiar with the situation, that Yale has moved forward and is in the process of selling some of these stakes, though without revealing dollar amounts or buyers.

Those familiar with the endowment say it has held stakes in funds managed by CD&R (formerly Clayton Dubilier & Rice), Madison Dearborn Partners, and Golden Gate, but it was unknown if these had been sold. In a statement, Yale said, "Following a monthslong review, the University is in process to sell select private-equity fund interests. Private equity remains a core element of our investment strategy."

"What is going on with endowments is equivalent to the financial crisis of 2008," UC's Bachher said. "If you have 50% of your assets locked into illiquid contracts for the next 10 years, you may have a hard time paying out a higher amount than you typically would. There will be more transactions."

Consider specifically why universities are looking to pare their PE holdings. First, threats from the Trump administration come in a number of forms, but they all take money away from schools. Cuts in federal funding could cost universities collectively in excess of $10 billion. Deporting, banning, and chilling foreign students means billions more in lost tuition.

Then there's increasing the tax on realized endowment gains from 1.4% to as high as 21% on large endowments. H.R. 1, the One Big Beautiful Bill Act, Sec. 112021, has a 21% excise rate ceiling, which would hit Harvard, Yale, Stanford, and Princeton to the tune of $500 million to $850 million a year, up from $39 million to $56 million, according to Phillip Levine of Wellesley College.

That possible tax hit is reason enough to sell sooner rather than later. "Endowments looking to crystallize gains in private equity would certainly rather do so before the tax goes to 21%," said the head of an endowment who sold off some PE last year and is staring at a potentially higher rate.

Still, the environment is uncertain. It's even possible that higher tax rates make private equity more appealing, as those investments defer gains. That might serve to hold PE allocations steady.

But for now, the urge to reduce stakes seems to have the upper hand. Consider that market internals are prompting sales, as well. So-called exits by private-equity funds totaled $80.8 billion in the first quarter of 2025, according to an S&P Global analysis, down from some $246 billion in the fourth quarter of 2021, as mergers-and-acquisitions and public-offering markets remain muted, in part because of uncertainty over President Donald Trump's tariff policy. Typically, exits provide universities a steady flow of cash. That has been reduced to a trickle.

Then there's the "denominator effect," which occurs when the overall value of a portfolio declines, say, because common stocks fall, while the value of private assets, which aren't marked to market, don't, leading to an overallocation of private investments. The denominator effect hit endowments hard in 2022, when the S&P 500 declined 19.4%.

The hiccup in 2022 notwithstanding, the S&P 500 has mostly outperformed private markets recently. That has boosted the performance of non--Yale Model endowments like Bachher's in California, which moved into stock indexes, and schools like Michigan State, which also focused on public equities. (Endowment fund manager memo to self: Why not just own plain-vanilla stocks?)

These factors, in addition to a craving for cash, the need to rebalance, and to exit from underperforming assets, begets private-equity sales. There is a cost, though: Discounts on sales of these stakes averaged 13% in 2024, according to private-markets adviser Campbell Lutyens, from 33% for real estate to 8.2% for infrastructure deals.

Some bankers, while acknowledging the selling, say that much of this is hand-wringing. "This is what endowments and other sophisticated investors do," says Nigel Dawn, head of Evercore's private-capital advisory business. "They put parts of their portfolios out for sale to see if they can generate acceptable offers. They've been doing this for years. Now they have more options."

Dawn is referring to the expanding secondary market, where transaction volume hit $160 billion last year, up from $80 billion in 2019, according to Evercore. Sales of investments by endowments often go to investment firms like Ardian, Lexington Partners, and Blackstone, which are creating funds from portfolios of secondaries. There's also a range of financing possibilities available, such as NAV (net asset value) bonds, which essentially securitize cash flows from PE holdings, allowing investors to get their money out -- for a fee, of course.

There's one more reason why the PE model is showing signs of stress, which comes from the nothing-if-not-sharp Marc Rowan, CEO of Apollo Global Management, who downplays the selling and any accompanying discounts unless universities "are looking to sell something bought when interest rates were 3% and they are now 7%," he says. "Then they may not like the pricing so much."

For decades, the private-equity boom was fueled by declining and rock-bottom interest rates, which certainly benefited Swensen and others who invested early in PE. Swensen was also able to gain entry into the highest-quality funds, which back then had much less competition. Today there are some 4,500 private-equity firms vying for deals, which serves to push up buyout prices. More-expensive deals make the economics less attractive for buyers of PE funds.

Swensen spoke about how culture was the key to success of the Yale Model. That certainly was important, but it also seems that ripe conditions played a part too. Mention Benjamin Franklin to an endowment manager today, and they might nod knowingly -- though not so much to the author of Poor Richard's Almanack as to the founding father on the $100 bill.

Now more than ever, it's all about the Benjamins.

Write to Andy Serwer at andy.serwer@barrons.com and Abby Schultz at abby.schultz@barrons.com.

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May 29, 2025 00:30 ET (04:30 GMT)

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