Princeton endowment chief sees private equity climate ‘worse than ever’

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The Princeton University foundation, known for its aggressive bets on private equity, faces the “worst environment on record” for the asset class as a slowdown in trading and public listings weighs on returns, according to its outgoing investment director.

“Until the last few weeks, I’ve seen very little cash coming out of the private equity and venture capital sector,” Andrew Golden said in an interview with the Financial Times.

“We’ve seen some potential thaw more recently, but we can’t be sure if this is truly the start of a new trend or if it’s just an incident.” Signs of improving liquidity “may sometimes be just a pretense,” he said, “that doesn’t necessarily mean it’s necessarily going to continue.”

Golden will retire in June after nearly 30 years at the helm of one of the world’s largest foundations, where he now oversees a $34 billion portfolio.

His remarks come after Princeton University Investment Company suffered a 1.7 percent loss last year, largely due to private equity underperformance, after growing nearly 10-fold since he took over. in 1995.

The outgoing CIO, however, said he was not worried about the endowment investment model that favors high-yielding but illiquid alternative assets that he had championed for decades.

“Large foundations like ours are in a much better position than [we] that was 2008,” he said, referring to the global financial crisis when Princo posted a 24 percent loss for the year to June 2009: “We have all learned our lessons.”

The comments follow a poor year for major U.S. university endowments, heavily exposed to alternative assets, which have underperformed their smaller peers focused on publicly traded stocks and bonds.

Endowments at colleges with more than $5 billion in assets saw an average return of 2.8% in the year through June 2023, according to the National Association of College and University Business Officers. That compares to 9.8 percent for those with less than $50 million in assets.

As a major source of funding for one of the world’s richest universities, Princo has set an ambitious long-term return target of more than 10 percent per year. The goal, Golden said, requires a “really aggressive” investment strategy that can bring “discomfort.”

Although the endowment has achieved double-digit annualized returns over the past three decades, it has done so at the expense of a steady overallocation to private equity, which Golden has blamed on its too-rapid expansion in that area.

“I was not sorry about the target we set,” he said, referring to the 30 percent private equity allocation target that Princo far exceeded. “It turns out our analysis was somewhat off as to how much we would have to commit to get there, and we simply overcommitted.” »

At 39.9% of assets as of June 2023, Princo’s private equity investment was double the average allocation of large U.S. university endowments.

The push toward private equity, initially a driver of returns, became a drag on performance when trading and IPOs collapsed after the Federal Reserve began raising interest rates in March 2022.

Golden acknowledged the problem, saying last year was “arguably the worst” since he led Princo. He said, however, that he expected the stress to be manageable because Princo had already taken steps to reduce the risks.

The endowment has reduced its uncalled private equity commitments, or money committed but not yet transferred, to less than half its 2008 level, Golden noted, suggesting “much lower” liquidity pressure than that of the financial crisis.

Another legacy Golden leaves is a cautious stance toward the campaign to divest from companies that contribute to global warming. While Princeton announced in 2022 that its endowment would liquidate its holdings in dozens of publicly traded fossil fuel companies, Princo has retained its investments in private traditional energy companies.

Golden admitted that divestment hurt Princo’s returns, saying the endowment “would have been better off” otherwise. But he highlighted a bigger concern: the pressure to “keep adding things that we can divest from.”

“Fossil fuels necessarily help get the overall economy to where it needs to be. [and] it would be impossible for the world not to use fossil fuels tomorrow,” he said. “Divestment is a pretty weak tool for changing the economy. »

That’s why Princo continued to invest in private fossil fuel companies, Golden said, dismissing concerns that it wouldn’t solve the emissions problem due to a lack of oversight of private companies.

“Some would say that private companies are generally worse stewards of the environment,” he said. “That might be true in general, but not for our guys. They do things like test well water twice the distance from their own well and as required by regulations.

Yet many in the Princeton community remain unconvinced. Divest Princeton, an activist group joined by thousands of students, alumni and faculty, has repeatedly called on Princo to completely divest from fossil fuel companies.

“Princeton continues to profit from the fossil fuel industry and it is very clear that the fossil fuel industry is the biggest obstacle to tackling the climate crisis,” said Princeton alumna and organizer Lynne Archibald. Divest Princeton. “It doesn’t matter if any of these companies are good at testing well water.”

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