In 2000, Yale University Chief Investment Officer (CIO) David Swensen published Pioneering Portfolio Management detailing the university’s “Unconventional Approach to Institutional Investment”. The book was published 15 years into Swensen’s incredible run at Yale, a period over which the endowment annualized at 17.4%. A natural mentor and teacher, Swensen trained some of the subsequent decades’ most recognized CIOs and asset allocators. Swensen reached thousands more through his writings.

A notable element of Swensen’s investment success was a healthy allocation to alternative assets – including private equity and real estate. As a patient provider of capital, Yale benefitted from its ability to invest for decades in exchange for the potential for high rates of return from investments in emerging firms and technologies, rapidly growing and globalizing companies, and corporate turn-arounds, among other opportunities.

For many institutional investors targeting 4-5% spending rates in a low interest rate environment, Pioneering Portfolio Management became a blueprint for replicating the success of Yale and other sophisticated investors.

Data compiled by PitchBook showed that the number of active private equity firms swelled from 362 in 2001 to 922 in 2007. Deal volume nearly doubled in that same period – private equity firms went from closing an average of 2.2 deals per year to 3.6 deals, with the average time between deals halving.

When the global financial crisis struck in late 2007, many private equity investors found themselves with outsized commitments relative to portfolios that had contracted dramatically with the public markets. Most institutions felt the additional strain of maintaining programmatic and grant-making support through a recession. These investors (and their consultants) gained an enhanced appreciation for managing illiquid positions through a liquidity crisis.

Almost 20 years later, most institutions build private equity pacing models that strive to project commitments and allocations through a variety of scenarios in an effort not to over- or undershoot their portfolio targets. These models also help institutional investors diversify across strategies, regions, investment stages, and investment periods (vintage years). In recent years, many investors have extended the expected investment horizon for private funds from an average of 7-10 years to 12-15 years in line with experience. Investors have also lowered the expected return premium for private investments within these models to align with recent experience.

David Swensen managed Yale’s portfolio through 2020. The annualized rate of return over the entirety of his tenure (1985-2020) was 13.1%. While exceptional by any standard, it’s worth noting that Yale was unable to replicate the early success of its portfolio as private equity investment popularized.

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