Should Endowments Continue to Commit to Private Investments?

For more than 30 years, endowments have committed ever-increasing allocations to private equity, venture capital, and private real estate-all based on expectations of returns superior to those available in the public markets. For decades, this belief was rewarded with above-market returns. However, evidence indicates that the claimed benefits of private investing as well as the returns reported might be exaggerated. In addition, the performance of private investments relative to public investments has diminished in recent years and, for the average endowment, no longer delivers compensation for the illiquidity, serial commitments, and other risks that investors are required to assume. Moreover, even for the largest endowments, evidence suggests that continued investing in future vintage years of private equity might produce disappointing results. The inability of private investments to outperform public market equivalents over the last decade could prove to be the new norm.