The "new subprime" crisis in the United States, triggered by Harvard and Yale?

Ivy League universities begin private equity sell-off, is a "new subprime crisis" slowly unfolding?

On Sunday, according to media reports citing informed sources, in the face of pressure from the Trump administration and threats to their tax-exempt status, Yale University is seeking to sell off a significant portion of its private equity portfolio, with the transaction size potentially reaching $6 billion, equivalent to 15% of its $41.4 billion endowment fund, marking Yale's first sell-off in the secondary market.

Not only Yale, but analysts suggest that if its tax-exempt status is still revoked, it is only a matter of time before Harvard University begins to sell liquid assets (such as stocks) and may even issue more debt.

The conflict between Trump and universities is intensifying, with the massive endowment fund investments of Ivy League schools becoming the "eye of the storm." These universities have large endowment funds and use them for high-risk investments such as private equity. Yale is a model of the "endowment fund" asset allocation model, ranking 27th among global private equity investors.

In the current environment where risks in the private equity industry are accumulating, this storm is likely to trigger a larger crisis—a new "subprime crisis"—and may lead to a chain reaction: hedge funds engaging in preemptive trading, private equity being revalued at a discount, and even affecting the venture capital sector supported by endowment funds.

Further analysis points out that the core issue lies not only in high exposure but also in the fact that endowment funds were originally a model of "long-term investment": lacking liquidity, enjoying tax benefits, and being insulated from political interference. Now, this isolation is breaking down. Once Harvard sells under pressure, it will not only make headlines but also serve as a signal, marking the beginning of a new phase characterized by defensive rotation, risk disintermediation, and a confidence crisis in private equity valuations.

Trump targets the "Ivy League," Harvard and Yale face sell-off pressure

According to CCTV News, recently the U.S. federal government threatened to freeze federal funding, demanding several universities to "rectify" their practices, while the prestigious private institution Harvard University chose to "stand firm." On April 14, Harvard rejected the Trump administration's demands for significant reforms to its management structure, hiring, and admissions policies. The U.S. government subsequently announced the freezing of approximately $2.26 billion in federal funding for the university.

On the 15th, Trump issued another threat to revoke Harvard University's tax-exempt status and demanded an apology from the school. On April 16, U.S. Secretary of Homeland Security Kristi Noem announced the cancellation of two grants totaling over $2.7 million that the Department of Homeland Security had provided to Harvard University.

Faced with severe financial challenges, reports indicate that Yale has been forced to sell off up to $6 billion of its private equity portfolio, with the fund's endowment size at $41.4 billion as of June 2024, and the portion sold accounting for about 15% of the total endowment.

A senior business reporter from FOX stated on X:

Wall Street executives focused on university endowment operations indicate that if its tax-exempt status is still revoked, it is only a matter of time before Harvard begins to sell liquid assets (i.e., stocks) from its portfolio, and it may also issue more debt. Unverified market reports suggest that the sell-off has already begunHarvard's investment in private equity is quite substantial, approaching nearly 40% of its endowment fund.

Analysts have noted that such a large-scale sale is extremely rare in the history of educational endowment funds, indicating that Ivy League schools are facing unprecedented financial pressure.

The scale of endowment funds is comparable to national GDP, focusing on private equity

It is worth mentioning that elite universities like Harvard are "wealthy enough to rival nations," with Harvard's endowment totaling nearly $52 billion, larger than the GDP of many countries. These universities are more willing to invest their vast wealth in higher-risk assets, but this model also comes with risks.

Historically, university endowment fund investments have been very conservative, but in the early 1950s, Harvard adjusted its allocation to 60% stocks and 40% bonds, taking on more risk and creating more opportunities for upside.

Other universities quickly followed suit, with Yale University pioneering the "Yale Model" in the 1990s, which focuses on diversified investments and allocates significant funds to alternative assets, particularly private equity. Yale ranks 27th among global private equity investors, with investments in this asset class exceeding $20 billion.

According to Harvard's annual report, the majority of the endowment fund's capital is allocated to private equity (39%), and Harvard has made significant adjustments to its portfolio allocation over the past seven years. Harvard Management Company has reduced the proportion of the endowment fund invested in real estate and natural resources from 25% in 2018 to 6%. These cuts have allowed for increased private equity investments.

Additionally, Harvard will issue $750 million in taxable bonds, maturing in September 2035. Earlier this year, the school issued $244 million in tax-exempt bonds. Many universities, including Princeton and Colgate, also issued bonds this spring.

Currently, Moody's has not updated Harvard University's AAA bond rating. However, regarding higher education as a whole, the rating agency is less optimistic and downgraded its outlook to negative in March.

"The new bond king" Jeffrey Gundlach previously stated in an interview,

Harvard originally relied on annual donation cash flow to operate, which allowed them to invest the principal, but ultimately they had to finance hundreds of thousands of dollars in the bond market to pay salaries and utility bills. They have no liquidity at all; their money is locked in completely immovable places.

Will turmoil in higher education trigger a "new subprime" crisis?

For the private equity industry, Ivy League schools have always been one of the most important investors. They not only provide substantial funding but their investment decisions are often seen as market indicators. The forced exit of these university funds will change the flow of capital in the industry and may lead to a valuation resetIn particular, the current Wall Street private equity industry is facing a perfect storm, trapped in asset entrapment, with a prolonged trading deadlock, valuation crises, and liquidity exhaustion.

Private equity giants such as Apollo, Blackstone, and KKR have seen their stock prices plummet over 20% this year, far exceeding the decline of the S&P 500 index. As the trading deadlock continues, these companies are increasingly finding it difficult to return funds to clients such as pension funds and endowments.

"New Bond King" Gundlach has warned that the U.S. may be facing a new "subprime mortgage crisis," with risks in the private equity market being severely underestimated. Analyst Marko Kolanovic stated on X:

The potential volatility of private equity assets has been masked for years. In 2020, private equity assets received a lot of attention, but due to central banks releasing massive liquidity, no issues ultimately arose. Since then, the scale of private equity assets has continued to grow. However, what would happen if a long-term downward tariff cycle occurs without central bank rescue? Coupled with the current state of university endowment funds.

The Myth of "Long-Term Capital" Shattered

EndGame Macro analyzed deeper impacts:

The Harvard endowment fund incident reflects deeper structural cracks in U.S. institutional capital, and is not merely a headline about a particular university. If true, the revocation of tax-exempt status due to political factors forcing Harvard to liquidate its most liquid assets—stocks—would mark a paradigm shift in how elite endowment funds respond to portfolio construction and geopolitical risk exposure. The core issue lies not only in leverage (40% private equity exposure), but also in the fact that endowment funds were originally the epitome of "long-term investment": lacking liquidity, enjoying tax benefits, and insulated from political interference. Now, this insulation is breaking down.

Historically, Yale and Harvard pioneered the "endowment fund model" under the leadership of David Swensen, which involved reducing public market equity allocation, focusing on private equity, and investing in highly specialized and opaque targets, optimized for a long-term investment perspective. However, this model also heavily relied on liquidity premiums. Now, with the threat of tax benefits being revoked, liquidity has become a burden. If forced to sell public market stocks in a fragile market environment, it could trigger second-order effects: hedge funds front-running trades, private equity being revalued at a discount, and even impacting the venture capital sectors supported by endowment funds (such as those connected to tech incubators or early cryptocurrency funds). Looking back at the liquidity scramble of pension funds during the 2022 UK gilts crisis and the CalPERS private equity markdown cycle, these events present a similar pattern of elite institutions de-risking

There may be a misconception in the analysis that assumes the entire investment portfolio of Harvard is at risk. In reality, over the past year, Harvard may have hedged political risks through prudent asset reallocation. However, the psychological signals conveyed to other institutions (such as MIT, Princeton University, and even corporate foundations) are crucial. A liquidity defensive posture will create a silent tightening effect through the capital markets, transmitting layer by layer.

This event marks the beginning of an era of reputational risk for institutional allocators. Today, political factors have become part of portfolio risk, and the myth of "permanent capital" has been shattered. Harvard's sale of stocks under pressure will not only make headlines but will also serve as a signal flare, marking the start of a new phase of defensive rotation, risk disintermediation, and an impending crisis of confidence in model-based private equity valuations. Next, closed-end funds and private equity secondary market auctions may come to a standstill, which is worth close attention.