Yale University is close to reaching an agreement to sell up to $2.5 billion in private equity, with a discount expected to be less than 10%
Previously, the Republican Party proposed in Congress to raise the tax rate on school endowment funds to 21%, a significant increase from the current 1.4%. This tax threat is forcing elite institutions, including Yale, to reassess their investment strategies, as the urgent need for cash flow is causing the once unshakeable long-term investment philosophy to begin to waver
Yale University is preparing to sell up to $2.5 billion in private equity assets in the secondary market.
According to media reports on June 5, Yale University will sell a large-scale private equity holding in the secondary market for the first time, with the Ivy League school's endowment fund engaged in in-depth negotiations for a portfolio codenamed the "Gatsby Project." The private equity assets are valued at up to $2.5 billion, with an expected overall discount of less than 10%, although potential buyers have at times estimated discounts of up to 15% on certain asset portfolios.
The report states that this transaction represents a significant adjustment led by Chief Investment Officer Matt Mendelsohn, aimed at reallocating its $41 billion endowment fund. This will also become one of the largest secondary market transactions of the year and is expected to set a historical high for the market.
University endowment funds are facing dual pressures: on one hand, there has been a lack of distributions from private equity funds in recent years, and on the other hand, there is the prospect of rising tax burdens on investment income.
Republicans in Congress have proposed raising the tax rate on certain private school endowment funds to 21%, a significant increase from the current 1.4%. This tax threat is forcing elite institutions, including Yale, to reassess their investment strategies, with the urgent need for cash flow causing the once-unshakeable long-term investment philosophy to begin to waver.
A Signal of the End of the "Yale Model"?
The late David Swensen led Yale University in pioneering investments in alternative assets beyond stocks and bonds—hedge funds, venture capital, and private equity—a strategy known as the "Yale Model."
This approach revolutionized the investment philosophy of endowment funds, prompting major pools of capital to increase their exposure to less liquid and more complex investments.
According to a study by the National Association of College and University Business Officers for the 2024 fiscal year, U.S. higher education endowment funds are expected to allocate an average of 56% of their assets to alternative investments.
As of June 30, Yale University, located in New Haven, Connecticut, held over $10 billion in leveraged buyout and venture capital funds, according to its 2024 fiscal year financial report.
Media reports indicate that Yale University has been considering asset sales for over a year and is contemplating reducing holdings in dozens of funds to clean up old positions. The sale negotiations involve a so-called "mosaic transaction," allowing buyers to select specific investment funds they wish to acquire. Several buyers, including Lexington Partners and HarbourVest Partners, have evaluated the portfolio.
As the founders of this model begin to withdraw on a large scale, the entire industry may need to rethink: in a new environment characterized by drastic changes in tax policy and liquidity crises, can the "Yale Model" continue to maintain its former glory?
