The adoption of the ‘Yale Model’ remains prominent among investors despite some industry sentiment that the investment strategy is becoming somewhat outdated. The model, which tends to focus on illiquid assets, such as private equity and other alternatives, in order to achieve above average returns over the longer term, has been prominent among endowments for a number of years. In particular, the main element of the Yale Model relies on a high level of portfolio diversification in order to reduce risk.
In comparison to the investment strategy of other investor types, Preqin’s Investor Intelligence online service suggests that endowment plans tend to pursue a higher level of diversification in terms of private equity investment preferences. For instance, analysis on fund type preferences reveals that 55% of endowment plans target fund of funds vehicles in order to maintain a high level of diversification throughout their portfolios, compared to 38% of all investors. Furthermore, a higher percentage of endowment plans state a preference for buyout, natural resources and distressed debt vehicles compared to the rest of the LP community, suggesting that endowment plans as a whole target a wider range of fund types than the average investor in private equity. This difference is also evident in terms of geographic preferences: 50% of endowment plans state a preference for private equity vehicles investing on a global scale, in comparison to only 36% of all investors that specify a global preference.
Preqin’s Investor Intelligence online service currently tracks 519 endowment plans that are investing in private equity, representing approximately 10% of all investors active in the asset class. Endowment plans are the fourth most predominant type of investor, after foundations, private pension funds and public pension funds. Of these endowment plans, 470 are based in North America, and represent 91% of the total assets of all endowment plans.
Through the years, endowment plans on average have shown a continuously healthy appetite for private equity. Over the past four years specifically, endowment plans have steadily increased their allocations to the private equity asset class, from an average allocation of 10.9% in 2010 to 12.8% at present in 2014. The target allocations for this investor type have also increased in line with their actual current allocation to the private equity asset class: in 2010, endowment plans maintained an average target allocation of 12.3% of total assets, which has increased to 13% in 2014.
With this positive trend in appetite for private equity investments among endowments, it is likely that this investor type will remain a significant contributor to the asset class in the year ahead.