Key Takeaways
- • Large university endowments with more than $1 billion in assets averaged -4.5% returns in the 12 months ending June 30, 2022, significantly outperforming the -8.0% average across all endowments and the -11.5% posted by endowments under $25 million, according to the 2022 NACUBO-TIAA study.
- • Private equity and venture capital allocations exceeded public equity allocations for the first time at large endowments by end of fiscal 2022, with endowments exceeding $1 billion allocating 32.6% to private equity compared to roughly 1% for endowments under $25 million.
- • The allocation disparity directly explains outperformance: mega endowments benefited from greater exposure to diversifying private asset classes—private equity, venture capital, real estate, real assets, and hedge funds—which helped cushion drawdowns in public markets during the challenging 2022 environment.
- • Despite 30.6% average returns in fiscal 2021, endowments across all size categories failed to meet the broadly accepted 7.5% annualized return target in all but one measurement period (one-year through 25-year), significantly depressing long-term performance trajectories.
- • The performance gap reflects the "willingness and ability of larger institutions to reach for higher return targets" through private market exposure, according to Ivy Flores, managing director at Nuveen (a TIAA company).
Summary
The 2022 National Association of College and University Business Officers-TIAA endowment study reveals a stark performance divergence driven by asset allocation, with the largest educational institutions substantially outpacing smaller peers during a challenging fiscal year marked by broad-based equity market declines. All endowments posted average returns of -8.0% for the 12 months ending June 30, 2022. However, endowments with more than $1 billion in assets weathered the downturn considerably better, averaging -4.5% returns, while smaller endowments under $25 million sustained -11.5% average losses.
The root cause of this performance gap is the substantial allocation difference to private markets. Mega endowments with assets exceeding $1 billion allocated 32.6% to private equity by fiscal year-end 2022, compared to only 1% for endowments under $25 million. This exposure pattern escalated across endowment size tiers: institutions with $501 million to $1 billion allocated 21.6% to private equity; those with $251 to $500 million allocated 18.3%; mid-sized endowments ($101-$250 million) allocated 11.8%; smaller institutions ($51-$100 million) allocated 6.25%; and those with $25-$50 million allocated 4.5%. The strategic shift in asset allocation proved consequential: private equity and venture capital positions outperformed public equities in 2022, and larger endowments benefited from additional diversifying allocations to real assets, real estate, and hedge funds that cushioned broader market deterioration.
The study indicates that endowments across all size categories fell short of the widely accepted 7.5% annualized return target across nearly all measurement periods—one-year, three-year, five-year, 10-year, 15-year, 20-year, and 25-year horizons—despite robust 30.6% average returns posted in fiscal 2021. This sustained underperformance has meaningfully depressed long-term annualized return profiles. Institutional investors and endowment boards increasingly recognize that larger endowments' capacity to access private markets and allocate toward alternative asset classes has become a material competitive advantage in navigating volatile public equity environments, reflecting what industry observers characterize as the "willingness and ability of larger institutions to reach for higher return targets."
The root cause of this performance gap is the substantial allocation difference to private markets. Mega endowments with assets exceeding $1 billion allocated 32.6% to private equity by fiscal year-end 2022, compared to only 1% for endowments under $25 million. This exposure pattern escalated across endowment size tiers: institutions with $501 million to $1 billion allocated 21.6% to private equity; those with $251 to $500 million allocated 18.3%; mid-sized endowments ($101-$250 million) allocated 11.8%; smaller institutions ($51-$100 million) allocated 6.25%; and those with $25-$50 million allocated 4.5%. The strategic shift in asset allocation proved consequential: private equity and venture capital positions outperformed public equities in 2022, and larger endowments benefited from additional diversifying allocations to real assets, real estate, and hedge funds that cushioned broader market deterioration.
The study indicates that endowments across all size categories fell short of the widely accepted 7.5% annualized return target across nearly all measurement periods—one-year, three-year, five-year, 10-year, 15-year, 20-year, and 25-year horizons—despite robust 30.6% average returns posted in fiscal 2021. This sustained underperformance has meaningfully depressed long-term annualized return profiles. Institutional investors and endowment boards increasingly recognize that larger endowments' capacity to access private markets and allocate toward alternative asset classes has become a material competitive advantage in navigating volatile public equity environments, reflecting what industry observers characterize as the "willingness and ability of larger institutions to reach for higher return targets."
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