Source: Wall Street News

After Yale, Harvard can’t stand it anymore? The "new subprime mortgage" thunder is slowly emerging.

According to media reports, Harvard Endowment Management, which owns up to $53 billion in assets, is working with Jefferies to sell its private equity fund portfolio worth about $1 billion to Lexington Partners.

According to people familiar with the matter, the negotiations have entered a later stage, but the terms of the transaction have not been finalized and there are still variables.

Lexington Partners, a subsidiary of Franklin Resources Inc., is one of the largest players in the secondary market trading field, just completed a record $22.7 billion in secondary market fundraising last year. The person also mentioned that Lexington may eventually introduce other partners to complete the acquisition.

Earlier, it was reported that Yale University was also seeking to sell its private equity portfolio on a large scale, with transactions that could reach as much as $6 billion, highlighting the liquidity dilemma that large institutional investors (LPs) generally face.

01 Liquidity Dilemma: Slowing Private Equity Returns and Huge Unpaid Commitments

Harvard University's sale reflects the severe reality facing the current private equity market.

According to its annual report (as of June last year), nearly 40% of Harvard Endowment's assets are allocated to the private equity sector. However, in recent years, investment companies have found it increasingly difficult to sell their own companies and return funds to their limited partners (LPs). The delay in return on investment has put liquidity pressure on endowments, pensions and family offices.

What is more worth noting is that according to data cited by users of the X platform, as of June 30, 2024, Harvard University's unpaid investment commitments on non-liquid assets such as private equity reached US$12.4 billion.

This means that Harvard not only needs to deal with cash demands in its current operations, but also needs to set aside a large amount of funds to meet possible future capital call--this huge potential liability undoubtedly exacerbates its urgency to seek liquidity.

Slower private equity returns and liquidity strains have become common challenges for endowments to top universities. The report also mentioned that a Yale University spokesman has confirmed that the correction has partnered with Evercore Inc. on seeking secondary market sales, a process that has been going on for months.

02 Under Trump's pressure, the risk of "subprime mortgage crisis" intensifies

The report pointed out that Harvard's efforts to sell the sale began last year, predating the significant pressure the Trump administration has put on it recently, including moratorium on federal grants and threats to impose taxes on it.

As one of the responses, Harvard University announced a freeze in recruitment in March this year and issued $750 million in bonds this month. Although the direct motivation for this private equity sale is more due to the market's own liquidity problems and high unpaid commitments, external political and financial pressures may also add additional considerations to this decision.

Wall Street News previously analyzed that as Trump and colleges and universities become increasingly fierce, Ivy huge endowment investment has become the "eye of the storm". These colleges and universities have large endowments and use them for high-risk investments such as private equity.

With the current situation where risks in the private equity industry are accumulating, the storm is likely to trigger a bigger crisis—a new “subprime mortgage crisis”—and may trigger a chain reaction: hedge funds are trading first, private equity discounts are revaluated, and even spread to the venture capital sector backed by endowments.