The Great Private Equity Squeeze of 2023

We provide some clues as to why some of the largest endowments have disappointing results in FY2023

October 18, 2023

Early data reported by Ivy endowments suggests that both pensions and Ivy endowments are notably underperforming individual FY2023 projection benchmarks in the MPI Transparency Lab. The Lab will provide a detailed attribution of results once all eight Ivies report. In the meantime, the chart below offers a simple clue as to why the “endowment model” is facing challenges this year.

Using CalPERS as an illustration, we show by how much the unfunded PE commitments surpass the cash distributions received during the year. This marks the most significant “squeeze” since the Global Financial Crisis of 2008 (GFC): during the dot-com bubble in 2001-2002 PE distributions covered only 1/10 of the unfunded commitments, compared to 1/18 during the GFC, and now less than 1/6 last year.

To meet capital calls, pensions and endowments must either sell PE investments to secondaries at a substantial discount or sell a portion of their liquid assets. This can be particularly challenging if the portfolio is heavily illiquid, as is the case for some Ivy League institutions, with 70-80% of their portfolio in illiquid assets.

Among reasons for high “squeeze ratio” in CalPERS’ case:

  1. Very low commitment-weighted average “vintage age” of PE funds. Younger vintage funds tend to have disproportionally high expenses (J-curve) and low distribution levels; and
  2. Decreasing number of deals and decline in valuation multiples for the industry in general.

PE vintage age can have dramatic impact on short-term performance. In chart below we show commitment-weighted age of private equity funds for CalPERS from the data provided in Preqin database. After 2008, CalPERS annual commitments to PE were $2.7B on average. During FY2018 the average age of private equity funds was over 9 years. A significant capital was then committed to new funds which peaked in 2021, when it deployed $13.8 billion. Because these were new funds, the average age dropped to 3 years. 
So this partially explains why CalPERS FY2023 return was -5.8% – almost 3% lower than the 8.7% benchmark provided by the Lab. Large endowments having substantial portion in investments may have experienced similar challenges which led to their underperformance.

Stay tuned for more insights as the MPI Transparency Lab provides a comprehensive report once all data is available.

DISCLAIMER: MPI doesn’t have detailed information about CalPERS investment portfolio other than provided by Preqin. The information is provided for illustration purposes and not to express an opinion about the merits of the CalPERS investment strategy and/or results.

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