Yale Endowment: Don't Mistake Lack of Liquidity for Lack of Value

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Yale President Richard Levin sent the following endowment update to Yale alumni yesterday afternoon:

We explained in our messages to the community last December and February that we did not want to overreact to the downturn in financial markets by making reductions that might later prove unnecessary if markets recovered quickly. Thus, the budget reductions we undertook eliminated most, but not all, of the deficits previously forecast for the years ahead. These forecasts assumed that the June 30, 2009, value of our endowment would be $17 billion. Although the publicly traded portion of our endowment declined no further in value between December and June 30, we continued to incur losses in the value of our illiquid investments in private equity and real estate. The precise final results for the 2008-09 fiscal year are still being compiled and will be announced later this month, but it is clear that we will report a June 30 value of the endowment of approximately $16 billion. Only a small fraction of our endowment is invested in publicly traded securities, so the recent stock market rebound has not had a substantial effect on that number. The bulk of our endowment remains invested in illiquid assets, which have not begun to recover their value.

Clearly, the Yale endowment continues to suffer from the illiquid nature of many of its investments. However, illiquidity should not be mistaken for lack of value. The marking up of privately held investments typically follows the marking up of assets in public markets. Recent gains in the stock market make it likely that Yale's private investments will be marked up over time as well. When it's all said and done, Yale endowment manager David Swensen should once again be regarded as a gaint among his peers. We'll keep you posted.

Disclosure: No positions.