Thoughts on private equity and outperformance of US endowment funds

Recently, the Financial Times reported that a “handful of endowment funds in the US” are expected to “significantly outperform” the S&P 500 index, which jumped more than 20 per cent in the 12 months to June 30, according to Cambridge Associate (link to article here – subscription required).

Why? The report quoted Cambridge Associates as saying that the funds “benefited from exposure to a small number of very successful private companies”. Examples mentioned included SpaceX, Anthropic and OpenAI.

If I were still doing product development and distribution, I would be tempted to jump on the news and write to all my clients, pointing out that private equity investments could deliver better performance than passive index trackers. So they should invest in our latest private equity investment – and here is the brochure….

But this is where a critical investor or adviser needs to see through the headlines.

First, we are talking about 12 months to June 30. In fact, the FT article stated that:

“Endowments with more than $5bn assets returned an annualized 7.8 per cent in the three years to June 2025, according to a study by the National Association of College and University Business Officers and Commonfund, compared with an annualized 19.7 per cent for the S&P 500 over that period.”

The better performance over the 12 months to June 30 could indeed represent a turnaround driven by venture capital or private equity investents. But we don’t know yet.

Secondly, notice that the success seems to have been driven by the big names mentioned above. The FT article stated that, excluding the five largest exits in the $347bn exit in the first quarter of this year, the exit value of US venture capital investments was 87 per cent lower. Was this down to luck or selection skill? Or a bit of both? And if there are skills involved, will they continue to deliver in the future?

And how about failures? Remember FTX, where some of the venture capital and private equity funds put money more because of “FOMO” than a thorough risk assessment?

Thirdly, endowment funds have different return objectives and risk profiles, as well as a very long investment horizon compared with, for example, private investors.

So be careful when private individuals or their advisers receive messages along the lines of: “Look how investing in private companies works for endowments. Usually it is only possible for institutional investors. But we have ‘democratised’ it for individual investors too. And you can invest now with us…”

I am not saying that private equity or venture capital is unsuitable for private investors. From a diversification perspective, it can provide exposure to different sources of returns and risks.

There may well be a place in a diversified portfolio for private investors. But first the investment type needs to be suitable. And it forms only part of the portfolio, such that risks like limited liquidity, opaque valuations and business failures are properly understood and managed.

And one last thought: I wonder whether these endowment funds have already exited their SpaceX investments following the company’s IPO. How many will continue to hold them? And will further exits by these funds put more pressure on SpaceX?

James Chu, CFA

Head of Investment Solutions