The chain reaction has begun. After Yale, Harvard has started dumping private equity assets.

Source: Wall Street Journal

After Yale, is Harvard also unable to hold on? The “new subprime mortgage” crisis is slowly surfacing.

According to media reports, Harvard Management Company, which manages assets worth up to $53 billion, is collaborating with Jefferies to plan the sale of its private equity fund portfolio valued at approximately $1 billion to Lexington Partners.

According to informed sources, negotiations have entered the later stages, but the terms of the deal have not yet been finalized and there are still variables.

Lexington Partners, as a subsidiary of Franklin Resources Inc., is one of the largest participants in the secondary market trading sector and recently completed a record $22.7 billion secondary market fundraise last year. The individual also mentioned that Lexington may ultimately bring in other partners to jointly complete this acquisition.

Previously, there were reports that Yale University is also seeking to sell its private equity investment portfolio on a large scale, with the transaction size potentially reaching $6 billion, highlighting the liquidity challenges commonly faced by large institutional investors (LPs).

01 Liquidity Dilemma: Slowdown in Private Equity Returns and Huge Unpaid Commitments

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

According to its annual report (as of last June), nearly 40% of Harvard’s endowment fund’s assets are allocated to the private equity sector. However, in recent years, investment firms have found it increasingly difficult to sell their portfolio companies and return funds to their limited partners (LPs). The delay in investment returns has created liquidity pressures for institutions such as endowment funds, pension funds, and family offices.

Of greater concern is that, according to users on platform X citing data from Harvard University’s financial statements, as of June 30, 2024, Harvard University had unpaid investment commitments in illiquid assets such as private equity amounting to $12.4 billion.

This means that Harvard not only needs to address the current cash demands of its operations but also needs to set aside a substantial amount of funds to meet potential future capital calls—this enormous potential liability undoubtedly intensifies its urgency in seeking liquidity.

The slowdown in private equity returns and tightening liquidity have become common challenges faced by top university endowment funds. Reports also mention that a spokesperson for Yale University has confirmed that the school is collaborating with Evercore Inc. to seek secondary market sales, a process that has been ongoing for several months.

02 Under Trump’s Pressure, the Risk of “Subprime Crisis” Intensifies

Reports indicate that Harvard University’s efforts to sell began last year, prior to the significant pressure exerted by the Trump administration recently, including the suspension of federal funding and threats of taxation.

In response, Harvard announced a hiring freeze in March and issued $750 million in bonds this month. While the direct impetus for the private equity sale was more due to liquidity issues in the market itself and high unpaid commitments, external political and financial pressures may have added additional considerations to the decision.

Wall Street Journal previously analyzed that as the conflicts between Trump and universities intensify, the Ivy League’s large endowment fund investments have become the “eye of the storm.” These universities possess substantial endowment funds and use them for high-risk investments such as private equity.

In the current private equity industry where risks are accumulating, this storm is likely to trigger a larger crisis—a new “subprime mortgage crisis”—and may lead to a chain reaction: hedge funds engaging in front-running, private equity being revalued at a discount, and even affecting the venture capital sector supported by endowment funds.