The Yale University endowment is lowering the percentage of assets dedicated to private-equity investments for the first time since 2005

Yale Endowment Shuffles Portfolio’s Allocations

Private Equity, Real Estate Will Play a Smaller Role

LAURA KREUTZER

Updated Oct. 20, 2013 6:52 p.m. ET

The Yale University endowment is lowering the percentage of assets dedicated to private-equity investments for the first time since 2005. The New Haven, Conn., college’s endowment totaled $20.8 billion as of June 30 and is closely watched for changes in its holdings of stocks, bonds, hedge funds, private equity and other investments. Yale Investments Office, which manages the endowment, said last month that it cut the endowment’s target exposure to private equity to 31% of assets for the fiscal year that began July 1.Yale Investments Office also reduced its targets for real estate, while increasing allocation targets for hedge funds, foreign equities and natural resources.

The private-equity target was 35% in fiscal 2012. As of June 30, 2012, private equity represented 35.3% of the university’s $19.3 billion of endowment assets, according to the latest detailed data available.

Yale Investments Office declined to comment on the moves through a spokesman.

Yale’s private-equity portfolio has generated a 14.4% annualized return in the past decade, ranking it as one of the endowment’s best investments, according to a preliminary report issued in September. Natural resources and real-estate portfolios, both largely made up of assets that like private equity are harder to sell, had annual returns of 15.6% and 7.2%, respectively.

Chris Douvos, a former portfolio manager at the Princeton University endowment who now is managing director at private-equity fund manager Venture Investment Associates in Peapack, N.J., said it is unlikely Yale’s lower private-equity target reflects a broad view of private equity as an investment.

“It’s extremely likely that Yale’s [target] reduction is … more of a micro-commentary on the managers out there,” he said.

The 31% target would keep private equity as the largest asset class in the Yale endowment’s portfolio—and one of the biggest in the U.S. University endowments with more than $1 billion in assets had an average private-equity allocation of 26% last year, according to a survey by the National Association of College and University Business Officers and Commonfund Institute.

Many university endowment managers have closely followed the “Yale model” of asset allocation, pioneered by Yale Chief Investment Officer David Swensen. The strategy called for higher allocations to alternative asset classes, such as private equity, real estate and natural resources.

The financial crisis and economic downturn raised questions about the strategy, especially at schools with fewer assets. Endowments at Harvard University and other colleges that increased exposure to such investments were hurt by steep declines in the value of their portfolios.

Yale’s endowment lost almost a quarter of its value in the year ended June 30, 2009. The university has since boosted its cash reserves, and the value of the portfolio has increased in subsequent years, including a 12.5% return for the year ended June 30.

Many endowments have “realized that putting a preponderance of the portfolio in illiquid … strategies may be too aggressive for them,” Mr. Douvos said.