Harvard predicts impending discounts on private fund holdings

Managers at Harvard University’s $51 billion foundation have warned of significant discounts in their private equity and venture capital portfolios, and forecast heavy losses for institutional investors.

The largest US university mutual fund expects “significant adjustments” to its private fund holdings by the end of the year, it said Thursday, as annual reviews force private equity and venture capital funds to cut valuations of unlisted assets.

The Harvard Foundation lost 1.8 percent for the fiscal year ended June 30, 2022, although it still outperformed the S&P 500, which fell 11 percent, as its portfolio of private assets mitigated a sharp decline in public stock markets.

The outbreak of war in Ukraine and rising interest rates have caused listed stocks to fall in value this year and created large holes in the portfolios of large endowments and pensions. However, private funds have not adapted to the new market conditions, and many have appreciated in value through mid-year — a disruption that Harvard forecasts will hit portfolios later.

“[Private] Managers have not yet tagged their portfolios to reflect broader market conditions,” Narv Narvekar, chief executive of Harvard Management Corporation, said in a message to the university. “We expect that the end of the current calendar year could bring meaningful adjustments to these valuations as investment managers review their portfolios.”

Buyout and venture capital funds were Harvard’s best-performing investments, Narvekar said. He highlighted that the foundation’s venture capital holdings, which grew “in the high single digits” for the fiscal year, are particularly vulnerable to discounts.

Managers’ convention of flagging venture investments in their latest funding round “may slow the process of bringing existing valuations to fair value,” said Narvekar, who noted that the foundation is “cautious about forward-looking returns in private portfolios.” .

Harvard sold $1.1 billion in private-equity funds in the summer of 2021 in a market it called “significant exuberance,” a maneuver it believes avoided the now big discounts.

While the Harvard Foundation lost ground, the Yale Foundation gained 0.8 percent for the year ended June 30. The Columbia University Foundation lost 7.6 percent, it said on Wednesday.

Harvard attributed some of its losses to a university decision to divest from fossil fuel-based investments.

Narvekar said a number of large investors “leaned into the conventional energy sector” in a strategy that “contributed significantly to their overall returns.”

He said Harvard “did not share in those returns given the university’s commitment to addressing the impacts of climate change, supporting sustainable solutions, and achieving our stated net-zero goals.”