As Harvard And Yale Dump Billions In Private Equity, Buyers Use Wild Secret Trick To Book 'One-Day Windfalls Of 1,000% Or More'

Harvard and Yale Universities are offloading significant portions of their private equity (PE) holdings, a move that, despite occurring at a discount, highlights a booming secondary market where buyers employ a technique known as “NAV squeezing” for potentially massive returns, reported Fortune.

What Happened: The secondary market for private equity stakes is experiencing a significant surge. Global secondary volume reached a record $162 billion last year, a 45% increase over 2023, as detailed in a paper by Jefferies.

Limited partners (LPs) sold their stakes at an average discount of 11% compared to their net asset value (NAV), according to Jefferies. This competitive pricing, coupled with an ample supply of quality portfolios, suggests a robust demand.

Despite these discounts, buyers are finding ways to generate substantial gains. Tim McGlinn, an investment veteran, explained to Fortune that buyers can “juice returns” through “NAV squeezing.”

This process allows secondary funds to mark up acquired investments to their old net asset value, potentially leading to “one-day windfalls of 1,000% or more,” which they report as real returns.

McGlinn described the technique as mind-bending, stating, “It makes your brain melt.” Jeffrey Hooke, a finance lecturer at Johns Hopkins, while stopping short of calling it a Ponzi scheme, agreed it appears “quite shaky,” though permissible under GAAP.

The sales of such stake by the endowment of these universities underscore a growing trend among elite institutions seeking greater liquidity and flexibility amidst economic turbulence.

Harvard recently agreed to sell approximately $1 billion of its PE stakes, while Yale is negotiating a nearly $3 billion sale at a discount of less than 10%.

These endowments are traditionally long-term investors in alternative assets like PEs, which are navigating a market where funds are taking longer to return capital as the borrowing costs are higher.

Why It Matters: For the universities selling the PE stakes, even at a discount to NAV, could still result in receiving more capital than they initially committed to those investments because of the massive demand in the secondar market.

Meanwhile, Yale emphasized in its own school's newspaper that private equity remains a core part of its investment strategy, with ongoing commitments to existing partners and pursuit of new opportunities.

Price Action: Bloomberg's weighted index of U.S. PE funds has delivered a 9.4% year-over-year gain from 2007 to 2024.

Meanwhile, the S&P 500 index is currently showing an annualized year-over-year gain of 12.02%, according to YCharts. This means that, over the past year, the index has increased by 12.02% when considering the total return, including dividends.

The SPDR S&P 500 ETF Trust SPY and Invesco QQQ Trust ETF QQQ, which track the S&P 500 index and Nasdaq 100 index, respectively, rose in premarket on Monday. The SPY was up 0.64% to $600.82, while the QQQ advanced 0.80% to $531.15, according to Benzinga Pro data.

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Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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