Harvard CIO Narv Narvekar on Private Equity J-Curve

It takes time to build a private equity program.

As many know, private equity funds draw down their capital over a period of years and then invest it for several more years before exiting. For now, and for the next few years, we will suffer the impact of the private equity “J-curve”—the natural progression of a fund’s value in this space, where short-term losses precede long-term gains. Many peers dealt with these growing pains years, if not decades, ago. Early in my time, we modeled it to take 7 – 9 years to attain a meaningfully higher allocation to private equity in a prudent manner (i.e., subject to maintaining higher manager quality, appropriate vintage year diversification, and being mindful of an aggressive valuation environment).

While we are making deliberate progress, we are obviously still early in the multiyear timeframe needed. Of note, some of the big IPOs of this past spring were backed by venture funds with vintage years from 2008 – 2013. Harvard did not participate in those funds in that era and therefore did not benefit significantly from those rewards in fiscal year 2019. Indeed, this is a long-term game.

Message from the CEO October 2019, Harvard Management Company

Indeed, you cannot time the market. Especially in venture.

For now, funds made available from asset sales and new cash have clearly been directed to hedge funds, where they can be put to work swiftly. But that is not Narvekar’s ultimate aim for HMC’s asset allocation. His principal concern, consistently expressed since his arrival, is that Harvard is under-invested in private equity: “HMC’s allocation to buyouts, growth, and venture capital continues to be low relative to what likely makes sense for Harvard.” That case rests not on the recent high returns (indeed, “recent performance, and specifically the valuation environment, serve as a restraint”). Rather, private-equity assets are a likely source of greater-than-market returns over time (in part in compensation for their illiquidity), and provide a useful way to deploy leverage (borrowing by companies within a private-equity fund manager’s portfolio) without recourse to the endowment itself.

Harvard Reports a $298-Million Surplus and Details Endowment Changes, Harvard Magazine

Their private equity portfolio investment return was 16% for the latest fiscal year.

Read more about Harvard’s endowment and finances here.

A fairly bright fiscal 2019, The Harvard Gazette

Harvard Investing Chief Is Disappointed With Fund’s Performance, Bloomberg

Harvard Endowment Is Doubling Down on Private Equity, Barron’s

Harvard Restructuring Shows Signs of Progress, Chief Investment Officer

Harvard’s Investing Chief Shares a ‘Sobering Thought’, Institutional Investor

FY 2019: The Good, the Bad, and the Ugly, The Harvard Crimson

Biblical inscription on Emerson Hall at Harvard.
Photo by Kelly Sikkema on Unsplash

Post by Marcelino Pantoja