For large university endowments, significant allocations to alternative investments have been a hallmark of portfolio construction for decades. The Yale model, as it is known, prioritizes significant investments in private equity, hedge funds, venture capital and other alternative strategies like infrastructure and credit with top-tier managers.
But the model that the late Yale CIO David Swensen initiated in the mid-1980s has seen headwinds in recent years. Distributions from private equity manager general partners to their limited partners have slowed, and returns for alternative asset classes have weakened, as compared with public markets. Federal funding cuts, rising tuition fees, declining student enrollment and a new tax on the largest endowments’ investment returns are also weighing on institutions that rely on these asset pools for annual funding.
“Many endowments built substantial allocations to private equity and venture capital during the prolonged low-interest-rate environment following the global financial crisis,” says Julia Wilkinson, CIO of and managing partner in multi-strategy manager LEBEC Capital Partners. “While that strategy delivered strong long-term returns, it has also created structural liquidity constraints in today’s” higher-interest-rate environment.”
But industry observers note that large endowments are not pulling back from investing in alternative investments—these assets are still core to these endowments’ asset allocation, due to their history of outperformance over long periods of time.
It paid off last year, as large endowments, which typically have higher allocations to alternatives, saw the strongest returns of any cohort in fiscal 2025, according to the 2025 Commonfund Study of Endowments, released in January.
Endowments with at least $5 billion in assets reported the highest returns, averaging 11.8%, according to Commonfund, while the lowest-performing cohort—endowments with between $101 million and $205 million—reported returns of 10.5%.
Endowments with less than $50 million in assets allocated on average 12.5% of their portfolios to alternative investments, while endowments with more than $5 billion allocated on average 62.5% to illiquid strategies.
Large Endowments Stick to Alts
Despite headwinds, large endowments are not pulling back from investing in alternatives, but endowments have become more selective with how they chose or re-up with managers.
“I’m not hearing [endowments] stepping away from private equity,” says Erika Murphy, a portfolio manager at Fidelity Investments. “What I am hearing is that they are being more selective.”
Still, endowment allocators are frustrated by what is now the fourth consecutive year where distributions from private equity funds are lower than what they had averaged in previous years.
“That’s frustrating if you think about how allocators [as a result] need to think about pacing their contributions,” Murphy says. “I think we are seeing slower re-ups in private equity funds, allocators are being more selective, and they’re not moving as fast when they are making the decisions to re-up with a private equity fund.”
Slower private market distributions are also prompting endowments to reassess how liquidity supports long‑term allocations, rather than rethinking alternatives overall, says Jessica Donohue, head of asset servicing at Northern Trust.
“Private markets remain central to portfolio strategy, but extended lock‑ups and delayed exits are leading institutions to hold larger liquidity buffers, revisit pacing assumptions and stress‑test portfolios under delayed‑distribution scenarios,” Donohue says.
Wilkinson notes many endowments are increasing allocations to cash-yielding alternative strategies such as private credit and infrastructure.
While public markets outperformed illiquid investments over the past few years, this year’s geopolitical-derived market volatility has the potential to derail the artificial-intelligence-fueled rally in equities.
“The pattern has been that we get these five-year stretches of very strong public market returns, especially equities, especially U.S. equities, and so a simple portfolios of equities… actually looks really good relative to say, the endowments,” says Mike Scotto, founder of advisory firm Highlight Advisors, noting that these stretches are often followed by weak periods in U.S. equities, in which private funds, such as those in venture capital, provide a countercyclical balance. Alternatives can also provide distributions and to limited partners.
“What happens: At the same time, you might get some large distributions and realizations from the venture funds,” Scotto says. “So … in a year when public equities are down, they might get some good distributions, and they might look good in that environment, and that’s why people are attracted to that model. That’s why they’re attracted to going into illiquid alternatives: because it helps smooth out the returns.”
Scotto highlights the highly anticipated initial public offerings of leading, high-value private technology companies such as OpenAI, Anthropic and SpaceX, which could create a windfall for endowments and foundations that have backed them through venture capital exposure. The top-performing higher-education endowments in fiscal 2025 attributed much of their performance to artificial intelligence exposure through their venture capital managers, according to Markov Processes International.
Smaller Endowments Have Their Own Headwinds
Smaller institutions have been drawing more on their endowments to provide funding for their operating budgets, as the organizations face declining student enrollment, challenging fundraising and loss of revenue from public funding sources, Murphy notes.
“On average, maybe we see endowments and foundations contributing high single-digit or low double-digits as a proportion of the total operating budget, and now we are starting to see, in 2024 and 2025, that number move into the mid-teens for the smaller institutions in the endowment space,” Murphy says.
Many endowments have abided by the IRS rule for distributions by tax-exempt private foundations: that they need to allocate to charitable purposes at least 5% of the average fair market value of their non-charitable investments. While not bound by the 5% rule, many have targeted a 5% annual payout rate as a best practice for maintaining their funds’ purchasing power.
The larger endowments have already been providing about 20% of their universities’ operating budgets while having large allocations to illiquid investments, Murphy notes, a number that has been more consistent. But as smaller universities need to draw further on their endowments for operational spending, these institutions have the benefit of being more liquid.
Scotto notes that smaller endowments may not have access to best-in-class alternative investment managers that can provide top-quartile returns. As a result, he expects these smaller institutions to dial back on illiquid investments.
“If you’re a sub-$1 billion institution and you’re going into a lot of alternatives and illiquid investments, you might not be getting [access to] the same quality of investments and funds that a mega-endowment might get—it’s just the nature of the game,” Scotto says. “I think for the smaller to midsize institutions that are dabbling and not getting the highest quality illiquid ideas or mismatching the level of … risk in their portfolios relative to the financials of the institution, I think that’s where you’ll see potential for people dialing that back and maybe looking at some more liquid strategies.”
Tapping the Secondaries Market
Some large university endowments, such as those at Harvard University and Yale University, made headlines in 2025 for selling billions of dollars in private equity stakes on the secondary market. People familiar with some of the endowment secondary sales described them as portfolio management tools—getting rid of older vintages to redeploy capital into newer strategies, rather than moves made out of desperation for liquidity.
“Smart investors are going to be looking at secondary pricing within their private markets portfolio, and while you might take a discount, they’re also thinking about what that capital can be used [for] on a go-forward basis,” says Colin Hatton, a principal in NEPC. “If they’re able to get 90% of their [investment’s value] back, but it’s a fund that’s marked at a 3x already and they don’t see a lot of upside potential beyond that, maybe they will take that 90 cents on the dollar as a portfolio management decision and reinvest it somewhere into a younger fund that hasn’t been invested or [use] that capital elsewhere.”
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Tags: Endowments, initial public offering, Private Equity, the Yale Model, Venture Capital