University Endowments and the Rise of Alternatives: The Expanding Role of Universities as Private Equity LPs

Introduction

Traditionally built on philanthropic gifts, these funds are invested with the goal of perpetual support for their institutions. Today, university endowments are also some of the world’s most sophisticated institutional investors — with deep commitments to private equity, venture capital, real assets, and hedge funds.

The modern endowment model — pioneered by institutions like Yale and Stanford — has reshaped institutional investing. Over the last two decades, universities have emerged as dominant limited partners (LPs) in alternative asset classes, fueling growth in private equity and other illiquid markets. Their vast scale, long time horizons, and predictable liquidity needs make them uniquely suited to alternatives.

Despite recent headwinds — from tax changes under the Trump administration to funding freezes and public scrutiny — endowments have continued to grow, diversify, and outperform.

The “Rise of Alternatives” is both a story of resilience and innovation: universities have redefined what institutional asset allocation looks like, setting a benchmark for the broader LP community.

Market Overview

University endowments collectively manage over $700 billion in assets, with a handful of elite institutions dominating the landscape. Just 6% of U.S. colleges and universities hold endowments exceeding $1 billion, yet these few account for most of the sector’s investable capital.

At the top of the list stands the University of Texas System, whose $69 billion portfolio — managed by the University of Texas Investment Management Company (UTIMCO) — surpasses even Harvard’s. The Texas Permanent School Fund follows closely with $57 billion, ahead of Harvard ($56.9B), Stanford ($47.7B), and Yale ($44.1B).

This concentration of capital among a few large players creates scale advantages. These institutions can access top-tier alternative managers, negotiate fees, and make large, long-duration commitments. Notably, among the top 25, more than half are private universities, while large public institutions like Texas A&M, Michigan, and California have also built formidable pools.

The top 50 endowments together manage $707 billion. The top five — Texas, Texas Permanent School Fund, Harvard, Stanford, and Yale — account for almost 40% of total assets. Public systems like Texas and California dominate by size, while Ivy League and private research universities lead in sophistication.

This elite group of endowments functions much like sovereign wealth funds: deeply diversified, professionally managed, and governed for perpetuity. For private equity investors, these institutions are not just allocators — they are anchor LPs whose commitment cycles shape the private markets themselves.

Returns

Despite volatility in public markets and political headwinds, university endowments have delivered consistently strong returns. The average one-year return for the top 50 endowments in 2025 reached 11.9%, while five- and ten-year averages stood at 10.4% and 8.7%, respectively. Over longer horizons — 15 to 20 years — endowments have maintained near 9% annualized returns.

These figures are remarkable considering the institutions’ dual mandates of stability and perpetuity. Most universities target 7–8% nominal long-term growth to sustain a 4–5% spending rule, preserving intergenerational equity.

Endowment performance in FY2025 reflects a powerful rebound from pandemic-era volatility. Nearly all Ivy League and top public universities posted double-digit returns, driven by a resurgent equities market and strong private markets performance. Harvard earned 11.9%, Yale 11.1%, and Stanford 14.3%, with the University of Michigan leading at 15.5%.

Even amid funding cuts and legal battles with the federal government, these returns illustrate the endowment model’s robustness. For instance, Harvard and Stanford each distributed nearly $2 billion to support financial aid, faculty, and research — a testament to the symbiotic link between investment success and institutional mission.

Looking longer term, the 10-year average return trendline (2002–2024) mirrors macroeconomic cycles. After peaking above 9% in the early 2000s, returns plunged during the Great Recession, bottoming at 3.4% in 2010, before gradually recovering. The COVID-19 pandemic created unprecedented volatility — with returns soaring to 30.6% in 2021, collapsing to –8% in 2022, and rebounding to 7.7% in 2023.

Such cyclicality reinforces why endowments have steadily increased allocations to private markets: alternatives provide return smoothing and inflation protection. Over the past decade, private equity and venture capital allocations have materially enhanced portfolio performance, contributing to the recent era of outperformance.

The Rise of Alternatives in University Endowments

If one trend defines the modern university endowment, it is the rise of alternatives. Alternative investments — including private equity, venture capital, real assets, and hedge funds — have grown from 27% of endowment portfolios in 2003 to 56% in 2023. Meanwhile, allocations to equities fell from 49% to 30%, and fixed income shrank from 21% to just 11%.

This structural shift — often called the Yale Model, pioneered by David Swensen — represents a philosophical break from the traditional 60/40 portfolio. For institutions with perpetual horizons, illiquidity is not a constraint but an advantage. Endowments can lock up capital for decades, capturing illiquidity premiums that other investors cannot.

The move toward alternatives was accelerated by regulatory changes in the 1970s, when laws began permitting total-return spending (income + capital appreciation). This unlocked the ability to invest in private equity and venture capital rather than solely income-yielding bonds.

The results have been transformational. Alternatives now drive the lion’s share of alpha across endowment portfolios, while also offering strategic tax efficiency. Private equity remains largely insulated from new endowment excise taxes, since carried interest and unrealized gains are less exposed than public dividends or fixed income streams. This has reinforced PE’s appeal as both a high-return and tax-efficient vehicle.

Moreover, as universities confront shrinking federal support and political scrutiny, alternatives provide financial resilience. Faced with frozen grants and excise taxes, elite institutions such as Harvard, Yale, and Stanford are monetizing illiquid gains rather than liquidating equities. Hedge fund redemptions and secondary PE sales have provided short-term liquidity — but long-term, endowments remain committed to private markets.

The strategy reflects a structural evolution: endowments are now active participants in the private market ecosystem, not passive allocators. They coinvest alongside fund managers, pursue direct deals, and in some cases establish internal PE-style investment arms. UTIMCO, Yale Investments Office, and Stanford Management Company exemplify this institutional sophistication — operating with governance structures indistinguishable from large family offices or sovereign wealth funds.

For private equity investors, this trend matters profoundly. Universities represent one of the most stable and expanding LP bases globally. Their appetite for illiquid assets, counter-cyclical funding ability, and mission-driven governance make them ideal long-term partners. As the alternatives share of portfolios exceeds 50%, endowments have become essential capital sources sustaining PE and VC fundraising cycles.

Endowment Spending

Endowments exist not only to grow wealth but to deploy it for mission-driven impact. In FY2023, 66% of endowment spending supported students and academics — including 48% for financial aid and 18% for academic programs. Smaller shares funded endowed faculty positions (11%), facilities (7%), and other operations (16%).

This spending stability enables universities to weather crises and plan for the long term. Endowments allow institutions to make commitments for educational activities now and far into the future with the knowledge that the resources will continue to be available.

However, spending patterns are shifting. Facing government funding cuts and new taxes, elite universities like Stanford and Harvard have increased payout ratios to offset losses. Stanford’s $47.7 billion merged pool distributed $1.9 billion in FY2025, nearly double its 2015 payout, covering 22% of total university expenses. Harvard, meanwhile, allocated $2.5 billion from its endowment to fund tuition and research — a record high.

These rising payouts underscore the growing reliance on endowment returns as operating capital. As federal grants shrink and tuition pressures mount, endowments have become the primary buffer ensuring institutional continuity. Yet they must balance near-term needs with long-term preservation — maintaining spending rates near 4–5% to protect purchasing power against inflation.

For investors, this disciplined payout structure translates into predictable capital commitments. Because universities operate with multi-decade planning horizons, they can sustain allocations to illiquid assets even amid short-term market stress. This makes endowments among the most stable LPs in private markets — and their allocations to private equity, venture, and alternatives are unlikely to retreat.

Implications for Private Equity Investors

The rise of alternatives within university endowments holds major implications for private equity investors:

1. Persistent Capital Inflows – With endowment AUM at record highs and long-term return assumptions anchored around 7–8%, PE remains a critical driver of performance. Expect steady capital commitments from top universities despite cyclical downturns.

2. Sophisticated LP Base – Universities are no longer passive allocators but strategic partners, engaging in co-investments, direct deals, and secondary market activities.

3. Tax Efficiency and Political Resilience – As endowment taxes focus on income-generating securities, private equity stands out as a tax-favored asset class, likely to retain or expand its share in endowment portfolios.

4. Public Scrutiny and Liquidity Management – While endowments face political pressure and funding volatility, their internal governance structures and smoothing mechanisms mitigate liquidity risk, preserving long-term investment commitments.

5. Impact Alignment – Many universities are aligning PE allocations with ESG and mission-related themes — investing in climate, health, and technology innovation. For fund managers, partnerships with endowments increasingly require alignment with institutional values and transparency.

Conclusion

University endowments are among the most powerful and enduring investors in global capital markets. Their evolution from traditional bondholders to diversified allocators in private equity and alternatives has transformed institutional investing.

Over the past two decades, the “Rise of Alternatives” has not only enhanced returns but also fortified universities against volatility and political headwinds. As allocations to private markets surpass 50% of portfolios, endowments have become cornerstone LPs — essential to the funding ecosystem of private equity, venture capital, and real assets.

For PE investors, the message is clear: universities are not just investors — they are perpetual partners. Their capital is patient, their governance disciplined, and their commitment to long-term value unmatched. In an era of rising uncertainty, this combination makes them indispensable allies in the continued growth of private markets.

Sources & References

American Council on Education. (2024). Understanding College and University Endowment. https://www.acenet.edu/Documents/Understanding-College-and-University-Endowments.pdf 

Forbes. (2025). Several Major Universities Post Double-Digit Endowment Gains In FY 2025. https://www.forbes.com/sites/michaeltnietzel/2025/11/02/several-major-universities-post-double-digit-endowment-gains-in-fy-2025/ 

PitchBook. (2025). Elite university endowments confront a ‘parade of horribles’. https://pitchbook.com/news/articles/elite-university-endowments-confront-a-parade-of-horribles 

PitchBook. (2025). PitchBook’s university endowment return tracker. https://pitchbook.com/news/articles/pitchbooks-university-endowment-return-tracker 

PitchBook. (2025). Stanford feels the burn of new excise task. https://pitchbook.com/news/articles/stanford-reveals-excise-tax-effects 

PitchBook. (2025). Tax rate hike leaves endowments at ease. https://pitchbook.com/news/articles/tax-rate-hike-leaves-endowments-at-ease 

Visual Capitalist. (2025). Ranked: The Largest American University Endowments. https://www.visualcapitalist.com/largest-american-university-endowments/