Venture Capital Investments Push Endowment Up by 5 Billion

Harvard's endowment grew by more than 30 percent in the past year to a staggering $19 billion, according to the University's annual financial report, which may be released as early as today.

The figures are for the fiscal year ending June 30. In fall 1999, the endowment was worth $14.4 billion.

"It's in the $19 billion vicinity," said Elizabeth C. "Beppie" Huidekoper, Harvard's vice president for finance. "It was a great year."

Harvard outperformed its investment benchmarks in almost all categories, according to Jay O. Light, director of the Harvard Management Company (HMC), which handles Harvard's investments.

"HMC outperformed the benchmarks in almost every category by sizable amounts," he said. "It's pretty much across the board."

The endowment, the largest of any university, also beat stock market indicators like the S&P 500 average, which rose only seven percent in the same period.

The 30-percent increase more than doubled last year's 12.2-percent return rate, which many described as lackluster.

It is also substantially higher than the average of 20.1 percent for the five-year period ending in fall 1999.

The report is in the form of a "John Harvard" letter, which will be sent to 1,000 overseers, fellows and other prominent alumni.

Much of the increase is a result of outstanding returns on venture capital investments, according to University financial officials.

Light said that the venture capital return was "very extraordinary" and is in the "hundreds of percents."

Fifteen percent of Harvard's investments are in long-term private equity, the accounting category that includes venture capital.

Domestic equities are the largest accounting category of Harvard's holdings, according to the University's policy portfolio, making up 22 percent of the endowment. Fifteen percent is invested in foreign equities and 10 percent in domestic bonds.

HMC manages most of Harvard's money internally, but private firms handle the University's venture capital investments.

Light emphasized that growth in the venture capital category this year was caused by especially high returns from a small group of the strongest firms.

"It's true that venture capital has been doing well, but what's really happened is that the top venture capital firms have really...performed," he said.

But though venture capital is very profitable for the University, Harvard has trouble investing heavily in the area because the top firms can only handle a certain amount of money.

"There's a limited number of exceptional managers and those managers have...been able to pick and choose how much they're willing to take into their fund," said Scott Sperling, a partner at the Thomas H. Lee Company, who previously handled venture capital for HMC. "The supply of capital available to those players has exceeded their willingness and ability to absorb it."

Light said this is still a problem, although the percentage of the University's holdings invested in venture capital has risen because of the exceptional growth in this sector.

Sperling points out the University takes a relatively long-term view of investing, allowing for it to participate in the volatile venture capital market.

"Harvard is one of the larger endowments, so they can look through the annual ups and downs of the venture capital market and take a relatively long-term view," he said.

But from year to year, according to old Harvard hands, the endowment is led by different investment categories and is not dependent on high venture capital performance.

"One year your real estate will do fine and your equity investments won't," said Jim Rowe, who served as vice president of government, community and public affairs from 1994 to 1998.

"This is an extraordinarily diverse portfolio. Year in and year out, some of these categories will do better than others," he said.