Venture funds key to endowment whopper

by Wendy Yu | 10/30/00 6:00am

When College President James Wright announced at a recent faculty meeting that the endowment had returned a whopping 46 percent last year, professors showed visible signs of excitement.

They were certainly happy about the possibility of using some of the new money for projects in their fields of study. But many were probably also wondering how the College was able to perform so well.

Lucrative investments in venture capital funds appear to have been the key to overcoming a waning stock market that has registered more losses than gains in the past few months, allowing the College to double its usual return on endowment funds last year.

As of June, 12 percent of the $2.49 billion endowment portfolio was invested in 'early stage' venture capital funds, which produced a return of over 500 percent last year.

At the same time last year, the endowment was worth $1.71 billion.

"It was a fantastic year," Director of Investments Jonathan King said. "[Last year] was one of the best years ever for venture capital."

The early-stage venture capital fund investments primarily went to Silicon Valley and Boston start-up companies involved in new technologies.

Many of these companies underwent initial public offerings last year, which dramatically boosted their value and the returns for the funds invested in them.

Most universities hold some portion of their portfolios in venture capital, and many posted similarly generous gains, although Dartmouth boasted the highest returns of the Ivy League.

Notre Dame enjoyed a 56 percent return, while Harvard, whose endowment is significantly larger than Dartmouth's, experienced a 32 percent gain.

The median return for tax-exempt universities nationwide was 11 percent last year.

Typically, the College endowment produces a 23 percent return, which makes Dartmouth the leading Ivy League investor for both three and five year returns.

Although venture capital is generally considered a risky form of investment because it lends to companies that have an above-average rate of failure, the method in which the College is involved with the firms reduces its risk factor.

Venture capital funds diversify their interest in any one specific company by spreading out their portfolio between 15 to 20 companies.

In addition, the College invests in many different venture capital funds, further increasing the diversity and reducing risk.

A part of Dartmouth's portfolio since 1978, diversified investment in venture capital funds is just one part of a strategic long-term investment plan that the College follows.

King said he is not considering upping the proportion of these lucrative venture capital funds due to the recent gains.

"We have a long-term allocation, and we continue to commit to new funds," he said. "We're not maintaining allocation, not increasing."

According to King, the returns on the endowment flattened out in the last few months, especially since April when technology stocks experienced what he called a "meltdown."

However, King said he is optimistic that the recent market losses represent corrections and that the long-term outlook for the market is still strong.