Yale boosting venture capital coffers

Despite dismal returns, university is upping its commitment to private equity. Gurley is vindicated.

Yale University, which has the second largest endowment behind Harvard and is the top performing endowment in the U.S., has increased its allocation to private equity, including venture capital, according to a report released yesterday. The endowment is boosting its private-equity allocation from 21 percent to 26 percent, despite having lost 26% of the value of its private-equity investments in 2009.

The decision, made at a June 2009 committee meeting, is a pleasant surprise for venture capital firms. The consensus in the industry has been that pullback from endowments, pension funds, and other big institutions that keep funds flowing to the global Silicon Valley will leave the venture industry at half its size within five years. But those were the optimistic folks. Others argued that poor returns in the VC industry was the main reason the for the pullback, and that as a result, the VC industry could be cut even further – or possibly even go away.

In August, Benchmark Capital’s Bill Gurley famously described this as the slimming down of the industry. He insisted the industry would not die for two reasons: big institutions would continue to diversify, and the principle of contrarian thinking (think Buffet: “be fearful when others are greedy and to be greedy only when others are fearful”) would inspire some institutions to increase allocations to poorly performing asset classes.

Yesterday’s announcement vindicates Gurley’s analysis. In an email to VatorNews, he reiterates that the “the idea to be ‘contrarian’ is the exact thing that prevents major swings. No one likes to "give up" when others are. This is the key balancing bar to long term change.”

And Yale is the master when it comes to long-term investment. Though the endowment lost a whopping 25% overall in the year that ended June 30, 2009 and underperformed the national average 19% drop for large endowments in 2009, it remains the top-performer over the last decade.

We asked Gurley if Yale’s example could further mitigate the bloodletting from the VC industry, and perhaps inspire other institutions to send more money to VC firms.

The reigning fear hasn’t inspired too much greed just yet. “I don't think all institutions have the confidence that Yale has,” he said.