As Harvard University and Yale Private Equity Holdings are sold, buyers can use this technique with 1,000% squeals. “It melts your brain.”

• Private Equity Stakes Secondary Market Buyers are booming as they are keen to photograph assets that are dropped by investors. There is reason to believe that Harvard, Yale and other elite institutions are selling their holdings at a discount on current ratings, but still get a fair deal.

Some of the most elite institutions in the country are Off-road A part of them Private Equity portfolio. As funds It will take time Harvard and Yale sell at discounts to return the money to investors. Economic turbulence.

However, both sides of such a transaction can bring in amazing profits.

Maintenance of this portfolio does not appear to link to President Donald Trump attack University finances including possibilities Tax increase About donations. However, industry skeptics believe these sales highlight Concerns are rising It returns to the opaque world of private equity.

“The big release is coming with private equity investments in elite universities’ auction blocks,” says Nir Kaissar, founder of asset management company Unison Advisors. I wrote it Thursday’s Bloomberg opinion column.

University funds usually make the ideal investors Alternative assets– With virtually endless investment vision, they can survive the wild turnover in the public market by building billions of dollars over several years.

On his face, the movement was easy. As Kaisar pointed out, Bloomberg’s The weighted index of US PE funds returned 9.4% year-on-year from 2007 to 2024. Volatilityonly 7.2%.

The S&P 500 gets 10.5% over that span, with a standard deviation of 16.8%, which is a much worse return on a risk-adjusted basis.

However, these numbers may not reflect the underlying picture. Unlike stock trading on public exchanges, private assets prices do not change daily based on the whims of investors.

Instead, valuations of most private, real estate, and other assets held by PE companies are based on subjective assumptions that do not fluctuate as the public stock market does. luck.

“And there’s nothing inherently wrong,” said McGlyn, who blogs about the alternative industry. thealtview.net.

But when an investor or future investors believe that they can actually sell their holdings at those prices, “it’s when things get into trouble.”

Ultimately, private equity companies make money for investors when they try to turn the conceptual valuation of paper into cash by terminating their investment. Therefore, Jason Reid, a professor of finance at the University of Notre Dame, said there must be some kind of correlation between the performance of public and private assets.

“If the market is doing very well, well, you’ll have a lot of opportunities to buy your company, other private equity companies, buy your company, publish it and get an IPO,” he said. luck. “But if the economy doesn’t work, companies are struggling and overall they don’t have many opportunities to sell.”

Harvard and Yale sell PE stakes

Bill Ackman, the owner of the billionaire hedge fund, a Harvard graduate, argued for his alma mater’s claims $53 billion donationalmost 40% of that is allocated to private equity, which is quite exaggerated.

“I think a significant part of the reason why many private assets remain private despite the greatest stock market ever, is that public markets value private assets at a lower value than privately carried,” says Ackman, CEO of Pershing Square Capital. I wrote it In a social media post last month.

The Harvard Management Company, which oversees university contributions, declined to comment. Following a similar move in the summer of 2021, we recently agreed to sell around $1 billion in PE stakes. Financial Reportallowing schools to avoid discounts. The funds would have been facing just a year later.

Meanwhile, Yale is negotiating a sale of nearly $3 billion from Private Equity Holdings at a discount of less than 10%, a spokesman for Yale Investments Office. I said School newspaper. The university has developed a 95% of its $41 billion fund allocated to growth-oriented assets such as PE, venture capital, real assets and global equities to drive facilities into alternative assets.

“After a month of review, the university is moving forward to sell interest on selected private equity funds,” Yale said in a statement. luck. “Private equity remains a central component of our investment strategy, pursuing new private equity opportunities to continue to commit important capital to existing world-class partners and to support the long-term growth of our contributions.”

This doesn’t seem like a distressing sale, McGlynn said, but otherwise it’s difficult to rate. More mature funds trade very differently from the new ones, with different positions packaged together in these types of transactions.

“Yael is Yale, so you can assume they’re getting the best price possible,” McGlynn said.

Buyer juice will be back with “Nav Spieezing”

Still, investors in PE funds, known as “limited partners,” sold their shares at an average discount of 11%. Net Asset Valueor nav, of these holdings of their balance sheet, According to To Jeffries.

It may seem strange that universities are trying to sell like this year Borrowing costs Still lifted up. However, the demand for Secondary market It’s booming. Secondary sales rose 45% last year to $162 billion, according to Jeffries.

As a result, Yale, Harvard and other universities were able to receive much less haircuts than they feared, while booking profits from their initial bets.

That’s because there’s a reason to believe that many buyers are happy to pay for overpayment, McGlynn said. Regardless of which secondary funds supply the plates to acquire these interests, he explained that they are permitted to mark these investments to the old net asset value.

McGlinn calls this process “Nav Sqeezing.” As Wall Street Journal It has been reported last yearwhich could lead to more than 1,000% of the day’s storms per day, McGlinn said the Secondary Funds are reporting as actual returns.

“It melts your brain,” he said.

Compare NAV aperture with a Ponzi scheme Jeffrey Hook, a senior lecturer in finance at Johns Hopkins Carrie Business School and a longtime PE critic, said: However, he agrees that even if the technique is allowed in accordance with commonly accepted accounting principles, it still looks very unstable. gaap.

“It’s almost like a full wash and rinsing cycle,” said Hook, who previously was the leading investment director for the World Bank’s International Finance Corporation.

Of course, the university will be on the other side of these transactions. They sell PE stakes at NAV discounts, but they can get more than the capital they were committed to those investments up to this point.

In other words, donations may still be running away with profits.

This story was originally introduced Fortune.com