Non-profit endowments and foundations face a pivotal moment in 2025, with some traditional revenue streams, including donations, in flux due to reductions in government spending and rising operational costs. These institutions—collectively managing trillions in assets—must generate sustainable returns to fulfill their missions which often includes a 5% annual draw against the corpus of their investment pool.

During an elongated period of low interest rates post COVID, the ability of traditional stocks and bonds to generate needed income and returns came into question. In search of an alternative path to create income during this period of “cheap” money, the allure of private markets was center stage given an expectation of an “illiquidity premium” of 2-3% returns above public equities under skilled management.¹ As a response, over the past decade, many of the largest endowments increased their allocations into the alternatives space including private equity (PE) and venture capital (VC). According to MPI Transparency Lab, “private equity holdings now represent approximately 37% of assets under management (AUM)” of Ivy League endowments² with unfunded commitments averaging 25.7% of portfolios.³

Yet, holders of private investments over the past few years have faced the headwinds of relative underperformance and an extended period of illiquidity. Looking at the last full calendar year, “in 2024, the S&P 500 Index outperformed private equity, venture capital, and private debt across every major time horizon for the first time in nearly 25 years.”⁴ Key issues included an overabundance of funding, mergers and acquisitions (M&A) were heavily scrutinized by government agencies, and the capital markets have been less receptive to taking companies public—hence an elongated period of illiquidity. As an offset, the high cash levels in the private company ecosystem provided the companies with an extended series of capital raises, funding them for years beyond the typical maturity date. As of the end of 2024, the “median period for private equity-backed portfolio companies has reached 5.8 years” compared to approximately three years back in 2000.⁵

Given PE commitments necessitate capital calls, as grants are called off, some institutions have shifted towards lowering their PE exposure. The methodology to reduce exposure involves either selling pre-existing fund commitments or assets in the form of a secondary fund, often at a discount to net asset value (NAV) to create liquidity and rebalance portfolios.

The process to clear the excessive inventory of funded private equity-backed companies along with the buildup of undeployed capital in PE funds still has a ways to go. However, we think the process is well under way into a relatively healthy backdrop considering that as we entered 2025, “credit markets were open, borrowing costs were dropping, [and] inflation stayed in check [which] sparked new energy, driving deal value to heights not seen since Q2 2022.”⁶ Although the backdrop has fluctuated, the expectation is that interest rates will continue to slowly move lower, the regulatory landscape will ease further, and we should have increased certainty on tariffs as we exit 2025.

If we are indeed off the bottom of the cycle, then the overhang of discounted PE inventory will clear up for the best assets where the discounts could prove appealing. Although the recent trend is to pivot towards balanced, liquid strategies to support the perpetual horizons inherent within endowment portfolios, we think having some exposure to private equity is rational. However, as is the case in all aspects of investing, diversification is the only free lunch, so we suggest moderation.

Given small to mid-sized endowments tend not to have internal investment teams, outsourcing the investment management task to a professional investment management firm such as Sand Hill Global Advisors can be an efficient path towards navigating complex markets. Thoughtful allocations for both your public (liquid) investment exposure and the alternatives sector, including gaining access to private companies, can help enable mission-aligned growth, anchored alongside institutional benchmarks designed to enforce diversification across uncorrelated assets, mitigating volatility while prioritizing liquidity.

1 – news.outsourceaccelerator.com/us-endowments-foundations-outsource

2 – www.markovprocesses.com/blog/elite-u-s-endowments-government-funding-and-liquidity-pressure

3 – www.institutionalinvestor.com/article/yales-potential-pe-sale-wont-solve-liquidity-challenges

4 – www.investopedia.com/etfs-that-outperform-private-equity-11754858

5 – www.privateequityinfo.com/blog/holding-periods-continue-to-grow-but-could-peak-in-2025

6 – www.cbh.com/insights/reports/private-equity-mid-year-trends-in-2025