Despite nearly two years of lockdowns, remote classes, and temporarily shuttered dorms, some major universities are seeing record profits… and it’s all thanks to private investments.

University endowments – investments where donations fund the principal – have booked some of their biggest returns in decades.

For the year ending June 30, 2021, check out the performance of the following endowments:

  • The University of Minnesota gained 49.2%.
  • Duke University gained 55.9%.
  • Bowdoin College gained 57.4%.
  • Vanderbilt University gained 57%.
  • And Washington University in St. Louis gained 65% (the school’s biggest ever).

With the S&P 500 returning 40.8%, and bonds (as measured by the Bloomberg US Aggregate Bond Index) returning -0.3% over the same period, you might wonder how these endowments are generating record returns…

The answer is venture capital (VC).

That is, investing in startups, early-stage, and emerging companies deemed to have high growth potential and high risk… Otherwise known as “pre-IPOs.”

These investments are on pace to land their greatest returns since the dot-com era of the late 1990s.

Large university endowments managing more than $1 billion had an average venture allocation of 11%, according to a 2020 study.

Consider Michigan State’s endowment, another one that’s consistently outperformed the S&P 500. CIO Phil Zecher said, “Our whole private investment portfolio did extraordinarily well with venture up over 100%.”

Today, I’ll show you why universities are becoming venture capitalists… and a simple way you can mimic their gains.

A No-Brainer

A big reason for these massive returns is that it’s more profitable for companies to stay private longer… So, when they eventually have their initial public offering (IPO), they’ll do so at much higher valuations.

chart

As you can see in the chart above, from 1999 to 2020, the average market cap of private companies at IPO jumped 776%.

Companies are accumulating higher valuations while private, which results in more gains to pre-IPO shareholders.

This makes private investments a no-brainer for universities looking for other ways to bring in capital that don’t involve hiking tuition, books, and housing fees…

In the last year, there’s been a huge appetite for fast-growing companies… and the returns have been massive:

  • In June 2021, AiHuiShou International listed on the NYSE. Pre-IPO investors saw 57,000% gains on IPO day. That’s enough to turn every $1,000 into $573,000.
  • In August 2021, QuantumScape listed on the NYSE. Pre-IPO investors saw 6,700% gains on IPO day. That’s enough to turn every $1,000 into $68,000.
  • In September 2021, On Holding AG listed on the NYSE. Pre-IPO investors saw 4,400% gains on IPO day. That’s enough to turn every $1,000 into $45,000.

And there’s a good chance this alternative asset class, traditionally reserved for uber-wealthy investors, is missing from your portfolio.

But that can change right now…

No Longer a Playground for the Rich

Private markets have always been a place where the rich get richer…

In the 1980s and ‘90s, all you had to do was buy a diversified portfolio of private tech stocks and hold them. When you cashed in, you’d buy 10-year bonds with an average yield of 9%… And you’d be set for life.

For example, if you bought private shares of Google in 1999, you could’ve sold those shares for 300x a year after the company went public in 2004. A $5,000 investment could have turned into $1.5 million.

Unfortunately, most of those opportunities were only available to wealthy investors and well-connected Silicon Valley insiders. Big VC firms sucked up most of the best deals.

However, rule changes by the Securities and Exchange Commission have opened the doors to this asset class for everyone… and 2021 was a record-breaking year for IPOs.

Last year, we saw 397 IPOs raise $142.4 billion. Per Renaissance Capital, known on Wall Street as the “IPO Experts,” it was the busiest year by deal count since 2000 and the biggest year for proceeds ever.

We expect 2022’s public listing explosion to be even bigger.

As you saw above, early investors in pre-IPO companies can see massive crypto-like gains when they go public…

But the problem with investing in private markets is that it can be tough to separate the winners from the duds… and following Wall Street’s lead, could see you playing catch-up for decades.

The Clock Is Ticking

One way you can get into pre-IPOs is with equity crowdfunding platforms.

For example, WeFunder, StartEngine, and Republic offer everyday investors the chance to participate in private company deals for, in many cases, as little as $100.

Regards,

Grant Wasylik
Analyst, Palm Beach Daily