UK universities have been slow to adopt private debt as a potential investment tool for their endowments. That’s despite private debt providers noting that these investors would be well suited to the asset class.
Of the country’s top 10 university endowments by assets under management, only one confirmed – via documents on its website – an allocation to private debt. The University of Edinburgh lists M&G’s Illiquid Credit Opportunities Fund II as one of its investments. The university’s representatives declined to comment when asked for further comment by PDI.
Other universities approached for comment on their appetite for private debt told PDI they either had no allocation to the asset class or declined to comment on specific investments within their respective endowments.
In theory, however, the UK’s university endowments represent an attractive investor set for private debt funds. “[An endowment] is trying to generate an attractive income to pursue activities at the university,” Jo Waldron, director for alternative credit at M&G Investments, tells PDI.
Like other institutional investors, endowments are long-term investors and can hold assets until maturity. They are also looking for income and yield, notes Philip Robson, president of Canada-based fund manager Integrated Asset Management’s private debt group. “Anybody who is investing in these types of vehicles is looking for the same kind of characteristics,” he says.
Where endowments differ, however, is in their need to preserve capital almost indefinitely. Unlike a pension fund, notes Waldron, endowments aren’t managing a pool of assets which is being paid out regularly.
“That preservation of capital is the crux of the difference between an endowment and a pension fund,” she says. “You want to generate income without putting that capital at risk.”
Additionally, tackling inflation is another hurdle endowments look to overcome with their asset allocations. “Of course, the cost of everything they’re funding only goes in one direction,” says Robson.
According to research conducted by UK-based educational charity the Sutton Trust, UK university endowments have not grown at the same rate as US endowments over the past decade.
“There’s a different culture of giving in the US,” Conor Ryan, head of research for the charity tells PDI. He says differing tax laws make donations to an educational endowment fund more of a draw for larger donors.
In order for UK endowments to fundraise more effectively, they should make it clear how the money raised is going to be used, Ryan says. “It’s important that the purpose of the endowment is made public,” he notes.
The success of fundraising within UK university endowments matters because it’s unlikely these investors will be able to put significant money towards new types of investments – including private debt.
According to PDI data, several US universities have allocations of more than $100 million to private debt. Only two UK universities – the University of Manchester and the University of London – have investments in the asset class, according to PDI’s database. These investments are, however, through the institutions’ superannuation schemes rather than their endowments. The investments are also significantly smaller.
Large US-based university endowments are likely to have cash in hand to allocate to a private debt strategy. Growth in these funds means private debt managers can approach investors with more latitude to make allocations. “All of a sudden they’ve got a bit more money to do things with,” says Robson.
UK endowments are significantly smaller and therefore might not have the same bandwidth to make allocations to new investment strategies. “They are miniscule compared to the Havards and Yales of this world,” Waldron tells PDI.
Allocating to alternative asset classes isn’t new to endowments. Most have explored alternatives in some capacity, with real estate investments seeming to be a popular choice for yield-producing assets.
Such allocations should mean endowments are already comfortable with some of the quirks of private debt, notably its liquidity profile. “They’ve got a lot of money in real estate, they’ve got bits and pieces in private equity,” says Waldron. “These are strategies doing the same thing in terms of liquidity.”
In saying this, there is an important distinction which needs to be made between an endowment’s real estate holdings and any future allocation to alternatives like private debt. In several instances, real estate investments made by endowments represent legacy holdings – ownership of an asset that may stretch back several decades, if not several centuries.
“From a tradition perspective you’re starting in a different place,” says Waldron. “You shouldn’t look at it as a current investment.”
According to Robson, it might not even be appropriate to assess real estate holdings in endowments as investments at all. “They tend to separate a bucket of assets from a bucket of investments,” he notes.
The legacy nature of real estate holdings in endowments means it’s unlikely funds will be swapping this alternative asset class in favour of a private debt allocation. More likely, an endowment would allocate away from fixed-income investments – searching for additional yield – or away from equities, in hope of preserving capital more securely.
How endowments are coming to allocation decisions is also something fund managers should be assessing. According to Robson, endowments often work with investment consultants which act as gatekeepers to any potential investment. They may also, however, have sophisticated in-house investment teams already managing a university’s pension fund or similar institutional investment.