THE UNIVERSITY'S POOLED ENDOWMENT FUND returned 43.7 percent for the year ending June 30, 2000 and 24.8 percent for the past three years, placing the fund in the top-quartile of college and university endowment funds. Such performance will result in a larger distribution of income to University departments over the coming year, growing from $56 million in fiscal 2000 to $73 million in fiscal 2001. The endowment's tremendous performance is largely attributable to the portion of the fund invested in private equity. While it is not unusual for the larger university endowments to have some commitment to this asset class, U.Va. and several other endowments distinguished themselves by the size of this commitment. As of June 30, 2000, the endowment had a 32 percent allocation to private equity.

How did the University find itself in this position? The endowment has had an unconventionally high commitment to equities of 75 percent since 1974. By 1999, the allocation to equities was raised to 80 percent, but the commitment to the long-only domestic equity market had shrunk precipitously over the intervening twenty-five years as international equities, hedge funds and private equity and real estate were added to the mix. The 100 percent commitment to the traditional markets (domestic stocks and bonds) in 1974 has now fallen to 40 percent.

Endowments, having a long horizon and a predictable and fairly low spending level, are particularly well positioned to take advantage of investments in private equity. These markets tend to be less efficient and carry a premium return for their inherent illiquidity. In addition, information in this arena tends to be less available, transactions are less frequent, and pricing is less efficient. Returns are more dependent upon a manager's experience and judgment, and historically there has been a wide dispersion of returns among managers with seemingly similar styles. At $1.8 billion, the endowment's moderate size coupled with U.Va.'s reputation allows for entry into some of the best funds.

U.Va.'s investment in private equity began in 1988 with $1.3 million invested in five funds. At that time, the focus was on seed, start-up and early-stage venture, as the board felt that this area offered the most potential for return given the risk entailed. Over the past decade, we have continued to add premier partnership groups to our fund and have continued to fund those with whom we have a long-term relationship. In addition to the venture funds, we have added some traditional, later stage private equity in cases where we believed that the manager could add value to the transaction for sources other than financial leveraging. Currently, we are focusing on European funds, which are participating in the consolidation process, and cross-border transactions that are beginning to occur throughout Western Europe.