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Weird Money

The fund managers for Ivy League endowments somehow managed to flop in this market

The reduced volatility of private equity comes with a cost.

11/12/24 2:52PM

Over the weekend, the Financial Times published an interesting piece on Ivy League endowment returns so far this year. Per the FT, through the 12-month period ending June 2024, six of the eight Ivies underperformed the higher-education average. And, in 2023, all of the Ivies returned below the higher-education average of 6.8%. For context, the S&P 500 was up 24% in 2023.

One reason for the Ivy woes? An overallocation to private equity. From the Financial Times:

“Top endowments have long used aggressive exposure to private investments in pursuit of excess returns they believe are out of reach through public markets. Now, as those investments have yet to pay off, some large endowments like Princeton have issued bonds to meet funding needs, according to the New Jersey Educational Facilities Authority…
Most Ivy League endowments had earmarked more than 30%, and in the case of Yale and Princeton at least 40%, of their assets to PE and VC by the first half of the year, according to Old Well Labs, a financial data provider.”

One reason that Ivy League schools have increasingly turned to private equity is that it offers lower volatility than public markets. Minimizing volatility is important for these endowments because they are responsible for funding a portion of their schools’ operating budgets each year. For example, in fiscal year 2024, Harvard’s endowment distributed $2.4 billion to cover 37% of the school’s operating budget. While the Ivies have underperformed over the last couple of years, that reduced volatility paid off in one year. In 2022, the S&P 500 was down 18.1%, but Harvard’s endowment only fell by 1.8%, and Yale’s endowment actually increased by 0.8%. When you have to make multibillion-dollar distributions each year, minimizing risk is far more important than maximizing returns, and private equity offers lower volatility.

However, the reduced volatility of private equity comes at a cost: illiquidity. There was an interesting phenomenon in 2022, where public markets sold off sharply but private-market valuations were less affected. While some private companies may have been more resilient, firms also sold far less of their portfolio companies in 2022 than the year before: exit volume was down 57% year over year through Q3 2022.

If a bucket of publicly traded fintech SaaS companies fell by 50%, you would think that, by correlation, the value of similar-sized privately held fintech SaaS companies would decline by 50%, too. But if the PE firms that own these similarly-sized fintech SaaS companies can say, “Our valuations have only declined by 15%,” and continue to hold those portfolio companies, then boom, outperformance. Of course, there probably aren’t any willing buyers at this valuation (hence the 57% decline in exit volume), but, at least on their own books, private-equity portfolios looked resilient.

However, because endowments have to distribute cash to help fund their universities’ budgets, valuations and “returns” don’t mean much if they don’t eventually yield exits that return cash, and distributions have been slow over the last three years. The result: Ivy League schools have had to issue nearly $3 billion in municipal debt so far through October 2024, up 650% from the year before, to help meet these cash needs.

Paper returns look good, but at the end of the day, an investment is only worth what someone else will pay for it. If you say your company is worth $1 billion, but no one else is willing to pay more than $700 million to acquire it, is it really worth $1 billion? Probably not, as endowments have figured out.

Max Knoblauch41m

Nintendo climbs for third day as China ramps up its memory production

Nintendo shares are climbing on Tuesday, marking the company’s third straight session of gains — something it hasn’t done since early March. The Mario maker’s US-listed ADRs were up about 4% in Tuesday morning trading.

The return of the Switch 2 game bundle appears to have stoked investor optimism in the company’s console sales, while China’s accelerating memory production plans could alleviate some of Nintendo’s pain from the “RAMpocalypse.” For the better part of a year, memory prices have surged as AI demand hoovers up compute power. That’s squeezed video game console makers — and the broader consumer electronics industry.

Tracking the performance of Nintendo ADRs against memory giant Micron helps put this move in perspective. Nintendo is a big memory consumer, and not in the front of the line in terms of securing supply. Micron, obviously, benefits from its offerings being in high demand.

Tuesday’s price action is just a drop in the bucket, and comes as part of a recent stretch where the stock market’s high-flyers are having their wings clipped while beaten-up laggards rally.

In its first-quarter results on Monday, Chinese DRAM producer CXMT said it’s ramping up production and issued bullish guidance. The company is planning an IPO later this year, and it could be China’s biggest of the year.

For Nintendo, more global memory production could see rising costs start to deflate, improving margins in a vital year for its new console.

Jon Keegan58m

Snowflake shares rise after BofA raises price target, predicts strong earnings next week

Snowflake shares jumped after Bank of America Securities analysts raised their price target for the cloud data warehousing company to $205 from $195, with a “buy” rating.

BofA analysts wrote that Snowflake will have a strong quarter because “the robust demand it was seeing heading into this year should continue unabated.” The report called the stock a “a share gainer in the attractive and growing AI business intelligence opportunity.”

Snowflake shares are down about 20% year to date. In November, shares hit a 52-week high of $280.67.

Helena Cheng2h

Standard Chartered to replace “lower-value human capital,” cutting jobs “in favor of the machines”

Standard Chartered is announcing a major “it’s not you, it’s me” corporate makeover with a 15% cut of its administrative roles (roughly 8,000 jobs) by 2030 in favor of automated systems.

“It is not cost-cutting, but it is replacing, in some cases, lower-value human capital with the financial capital and the investment capital that we are putting in,” said CEO Bill Winters.

Congratulations to Standard Chartered employees who survive this culling; obviously, your CEO thinks you’re at least medium-value human capital.

Defending the strategy at a press briefing in Hong Kong, Winters explicitly rejected framing the large layoffs as a standard budget-slashing initiative.

He noted that the bank does not view the transition as an unmitigated loss of staff, but rather “job role reductions in favor of the machines,” which will “accelerate as we go full-bore into AI.”

The operational downsizing aims to boost profitability and increase overall income per employee by 20% over the next two years.

The bank joins a long list of companies that have announced job cuts in concert with plans to lean more into AI. Per CNBC, the subsequent performance of these stocks varies significantly, with some up more than 40% and others down just as much, or worse.

Luke Kawa2h

Hyperliquid Strategies spikes on report that the SEC will soon greenlight an “innovation exemption” for tokenized stocks

Shares of Hyperliquid Strategies are soaring in early trading after Bloomberg reported that the Securities and Exchange Commission is slated to release an “innovation exemption” that formalizes rules around the trading of tokenized stocks.

In what Bloomberg dubbed a “surprise move,” the SEC is slated to permit tokenized stocks (crypto wrappers for traditional shares) even if the public companies don’t consent to their creation.

Hyperliquid Strategies is a digital asset treasury company that holds hype tokens and provides liquidity on the DeFi exchange Hyperliquid.

Tokenized securities offer faster settlement and expanded trading hours, though without the same market depth that typically prevails with traditional exchanges and with a higher potential for price fragmentation.

Per the report, which cites people familiar with the matter, these platforms would need to provide their third-party holders with voting rights and dividends in order to list these tokens. As such, the platforms would effectively be required to hold the underlying securities they’d be offering tokenized access to.

Helena Cheng3h

Home Depot reports Q1 sales beat, reaffirms full-year guidance

Home Depot reversed its initial gains following earnings after a spike in long-term bond yields overshadowed the retailer's solid Q1 results.

Key numbers:

Revenue of $41.77 billion (estimate: $41.50 billion).
Adjusted earnings per share of $3.43 (estimate: $3.42).
Comparable-store sales of 0.6% (estimate: 0.9%).

Comparable sales came in below forecasts, while the company reaffirmed its full-year guidance, expecting annual sales to grow between 2.5% and 4.5%.

“Our first quarter results were in line with our expectations,” said Ted Decker, chair, president, and CEO. “The underlying demand in our business was relatively similar to what we saw throughout fiscal 2025, despite greater consumer uncertainty and housing affordability pressure.”

While the company has served neighborhood handymen for decades, its recent growth is also partially charged by its finalized acquisition of Mingledorff’s, a premier wholesale HVAC distributor operating 42 commercial locations across the southeastern United States. Home Depot said the transaction gave it access to high-volume commercial mechanics and residential trade contractors, expanding its total addressable market to $1.2 trillion.

The company is also using machine learning to automate parts of commercial building work that have traditionally been manual. One example is its Material List Builder AI, which lets contractors upload architectural blueprints or dictate voice notes from a jobsite to generate materials lists.

Investors are continuing to track whether strategic pricing changes and distribution scale can help the business maintain its full-year gross margin target of 33.1%.