7 Pages Posted: 28 Oct 2011 Last revised: 14 Nov 2011
Date Written: September 2011
The recent decade has seen the emergence of the 'Yale model' of portfolio management. Most of it rests on one fact: by having an aggressive allocation to private equity, Yale grew its endowment significantly. A key figure cited as supporting evidence is that the private equity return of Yale since the inception of their PE program is a staggering 30.4%. This paper points out that this figure is a since-inception-IRR. Even though since-inception-IRRs are recommended by the GIPS standards, they can be dramatically misleading. Presenting Yale as an investment model on such a basis is therefore probably premature. To illustrate, I show that an investor with a rather 'average' track record in venture capital could display a 30% return over a long horizon and that this number would hardly change in any year from 2000 to 2010, irrespective of the increase in capital allocation, which is similar to what is seen from the annual reports of Yale Endowment.
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