Consequences of Unfunded Capital Commitments: Evidence from University Endowments
Presented at the 2023 Mitsui Finance Symposium
41 Pages Posted: 19 Sep 2024
Date Written: February 24, 2023
Abstract
Asset owners globally have a $4 trillion liability due to their commitment to private capital funds. Using hand-collected data on US university endowments, we show that these unfunded commitments are negatively correlated with cash holdings and positively correlated with lines of credit. Hedging these unfunded commitments with cash and credit lines has real consequences. Hedged endowments achieved higher returns than unhedged ones during the Great Financial Crisis and subsequently spent more on faculty salaries and scholarships, leading to higher university rankings. However, in normal times, hedged endowments experienced lower returns. These findings emphasize the role of endowment liquidity management on university operations.
Keywords: Capital commitment, private equity, commitment risk, liquidity premium
JEL Classification: G11, G12, G23, G32, G40
Suggested Citation: Suggested Citation