Working Paper | HBS Working Paper Series | 2018
Private Equity, Jobs, and Productivity: Reply to Ayash and Rastad
Steven J. Davis, John Haltiwanger, Kyle Handley, Ron S. Jarmin, Josh Lerner and Javier Miranda
Keywords: Private Equity; Leveraged Buyouts; Jobs and Positions; Performance Productivity;
Citation:Davis, Steven J., John Haltiwanger, Kyle Handley, Ron S. Jarmin, Josh Lerner, and Javier Miranda. "Private Equity, Jobs, and Productivity: Reply to Ayash and Rastad." Harvard Business School Working Paper, No. 18-074, January 2018. View Details
Over the past 30 years, Yale dramatically reduced the Endowment's dependence on domestic marketable securities by reallocating assets to nontraditional asset classes. In 1985, over four-fifths of the Endowment was committed to U.S. stocks, bonds, and cash. Today, domestic marketable securities account for approximately one-tenth of the portfolio, while foreign equity, private equity, absolute return strategies, and real assets represent nearly nine-tenths of the Endowment.
The heavy allocation to non-traditional asset classes stems from their return potential and diversifying power. Today's actual and target portfolios have significantly higher expected returns and lower volatility than the 1985 portfolio. Alternative assets, by their very nature, tend to be less efficiently priced than traditional marketable securities, providing an opportunity to exploit market inefficiencies through active management. The Endowment's long time horizon is well suited to exploiting illiquid, less efficient markets such as venture capital, leveraged buyouts, oil and gas, timber, and real estate.
Supporting the University
The Endowment spending policy, which allocates Endowment earnings to operations, balances the competing objectives of (1) supporting today’s scholars with annual spending distributions and (2) maintaining that support for generations to come. The spending policy manages the trade-off between these two objectives by using a long-term spending rate target combined with a smoothing rule, which adjusts spending in any given year gradually in response to changes in Endowment market value.
Using the metrics of stable operating budget support and purchasing power preservation, simulations of Endowment performance demonstrated substantial improvement over the past thirty years. As Yale improved diversification by allocating more of the Endowment to the alternative asset classes of absolute return, private equity, and real assets, risks plummeted for both spending volatility and purchasing power degradation.
In 1985, when alternative asset classes accounted for only 12 percent of the Endowment, Yale faced a 21 percent chance of a disruptive spending drop, in which real spending drops by 10 percent over two years, and a 36 percent chance of purchasing power impairment, in which real Endowment values fall by 50 percent over fifty years. By 2016, when absolute return, private equity, and real assets accounted for approximately 74 percent of the Endowment, disruptive spending drop risk fell to 8 percent and purchasing power impairment risk declined to 10 percent.