Investing in private equity has long represented a lucrative opportunity for universities to grow their endowments. However, these often-risky market moves have recently come under the scrutiny of Moody’s Investors Service. In a recent report, Moody’s has noted that private equity is inherently less liquid than public equity, a reality that nobody denies. However, the interconnection between this lack of liquidity and the overall credit risk has not been clearly defined.
Financial expert Aaron Brown, in an article recently published by Bloomberg Law, argues that universities should not face punitive measures for speculative investments in private equity. You can read Aaron’s full arguments and views here.
Private equity, in theory, offers larger return rates than more traditional investment avenues, such as public equities. However, without immediate and regular cash inflows like dividends or bond interest – and challenged by the inaccessibility of invested capital due to investment lock-up periods – these investments can pose significant risks.
Moody’s warning to universities about the potential pitfalls of private equity investments seems to echo an underlying concern about the systemic risk these could pose – particularly in situations of sudden financial turbulence or high volatility. Despite this, the report is yet to elucidate on how such illiquidity may translate into credit risk.
In the face of these concerns, universities must reassess their asset management strategies, taking these potential risks into account while they continue to seek solid returns on their endowments.