Endowment Secondaries: Misunderstood Motives
June 14, 2025 by [email protected]
Recent press coverage of secondary sales in endowment portfolios misses the mark. Yale’s activity is likely driven by portfolio repositioning and tax arbitrage, not liquidity. Each time a CIO takes the stage, as Matt Mendelsohn did in 2021, the new leader refreshes the portfolio in their image (See The Investment Office Playbook). For some institutions, the slower pace of private distributions has led to private allocations exceeding targets, and secondaries serve as a mechanism to rebalance.
Taxes are the most important factor and are largely overlooked by the media. Here’s the math: under the proposed tax framework, legacy assets do not benefit from a step-up in basis since the initial endowment tax took hold eight years ago. Assume Yale’s private equity portfolio earned the Cambridge Associates US Private Equity Index return of 13.3% annually over those eight years. A $100 investment would have grown to $270. The resulting $170 would be subject to a 21% tax upon realization, representing a $35 tax liability or approximately 13% of the current portfolio value.
If Yale can sell in the secondary market at a 10% discount with a 1.4% tax, it achieves a better outcome than paying taxes at a higher rate upon realization. It also provides capital to refresh the portfolio and dry powder to redeploy into high-conviction opportunities. A triple win!
If you were Yale, how much of this would you try to do? How about as much as possible to test what the market will bear, say $6 billion?
Among the endowment CIOs I’ve spoken with, not one is pursuing secondaries out of necessity. This isn’t a reprise of 2008. Today’s activity is driven by thoughtful portfolio construction and tax planning, not distress or forced selling.
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