Why Notre Dame invests in private equity

The University of Notre Dame's endowment provides nearly $100 million in financial aid annually to help students pay for college. Less than a generation ago, in 1990, the number was around $5 million. We've been able to keep pace with the rapidly growing financial needs of our students, in part, by making smart investments in private equity.

Thousands of students at Notre Dame are able to earn a college degree because of the returns that private equity provides our endowment. But this fact is seemingly missing from the current debate about the industry. It shouldn't be. Private equity is instrumental in helping university endowments and other foundations and charitable enterprises carry out their missions.

Notre Dame first invested in private equity in 1988, when our initial investment allocation was set at 5%. Today we look to invest more than a quarter of our endowment in private equity, for a simple reason: private equity provides our university with superior risk-adjusted returns. Recent analysis shows that private equity outperformed the Standard & Poor's 500 stock index over the one-, five- and 10-year time horizons, ended Dec. 31. Notre Dame's private equity investments have generated more than $2 billion of incremental return to the endowment, providing the university with the needed resources to fund capital improvements, pay staff salaries, and increase financial aid to students. No other asset class has benefited the university and its students as much as private equity.

This is critical to the institution for reasons beyond the financial aid it allows us to provide our students. The endowment helps Notre Dame meet its operating budget, and spending from the endowment is up dramatically as a result. Since 1990, spending from the endowment has doubled and now accounts for nearly 30% of the university's operating budget. None of this would have been possible without returns from our private equity investments.

One of the features we prize most in our partnerships with private equity firms is the opportunities they provide us to invest side-by-side with hands-on partners that create value through operational improvement strategies like developing new products, expanding distribution channels and increasing process efficiencies. The Notre Dame private equity portfolio contains more than 5,000 active portfolio companies. These companies help the economy grow and drive the economic engine that provides employment opportunities for our graduates and other Americans.

Notre Dame's 24-year partnership with private equity has been a resounding success. By investing in private equity, Notre Dame has provided capital to help start, grow and improve thousands of companies. As a result, Notre Dame has been fortunate to participate in the creation of valuable new jobs and technologies for society, while also generating financial aid for thousands of deserving young people and putting the university in a more secure financial position.

It is safe to say that Notre Dame would not be the university it is today without our partnership with private equity.

Scott Malpass is vice president and chief investment officer of the University of Notre Dame, Notre Dame, Ind. During his tenure as CIO, beginning in 1988, the Notre Dame endowment grew to $7.5 billion from $425 million.

This article originally appeared in the August 20, 2012 print issue as, "Why Notre Dame invests in private equity".