Private equity and venture capital are unlikely to be the primary drivers of institutional alpha over the next 35-40 years as they have been in the past.
The high valuation multiples paid in private equity during 2020-2021, often exceeding 20x EBITDA, were a sign of market froth and are likely to lead to poor future returns.
The power dynamic in venture capital has fundamentally inverted, with top entrepreneurs now holding leverage over VCs, which compresses investor returns.
The recent expansion of private equity access to retail investors will likely result in disappointment for many, due to high fee loads and mediocre net performance.
The historical success of the 'Yale Model' was contingent on a disciplined, contrarian investment philosophy and an early-mover advantage that is difficult to replicate in today's more efficient market.
Mid-1980s
The Yale Endowment, under David Swenson, establishes foundational relationships with top-tier VC firms like Sequoia and Kleiner Perkins, with private assets constituting only about 2% of the portfolio.
1987
Following the stock market crash, David Swenson insists on disciplined rebalancing by buying equities, a contrarian move that Sullivan highlights as a key moment for the endowment.
Early 1990s
Sullivan notes a shift in the LBO industry to using EBITDA instead of EBIT for valuations. The negative public perception following the RJR Nabisco LBO creates a favorable investment environment for Yale.
Late 1990s (Dot-com Bubble)
Observes extreme market froth as venture firms that managed $200M funds in 1995 were managing and rapidly deploying billion-dollar funds by 1999, leading to poor outcomes.
2020-2021
Identifies another period of market excess, stating that private equity firms were routinely paying unsustainable valuations of over 20 times EBITDA for quality businesses.
Present & Future
Articulates a bearish outlook on future private equity returns, citing a fundamental power shift to entrepreneurs in VC and predicting disappointment for new retail investors entering the asset class.
▶The 'Yale Model': A Product of Time and TemperamentApr 2026
Sullivan details the Yale Endowment's foundational strategy, emphasizing its early-mover advantage in private markets, a focus on operationally-focused managers, and disciplined, contrarian rebalancing under David Swenson. The model's success was also built on unique relationships, such as the one with Hillhouse Capital, which originated from a student internship.
The analysis suggests that the 'secret formula' of the Yale Model was highly dependent on a specific market context of information asymmetry and first-mover access, making its historical success incredibly difficult for other institutions to replicate today.
▶The Evolution and Froth of Private MarketsApr 2026
Sullivan chronicles the maturation of private equity and venture capital, highlighting key inflection points that often signaled market excess. He points to the shift from EBIT to EBITDA multiples in the 1990s as a way to justify higher prices and compares the dot-com era's billion-dollar funds to the 20x+ EBITDA multiples paid for companies in 2020-2021.
For Sullivan, shifts in industry norms and valuation metrics are critical leading indicators of market tops, suggesting that investors should be wary when the methods of financial justification become more creative.
▶Shifting Power Dynamics in Venture CapitalApr 2026
A key observation from Sullivan is the fundamental reversal of power in the venture capital ecosystem. He contrasts the past, where top firms could invest small amounts for large stakes (e.g., $3M for 30%), with the present, where those same firms must compete to invest large sums for minimal equity (e.g., $50M for 3%).
This power shift directly challenges the traditional venture capital return model, implying that future gains will be harder to come by for LPs as more value is captured by founders and early employees.
▶Skepticism on Future Private Equity ReturnsApr 2026
Sullivan expresses a strong conviction that the golden era for private equity and venture capital is over. He predicts these asset classes will struggle to be the primary source of alpha for institutions over the coming decades and warns that newly-admitted retail investors will likely be disappointed by net returns after fees.
Sullivan's forward-looking commentary serves as a cautionary note for asset allocators, suggesting that the strategies that drove outperformance for the last 40 years will not suffice for the next 40, necessitating a search for new alpha sources.