How are endowments thinking about private markets, illiquidity, and the denominator effect?

The "denominator effect" has emerged as one of the most significant issues facing private markets, creating widespread over-allocation problems for endowments and other limited partners (LPs) [1, 2, 3]. This mechanical over-allocation, which occurs when public market portfolios decline in value while private asset valuations remain static, has collided with general partners (GPs) raising ever-larger funds, creating a looming industry shakeout [3, 8]. The immediate consequence for LPs is a severe liquidity crisis, characterized by a massive problem with low Distributions to Paid-In Capital (DPI) [6, 12]. This has stalled the traditional capital recycling engine, resulting in an estimated **$200 billion** in net negative cash flow for LPs since 2022 and forcing them to re-evaluate pacing strategies and become more selective with new commitments . The strained environment is expected to fuel a flight to quality managers and may push GPs to seek capital from new sources, such as the retail investor market [5, 16].

Despite these near-term challenges, the strategic imperative for private market allocations remains strong, driven primarily by the search for diversification away from increasingly concentrated public equity markets [4, 10]. The widespread adoption of the "Yale Model," which pioneered significant allocations to illiquid alternatives, has shifted the conversation from *if* endowments should invest in private equity to *how much* [3, 7, 28]. Allocation targets and current exposures vary, reflecting different institutional philosophies. Princeton's endowment (Princo), for instance, has a long-term policy target of **25%** to private equity [14, 19], while Washington University in St. Louis reported being overweight at roughly 45% of its portfolio . These figures are consistent with the broader range of 20-50% for sophisticated institutional investors [11, 27], and have been the top-performing asset class for some, like the Stanford Management Company .

In response to the current liquidity squeeze and concerns about future returns, endowments are adopting more dynamic portfolio management tactics and, in some cases, challenging the high-allocation consensus [7, 13]. Allocators are actively reducing annual commitment budgets, extending assumed fund lives in their financial models, and strategically using the secondary market to manage exposures . A notable counter-strategy is being pursued by Virginia Commonwealth University's endowment, which intentionally limits its private market exposure to **20-25%** to preserve liquidity [9, 18]. This approach is designed to retain the ability to act counter-cyclically during market dislocations, a strategic tool that some believe has been lost by endowments that are heavily over-allocated to illiquid assets [18, 26]. This caution is amplified by skepticism about the ability of multi-billion dollar mega-funds to generate meaningful returns and a belief that the private equity return premium has shrunk in a crowded market [24, 29].