Princeton Slashes Endowment Return Expectations from 10.2% to 8%, Warns of $11 Billion Loss Over Decade

Princeton University has slashed the long-term return assumption on its $36 billion endowment from 10.2 percent to 8 percent, warning that heavy exposure to increasingly crowded private equity investments will cost the institution an estimated $11 billion in lost growth over the next decade and force budget reductions across the university.

President Christopher Eisgruber delivered the sobering assessment in his annual State of the University letter Monday, citing "changing market fundamentals" driven by excess capital chasing limited investment opportunities that will cause a persistent decline in long-term returns.

Even the reduced 8 percent assumption "might be considered aggressive," Eisgruber cautioned, acknowledging profound uncertainty about whether Princeton is being too pessimistic or, perhaps more alarmingly, too optimistic about future performance.

The $11 billion shortfall over the next decade exceeds the combined proceeds of Princeton's past two major fundraising campaigns, representing a financial blow that will fundamentally reshape the university's budget and strategic priorities during a period when federal funding cuts by the Trump administration are simultaneously squeezing resources.

Budget Cuts Already Underway

Princeton has already sought 5 to 7 percent spending cuts across the university over the past 12 months in anticipation of lower endowment returns, Eisgruber disclosed. Looking ahead, "the long-term decline in endowment return would require more targeted, and in some cases deeper, reductions over a multiyear period."

The president did not specify which programs, departments, or initiatives would face cuts, nor did he indicate whether staffing reductions might be necessary. However, the magnitude of the financial challenge—$11 billion in foregone growth—suggests that incremental adjustments will prove insufficient and that Princeton faces difficult decisions about its scope and ambitions.

For an institution that has relied heavily on endowment growth to fund academic excellence, financial aid, faculty recruitment, and facility investments, the recalibration represents a fundamental shift in financial planning that could reverberate for decades.

The Private Equity Problem: From Advantage to Albatross

Princeton's endowment challenges stem directly from an investment strategy that had been spectacularly successful for decades but now appears to have been pushed too far.

The Princeton endowment has benefited from an aggressive bet on private equity, which as of June 2025 accounted for more than two-fifths of its portfolio—an extraordinarily high allocation even among university endowments known for illiquid alternative investments.

Eisgruber explained that the approach worked because elite universities such as Princeton had "access to unusually attractive investment opportunities" in private equity that generated outsized returns. However, "those conditions had since changed as more investors entered the space," he acknowledged.

The democratization of private equity investing—with pension funds, sovereign wealth funds, family offices, and other institutional investors all piling into the asset class—has fundamentally altered the competitive landscape. What was once a relatively uncrowded space where sophisticated investors could identify mispriced opportunities has become intensely competitive, with too much capital chasing too few attractive deals.

"There is probably no way to hold a diversified portfolio and reach a double-digit return target over a long period of time," said Britt Harris, former chief investment officer of the University of Texas/Texas A&M Investment Management Company. "Princeton has just come down to what is normal."

Harris's comment carries particular weight given his experience managing one of the nation's largest public university endowments. His characterization of Princeton's adjustment as returning to "normal" suggests that the past two decades of exceptional returns were aberrational rather than sustainable.

The Performance Collapse

The magnitude of Princeton's performance deterioration is striking. The endowment achieved a record-high return of 47 percent in 2021, a spectacular result driven by surging valuations in public and private markets during the pandemic recovery.

However, returns in the years following 2021 were "among the worst that the university has had," Eisgruber said, marking the first time Princeton reported two consecutive years of negative performance.

This boom-bust pattern illustrates the volatility inherent in portfolios heavily weighted toward illiquid private assets. When markets surge, private equity valuations soar and endowments report exceptional gains. When markets correct or stagnate, those same illiquid positions become difficult to exit, locking in losses or opportunity costs.

The longer-term picture proves equally concerning. Princeton's 20-year rolling return dropped steadily from more than 14 percent in 2005 to less than 10 percent in 2025—a secular decline suggesting structural changes in investment opportunities rather than temporary cyclical weakness.

This two-decade trend reveals that even before the recent negative returns, Princeton's endowment performance had been eroding for years. The headline-grabbing 47 percent return in 2021 masked an underlying deterioration in fundamental investment conditions that the university's managers could not reverse through skill or access alone.

"An Overcrowded Parking Lot"

Harris offered a blunt assessment of what happened to university endowments and other institutional investors who rushed into private markets: "They ran to an overcrowded parking lot and nobody could get out."

The metaphor captures both the entry problem—too many investors competing for limited opportunities—and the exit problem that currently plagues private equity investors.

Higher interest rates have slowed exits in the short term by curbing initial public offerings and merger-and-acquisition activity, the traditional mechanisms through which private equity firms realize returns. Companies that might have gone public or been acquired in 2020-2021's low-rate environment are now waiting for better market conditions, leaving investors stuck holding positions longer than anticipated.

Meanwhile, an oversupply of capital has intensified competition for new deals, compressing returns over the longer run as investors pay higher prices for assets and accept worse terms to deploy capital.

Harris suggested university endowments could learn from Princeton's experience, particularly the danger of taking a successful strategy too far. "You took a good thing too far and now we have to reel it back in," he said.

The question for Princeton and peer institutions is whether "reeling it back in" is feasible when private equity positions are by definition illiquid and difficult to exit quickly. Universities cannot simply sell their private equity holdings the way they might dump underperforming public stocks; they are locked into investments until private equity firms orchestrate exits on their own timelines.

The Endowment Model Under Pressure

Princeton's difficulties underscore broader challenges facing the endowment investment model pioneered by Yale's David Swensen and adopted widely across higher education.

The "endowment model" emphasizes illiquid alternative investments—private equity, venture capital, hedge funds, real estate—on the theory that sophisticated institutions with long time horizons can accept illiquidity in exchange for higher returns unavailable in public markets.

For decades, this approach generated exceptional results for elite universities with access to top-tier private equity managers. Harvard, Yale, Stanford, Princeton, and their peers consistently outperformed traditional balanced portfolios by deploying endowment assets into alternatives.

However, the model's success attracted imitators. Universities large and small, plus pension funds and other institutions, rushed to adopt similar strategies. The resulting flood of capital into private markets eliminated the inefficiencies and mispricings that had enabled early adopters to generate alpha.

What worked when a few sophisticated players exploited market inefficiencies stops working when everyone employs the same strategy. The endowment model's democratization may have sown the seeds of its own obsolescence, at least in its most aggressive forms.

Implications for Higher Education

Princeton's endowment warning carries implications far beyond one Ivy League university's investment returns. It signals that the financial model supporting elite higher education faces structural challenges that budget discipline alone cannot solve.

Universities have relied on endowment growth to fund expanding missions without proportional tuition increases. Endowment income supports financial aid, faculty salaries, research infrastructure, and operating expenses that tuition and philanthropic contributions cannot cover.

If endowment returns persistently fall short of historical norms, universities face unpalatable choices: raise tuition faster (politically difficult and potentially counterproductive for access), increase fundraising (already aggressive at elite institutions), reduce spending (cutting programs, staff, or services), or accept slower mission expansion and potentially declining competitiveness.

For Princeton specifically, the challenges are compounded by federal funding cuts under the Trump administration. Eisgruber noted that Princeton's economic model "depends heavily on its endowment amid federal funding cuts."

Universities facing simultaneous pressures from declining endowment returns and federal funding reductions will struggle to maintain current operations, let alone pursue ambitious new initiatives. The result could be a period of retrenchment across higher education as institutions adjust to reduced financial capacity.

Contagion Concerns

If Princeton—with a $36 billion endowment, exceptional investment talent, and access to elite private equity managers—cannot sustain historical return levels, what does that imply for peer institutions with similar investment strategies?

Harvard ($53 billion endowment), Yale ($42 billion), Stanford ($37 billion), MIT ($24 billion), and the University of Pennsylvania ($21 billion) all employ endowment models with substantial private equity allocations. If market conditions have fundamentally changed in ways that compress returns regardless of manager skill, these institutions face similar challenges.

Indeed, several Ivy League endowments have reportedly been selling private equity stakes on secondary markets amid the buyout downturn, accepting discounts to realize liquidity rather than waiting indefinitely for exits. These distressed sales suggest widespread stress beyond Princeton.

The Financial Times reported that Ivy League endowments have been selling private equity stakes, a development that both confirms liquidity pressures and potentially creates opportunities for bargain-hunting investors willing to provide that liquidity at attractive prices.

Princeton's Intellectual Honesty

While Princeton's announcement delivers unwelcome news, the university deserves credit for intellectual honesty in acknowledging changed circumstances and adjusting expectations accordingly.

Many institutions cling to optimistic return assumptions long after evidence suggests those projections are unrealistic. Overly optimistic assumptions delay necessary adjustments, allowing problems to compound and making eventual corrections more painful.

Eisgruber's candid assessment—including his acknowledgment that even the reduced 8 percent assumption might prove "aggressive"—suggests Princeton is attempting to face reality rather than engage in wishful thinking.

"We might be too pessimistic, but it is also possible that we are being too optimistic," Eisgruber wrote, a remarkable statement for a university president to make about his institution's financial planning.

This intellectual honesty may prove strategically valuable if it enables Princeton to make difficult adjustments earlier and more gradually than competitors who delay reckoning with similar challenges.

What Happens Next

Princeton faces years of budget discipline as it adjusts operations to align with lower endowment growth. The "multiyear period" of "more targeted, and in some cases deeper" cuts Eisgruber referenced suggests a prolonged process of institutional right-sizing.

The university will need to identify which programs and initiatives are truly essential versus those that can be reduced or eliminated. These decisions involve not just financial calculations but also judgments about institutional mission and competitive positioning.

Faculty and staff will likely face hiring freezes, salary moderation, and potentially positions eliminated through attrition if not outright layoffs. Students may encounter larger classes, reduced course offerings, or scaled-back services as the university operates more leanly.

The endowment's investment team faces the challenging task of rebalancing the portfolio—potentially reducing private equity exposure despite illiquidity constraints—while somehow achieving the revised 8 percent return target in an environment that Eisgruber described as structurally more challenging.

For the broader higher education sector, Princeton's announcement serves as a warning that the financial model supporting elite universities may require fundamental rethinking. The decades of extraordinary endowment growth that enabled ambitious expansion and generous financial aid may be ending, forcing institutions to reconsider priorities and accept constraints on growth.

As Harris noted, Princeton discovered that you can take a good thing too far. The question now is whether other universities will learn from Princeton's experience or repeat the mistake themselves.