July 9 (Bloomberg) -- The University of Virginia may double investments in private-equity, real estate and commodities as U.S. colleges are squeezed by commitments to fund managers made before financial markets collapsed.

Virginia’s holdings will increase to about $2 billion in the next six years because the Charlottesville school is contractually obligated to make the investments, Christopher Brightman, chief executive officer of the University of Virginia Investment Management Co., said in an e-mail. Losses on so-called alternative assets drove a 22 percent decline in the university’s $4 billion in funds from July 2008 through May.

“The increase that we project in the amount invested in private funds is largely a function of present uncalled commitments and our expectation for sparse distributions from private funds over the next several years,” Brightman said. “Until a more normal pace of distributions resumes, we will make relatively few new commitments,” he said.

Colleges and universities across the U.S. have little choice but to make good on agreements with fund managers to buy more of the same assets that fueled record losses in the fiscal year ended June 30. With an increasing chunk of their endowments in hard-to-sell holdings, they may see a repeat of the cash crunch that forced some schools to fire employees, slow building projects and sell bonds.

“We’re going to be more illiquid than we planned on being,” said Jeff Pippin, who manages about $465 million at Pepperdine University in Malibu, California. The school will make fewer fresh private-equity purchases “until we get a clear sense of where things are going.”

Michigan, Yale

Unfunded capital commitments range from 20 percent to 40 percent of the wealthiest college funds with more than $1 billion in assets, according to John Nelson, an analyst at Moody’s Investors Service in New York. Institutions such as endowments and pensions funds typically agree upfront to invest a set amount with asset managers over a period of years. Not all commitments are called by managers.

Most schools won’t disclose their unfunded pledges for the fiscal year ended June 30 until at least September. For the prior year, the University of Michigan’s $3.34 billion in uncalled commitments was the highest among the 10 wealthiest U.S. colleges, making up 44 percent of its $7.6 billion endowment. Yale University was next at $8.7 billion, or 38 percent of its $22.9 billion fund, followed by Princeton University at $6.1 billion, or 37 percent of the $16.3 billion fund.

Increasing Liquidity

Unfunded pledges make up about 20 percent of Pepperdine’s endowment, according to Pippin. It’s taken steps to raise liquidity, including doubling easier-to-sell fixed-income securities to 20 percent of assets, and increasing cash to 5 percent of the fund from zero in the past year. Private equity makes up about 20 percent of the endowment, more than the school’s long-term target of 15 percent, he said.

“For several years, we were unable to reach our target because you’re chasing it when markets are going up,” said Pippin, who estimates the fund will be down 22 percent for the year ending July 31.

U.S. endowments fell 24 percent in the last six months of 2008, according to Commonfund Institute in Wilton, Connecticut. The loss for the fiscal year ended June 30 probably will be the biggest since 1974, said the researcher, which is affiliated with Commonfund, a manager of about $24 billion for nonprofit institutions.

Yale’s David Swensen, the top-ranked college endowment manager in the past decade, boosted long-term returns by cutting holdings of stocks and bonds and buying more real estate, private equity and hedge funds, a strategy that has been copied by schools across the country. His rationale is that the best alternative-asset managers can producer better returns than the best traditional stock and bond firms.

Questioning Yale Model

“The Yale model has been quite successful for a long period,” said Jason Gull, a partner at Adams Street Partners LLC in Chicago, which advises clients on buyout investments. “Many people are questioning whether that model still works the same way that it used to.”

Endowments at U.S. and Canadian schools gained an average of 6.5 percent annually in the decade ended June 30, 2008, according to the Washington-based National Association of College and University Business Officers. Yale, based in New Haven, Connecticut, led the group with a 16.3 percent average annual return.

Endowments increased their allocations to alternative investments to 51 percent as of Dec. 31 from 46 percent six months earlier, according to a March survey released by Commonfund Institute.

Swensen had a “huge influence” on the University of Virginia’s endowment, said Henry Kaelber, the school’s chief financial officer from 1997 to 2003. Swensen’s book “Pioneering Portfolio Management” was recommended reading, said Kaelber, who is partly retired and manages less than $10 million at Elf Capital Management LLC in Charlottesville.

Cash on Hand

Brightman, 47, who joined the endowment in December 2004, said he has “only skimmed” the book. He said liquidity isn’t a problem for Virginia, which has $2 billion in public equities and other assets than can be “readily sold.” The fund also holds $400 million in U.S. Treasuries and about $200 million in cash, he said.

The school, founded by Thomas Jefferson in 1819, has deferred salary increases and cut spending as investment losses mounted. Unfunded commitments to private equity, real estate and resources managers made up $1.34 billion, or 34 percent, of Virginia’s fund as of May.

To contact the reporter on this story: Gillian Wee in New York at gwee3@bloomberg.net;

Last Updated: July 9, 2009 00:01 EDT