Harvard endowment is down $8B

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<p>Harvard</a> Endowment Down $8B, Further Losses Expected | Xconomy</p>

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Harvard University’s endowment, the largest in higher education and historically a major investor in venture capital funds, has dropped a scary 22 percent, or $8 billion, from its $36.9 billion value on June 30, the Harvard Crimson student newspaper reports.</p>

<p>The impact of the big decline is already being felt. The Crimson reports that university departments have already instituted hiring freezes, and president Drew H. Faust says that departments should reevaluate hiring, staff levels, and compensation. What’s more, Harvard officials expect the school’s endowment to shrink by as much as 30 percent in the current fiscal year ending June 30, 2009.</p>

<p>The decline in Harvard’s endowment, which itself is bigger than most school’s total endowments, is no doubt a harbinger of what’s going on at other universities. Besides the impact on universities themselves, the drop in value also spells more bad news for the innovation community, including VCs on the hunt for investors to raise capital for funds: many venture funds have received significant backing in the past from major university endowments at Harvard, Duke University, and the like. Harvard is already looking to shed $1.5 billion in private equity assets at cut rates to balance its portfolio, according to published reports like this Bloomberg News article

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<p>:eek:</p>

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<p>They did much better than the market when times were good, and they are still beating the market aren't they? I'm not too worried about Harvard.</p>

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<p>I'd be thrilled in my investments were only down 22%. </p>

<p>Whine, whine.....</p>

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<p>They are down a lot more than 22 percent. That $1.5 billion in private equity they tried to sell? What's that worth? The going bid on the secondary market was 50 cents on the dollar before Harvard tried to dump that portion of the $4 billion they hold in private equity. A lot of these investments are worthless right now. No buyers. That's why everyone is being cagey about there endowment values.</p>

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<p>Before the recent markdown, Harvard was the wealthiest permanent private institution in the history of the world. (I put the Catholic Church in a different category, and the Gates Foundation is intended to be ephemeral.) After all the losses, it is still the wealthiest permanent private organization in the history of the world. Just looking at the value of its endowment severely understates its wealth, since the land and buildings it occupies, and all of its IP (including, of course, its brand) are not taken into account.</p>

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<p>Yup, the pain is much less when you still have over $25 Billion or so. It's all relative. Some areas might have to cutback a little but really, not that much. Some luxuries might be harder to justify. No tag sales for Harvard yet. U Washinton's or Wisconsin's loss of $500 Million will have greater impact on students.</p>

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<p>^^^ interesteddad makes a good point. It's easy to measure losses in publicly traded equities because there's still a market in them. Some of these other holdings in endowment investment portfolios are harder to value because there's just no market for them right now. Technically you could say they're worthless if no one wants to buy them and you're using "mark-to-market" accounting. In principle, though, you might be able to move them at a few cents on the dollar---but no one wants to lock in those losses. But they may not show up as losses at all until they actually do sell and the endowment realizes the loss.</p>

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<p>Or they'll wind up not being losses at all. The fact that a private equity investment is illiquid now doesn't make it worthless. They may not get the 30% IRR and 5-year exit they hoped for, and that will be a terrible disappointment to everyone, but companies with successful businesses will have real value sometime in the next decade, and Harvard can afford to wait.</p>

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<p>Most of the private equity deals done in the last 3 years are going to end up in the trash heep. They are terrible deals.</p>

<p>Harvard wants to get out of their private equity deals because they aren't fully funded. Harvard owes more money. Harvard doesn't want to come up with more money when the capital calls are made.</p>

<p>Harvard will be ok. :)</p>

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<p>Bloomberg.com:</a> Exclusive</p>

<p>"Crippled financial firms such as American International Group Inc. and bankrupt Lehman Brothers Holdings Inc. are joining strapped endowments such as the ones at Columbia University in New York and Duke University in Durham, North Carolina, in trying to sell private-equity stakes. A deepening global recession that is crimping the value of buyout firms’ holdings is forcing further price cuts in a market where buyers already are scarce. </p>

<p>“There’s a huge supply-demand imbalance,” said David De Weese, a general partner at Paul Capital Partners in New York, which manages $6.6 billion. As much as 10 percent of the world’s $1.2 trillion of private-equity interests may change hands next year in the so-called secondary market, up from an average turnover of about 1 percent, De Weese said. </p>

<p>Harvard’s Holdings </p>

<p>Officials at Harvard are in talks to sell $1.5 billion of limited-partnership holdings in leveraged buyout funds, including one run by Boston-based Bain Capital LLC, according to a person briefed on the situation. Harvard and other endowments have suffered lower returns this year and face further writedowns on their private-equity stakes when the funds report their third- quarter valuations. </p>

<p>“It’s fair to assume these stakes will be revalued to mirror the publicly traded proxies,” said Steven Kaplan, a professor of finance at the University of Chicago Graduate School of Business who studies private equity. “Many endowments overcommitted to private equity, believing the drawdowns would be slower and payouts faster.” </p>

<p>Shares of KKR Private Equity Investors LP, which invests in KKR’s funds and trades on Euronext Amsterdam, lost about 25 percent of their value during the third quarter. Blackstone shares lost about 13 percent of their value during that period. </p>

<p>KKR, Terra Firma </p>

<p>The University of Virginia in Charlottesville said in a statement posted on its Web site that it may sell some of the $1.6 billion it has invested in buyout funds, noting that proceeds “may be far below face value.” </p>

<p>“I don’t know of any institution that’s not looking at its portfolio and saying, ‘What can we do?’” said Frank Morgan, a partner at Coller Capital Ltd., a London-based firm that invests in buyout and venture capital funds. </p>

<p>One financial institution recently held discussions about selling more than $100 million in private-equity stakes in a fund run by New York-based KKR at a discount of about 50 percent, a person briefed on the talks said. A sale hasn’t yet been completed. A $50 million investment in a fund run by Terra Firma, the London-based LBO firm led by Guy Hands, is also for sale, with bids implying a discount of about 50 percent, said a person involved in the process."</p>

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<p>
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Technically you could say they're worthless if no one wants to buy them and you're using "mark-to-market" accounting.

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<p>That's why there's such a tap dance going on. I think they are probably required by current accounting standards to use mark-to-market accounting. That's why nobody wants to talk about these investments that might be literally worthless today.</p>

<p>Here's the other problem. The big endowments are wagging the dog. They can't manuever without triggering firesales in the market. Harvard can't quietly sell off $1.5 billion of private equity. They are stuck with it and stuck with the cash calls. Think about how shocking it is that Harvard is now forced to borrow because they need the cash. Stunning.</p>

<p>We are talking serious coin here. Williams, with an endowment worth about $1.3 billion now, has cash commitments to private equity and similar funds of $268 million. Figure Harvard, with an endowment 20 times larger and a more aggressive investment strategy, must be on the hook for at least $5 billion in cash commitments. Easy to see why they were trying to find a fish to buy $1.5 billion and, failing that, why they are having to borrow to raise cash. They probably don't even have $5 billion in US stocks to sell off and can you imagine what the market would do if they tried to dump that much to raise cash?</p>

<p>It probably won't be long before these colleges start telling Bain Capital, "forget it, we aren't ponying up any more cash" and then the private equity funds will crash and burn. Some of the funds are probably nothing but glorified pyramid schemes to begin with, relying on the constant infusion of new cash.</p>

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<p>"We are talking serious coin here. Williams, with an endowment worth about $1.3 billion now, has cash commitments to private equity and similar funds of $268 million. Figure Harvard, with an endowment 20 times larger and a more aggressive investment strategy, must be on the hook for at least $5 billion in cash commitments. Easy to see why they were trying to find a fish to buy $1.5 billion and, failing that, why they are having to borrow to raise cash. They probably don't even have $5 billion in US stocks to sell off and can you imagine what the market would do if they tried to dump that much to raise cash?"</p>

<p>Ugly numbers.</p>

<p>"It probably won't be long before these colleges start telling Bain Capital, "forget it, we aren't ponying up any more cash" and then the private equity funds will crash and burn."</p>

<p>I have a couple of friends in the Private Equity business, but, because I'm pretty sure they won't read this.... :) </p>

<p>Private equity businesses polish up toads and sell them like princes.</p>

<p>They buy crappy companies, load them with debt, fire a bunch of employees, and then resell the companies to suckers.</p>

<p>The guys I know in the business are pretty smart guys and work hard, but how much intelligence does it take to leverage conpanies to the max and then hope the economy will bail the companies out, so the PE companies can get out profitably.</p>

<p>John Snow and Dan Quayle's company, Cerberus, bought Mervyn's, and stripped Mervyn's of it's assets. Then Cerberus took it's profit out of Mervyn's and now Mervyn's is broke.</p>

<p>And Chrysler and GMAC....</p>

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<p>I think it's a little harsh to say that all the private equity funds are glorified pyramid schemes. They don't actually sell to each other that much. Maybe in the macro sense, in which all American assets, not just real estate, have been inflated to handle the huge capital inflows needed to finance our trade deficits.</p>

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<p>Maybe, a teeny, tiny bit harsh. :)</p>

<p>Just to clarify, I didn't say PE firms sell companies to each other.</p>

<p>Venture capital companies are going to be interesting too. The last 8 years haven't been that great for that industry. Practically made nothing. The last 10 years have been great because they include the years 1999 and 2000.</p>

<p>When those years drop off the 10 year returns, as they will in a couple of years, the 10 year returns aren't going to look too good. I wonder how much money that industry will attract in the future.</p>

<p>That's a more important business.</p>

<p>I wonder how much schools invest their endowments in venture capital. I haven't heard too much about that.</p>

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<p>I think that Wall Street can stand up and take a little "harshness". Actually, I think the entire faculty of the Harvard Business School should resign in disgrace. What have they been teaching?</p>

<p>Replace 'em with cheap adjuncts and Harvard could probably save enough to cover the next cash call from Bain.</p>

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<p>College</a> Endowments Deserting Venture Capital - BusinessWeek</p>

<p>Beyond</a> the Ivied Halls, Endowments Suffer - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times</p>

<p>"Some schools do not want to have to come up with the money that they have promised these alternative funds. Partly that is because their endowments have shrunk with the market. They also are not getting the payouts from earlier investments.</p>

<p>Historically, private equity and venture capital funds returned money to investors as deals matured even as the funds made “capital calls” for new investments. In that way, the demands for additional cash were muted. But payouts are shriveling this year, and will be smaller than expected next year.</p>

<p>Some endowments became very heavily weighted in investments that are not publicly traded. The University of Virginia, for example, disclosed that just 21 percent of its investment pool was in liquid assets, like stocks and bonds. It plans to sell at least several hundred million dollars in those assets and a comparable amount in its hedge funds through 2010 to meet its capital calls from private equity funds, resource managers and others. Real estate and timber investments are frequently structured as limited partnership funds, which can have periodic capital calls, like private equity funds.</p>

<p>Virginia is also exploring the sale of some older private equity stakes. The university’s chief operating officer, Leonard Sandridge, said the school had no liquidity issues.</p>

<p>“It is a little like having to go to a pawn shop,” said one university endowment manager who said its policy is not to discuss performance publicly. “People don’t want to admit they have to sell this stuff. I am sure that a lot of people overcommitted over the past couple of years.”</p>

<p>Some schools say they simply want to rebalance their portfolios. As the stock market has plunged, their private equity stakes may have swelled to a larger percentage than their target. A spokesman for Columbia said that its $7 billion endowment was mulling some sales, but only to rebalance the portfolio, and that it did not have to raise cash.</p>

<p>Selling stocks is a quick and easy way to generate cash for capital calls. It may be one factor in the sharp declines in stock prices in recent weeks.</p>

<p>If the financial markets stay depressed for a few years, endowments could wind up in serious distress. The endowment of the Museum of Contemporary Art, in Los Angeles, has shrunk to less than $10 million, among its lowest levels since the museum’s founding in 1979. The decline, from $40 million a few years ago, prompted the billionaire Eli Broad recently to offer $30 million toward the museum’s rescue.</p>

<p>Foundations can scale back their grant-making in hard times. Museums and schools generally count on their endowments to cover a portion of their budget, and its many fixed costs. Now, their overall returns are plummeting, and donors are receding,</p>

<p>The decline in the market value of the endowment and the need to spend from it on a regular basis to meet operating needs can be very difficult, Alice W. Handy, whose firm, Investure, manages money for Smith, Barnard, Middlebury, Trinity and other schools, told The Times. “Meeting spending requirements in a down market is a significant obstacle to building the endowment.”</p>

<p>The stampede into alternative investments was fed by a desire to imitate the Yale Model, an investment strategy developed by David F. Swensen, who diversified Yale’s endowment portfolio beyond stocks and bonds into hedge funds, private equity, real estate and commodities.</p>

<p>David A. Salem, who manages the Investment Fund for Foundations, says few managers can match the skills of a Yale or Harvard endowment and many overpaid for those assets. “So it’s no surprise that the scrambling going on to liquidate some of this stuff is the product of equally unenlightened methods that are conditioned by the same illogical assumptions,” Mr. Salem told The Times. (His group recently purchased a position in a private equity fund, after two higher bids were rejected because of concerns about those prospective buyers’ creditworthiness.)</p>

<p>Along the way, schools have wound up with relatively small amounts in fixed-income investments: a traditional source of income to withstand bad times."</p>

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<p>dstark, you didn't make the pyramid scheme comment, it was interesteddad. (And he didn't say all PE funds were glorified pyramid schemes, just "some".)</p>

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<p>Ok. No problem.</p>

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<p>Interesting that UVA says it doesn't have liquidity issues.
The NY Times reported today that Harvard says it may need to do taxable borrowing to meet private equity commitments.</p>

<p><a href="http://www.nytimes.com/2008/12/04/business/04harvard.html?_r=1%5B/url%5D"&gt;http://www.nytimes.com/2008/12/04/business/04harvard.html?_r=1&lt;/a&gt;&lt;/p>

<p>Ninth paragraph.</p>

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<p>
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I think they are probably required by current accounting standards to use mark-to-market accounting. That's why nobody wants to talk about these investments that might be literally worthless today.

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For private universities? They have no public report obligation, hence no reason to "mark to market". </p>

<p>In fact, financial reporting obligations (of which mark to market is only one of many obligations) only exist for organizations that are either (1) publicly held i.e. companies that issue stock) or (2) organizations that are subject to reporting under state law. And I don't even know of any such state laws, although others might, other than rather weak state level financial disclosure laws.</p>

<p>The bigger reason, as others have pointed out, is cash flow. Keep in mind that university endowments only have two sources of cash: Cash income from investments (not imputed, and not much this year anyway!) and results from current fundraising (an up year for alum donations? Hardly...). They use cash for (1) their contribution to the U's budget and (2) for investment purposes. To the degree that they made a commitment (to a private equity fund, for example) to invest cash without having transferred the cash, they can have a problem. For instance, many private equity deals call for an initial investment and a provision whereby the private equity can issue a call (a legally enforceable demand, in practice) for more cash under specific circumstances. </p>

<p>So, with no cash coming in from investments (unless they liquidate some, which can have its own problems), alumni fundraising down, demands to provide more cash to U operations up (remember that budgets get set in advance!), and cash calls from private equity, an endowment fund can have a real cash squeeze, especially if a lot of their assets are not very liquid, which is often the case. </p>

<p>A cash squeeze is not the same as a liquidity (or cash) crisis . The latter occurs when you have no liquid assets, and is why organizations go bankrupt even when they have more assets than liabilities. Rather, the squeeze can lead to decisions that are not in the long term interest, maybe even short term interest, of the fund. </p>

<p>At any rate, it is a bad year to be an endowment fund manager, I think, and not a particularly good year to be in academe.</p>