<p>But Bain Capital's positions without the cash infusions would go belly up. Sue Harvard and an easy win.
"Illiquid" seems a vague term. But let's put particulars on it. Timberland with no housing market to feed for the next five or ten years. Use the stuff for paper? The Philadelphia Inquirer just went bankrupt in an electronic and wireless world. The papers aren't coming back.
Add cash calls and you are throwing good money after bad.
A sobering situation for more than Harvard.</p>
<p>You are welcome. This whole situation has only slowly emerged to public view. And, as they say on the late night Ginzu knife infomercials:</p>
<p>But wait, there's more!</p>
<p>None of these private investments can be accurately priced right now. So what a lot of colleges are doing is pretending that the private equity portions of there endowments are still valued at what they were valued at by the fund operators on June 30th. </p>
<p>Yet, all indications are that many of the private equity investments have just gotten wiped out. It is generally believed that the leveraged buyout deals of the last two or three years are now worth literally zero. How bout the price of timber with the collapse of housing market. Let's just say that all of Harvard's timberland partnerships got creamed. Or the partnerships that invested in oil tankers full of oil floating around waiting for speculators to drive gas up to $5 a gallon. Oh, wait, gas has gone from $4 a gallon to under $2. Ooops. "Hey buddy, wanna buy an oil tanker? Have I got a deal for you. Three seventy five a gallon...."</p>
<p>That's why people close to Harvard's investments have been quoted saying that the endowment really may have fallen by 50%. The chickens will come home to roost next June when all the private partnerships have to revalue their assets.</p>
<p>Trust me, a lot of college investment offices have severe heartburn, choking on these additional cash calls. They are literally pouring good money after bad.</p>
<p>I'm just befuddled to think that these institutions and their legions of the best and brightest with 1,600 SATs and myriad APs could get themselves into such a mess.</p>
<p>Thanks for your insight on this.</p>
<p>BTW, I'm not picking on Harvard. All the big boys are in the same boat. The schools that are in the best shape went more conservative. Maybe only 40% of their endowments in these private funds. Maybe 15% in cash and T-bills. Yes, they didn't enjoy quite the same returns in the bubble markets, but they have operating cash, they can fund their cash calls, and the "only" problem then have is figuring out how to trim operating expenses by 10% to 20% over the next three years.</p>
<p>Harvard sold most of it's stocks. More than 80% sold raising about $2.8 billion.</p>
<p>How many schools are you talking about that do this sort of thing? 10? 20? A few hundred? Is this a ticking time-bomb that's going to force mergers and closures? Or just a rough patch that most will get through?</p>
<p>It almost feels analogous to what the banks are going through with their bad assets. Maybe universities need to be tarped.</p>
<p>I think that part of Harvard's problem is that it depends more than a lot of other institutions on its endowment income. I think I saw a chart that showed that tuition income accounted for something like 16% of its operating income and that endowment income was somewhere about 50%.
I think that Stanford is having similar problems (expected drop in income), though I have no idea whether it is due to cash calls.</p>
<p>BCEagle: Harvard and Stanford will survive. There are some, including public universities that will have a harder time. I recall the time when Madison was celebrating its anniversary with plans to hire 40 more faculty. Then within a year or so, its budget problems were so severe that it suspended admitting students. Some of the smaller and less well endowed universities are in for a really rough time. Brandeis' endowment went from $700M (itself not a very large figure compared to some other schools of similar size) to $500M. The president tried to address the shortfall by selling the Rose Museum and precipitated a huge controversy.</p>
<p>Stanford does have issues.</p>
<p>Also, Stanford only has discretion on 25% of its endowment.</p>
<p>Palo</a> Alto Online : Stanford undergrad costs to increase 3.5 percent</p>
<p>A true irony of the situation, marite.
The wealthier the school the larger percentage of the budget endowment payouts have represented.
I would rather have the bigger endowment. Yet...</p>
<p>
[quote]
Harvard sold most of it's stocks. More than 80% sold raising about $2.8 billion.
[/quote]
</p>
<p>Given the size of endowments, these cash call obligations and forced firesale stock selling is actually contributing to the declining market and economic slump.</p>
<p>BC Eagle. It's at least several hundred schools. Dickinson is #196 on the list of college endowments with around $300 million in their endowment. They listed $62 million of cash call commitments in their annual report. So this private equity issue extends at least that far down the food chain.</p>
<p>BTW, this whole issue of a bigger problem for schools that rely on a higher percentage of endowment is a red herring. It's not like Harvard's income from tuition and all the rest is less than Podunk U's. It's just that Harvard's bigger endowment spending lets them spend much much more than Podunk. If Harvard didn't spend one dime from its endowment, they would still be ahead of the game based on other revenue streams. All things being equal, I'll take the bigger endowment every day. I'll deal with the "problem" of having endowment money fund "too much" of my school's operations!</p>
<p>While the size of Harvard's problems may seem massive compared to other schools, I think we still need to keep their effect on the stock market in perspective. They are selling $2.8 billion--while the overall withdrawals by all investors from money market funds alone is $5 billion per week--and was over $150 billion total during just two days last September.</p>
<p>P.S. Good info and explanation, interesteddad.</p>
<p>I generally agree with Interesteddads points but where I would disagree is where you say I would take a bigger endowment everyday. The big problem facing schools like Harvard and Yale that use their endowments to cover over 40% of their costs is that this source of income truly is being wiped out and they really don't have many good alternatives to reduce costs or increase revenue to cover this 40% haircut in income. Many of their biggest costs - loans on massive building projects, maintenance of all these new buildings, high priced contracts for tenured, star professors, and need blind based admission are fixed. This is a big, big problem. For schools that rely on their endowments for 10% or less obviously the cuts necessary are far less as long as they can keep their enrollment up.</p>
<p>My other point is that I don't really think the issue is liquidity. The issue is that these alternative investment are worth far less than the private equity firms and others are saying they are worth. Good article 2/20 in Forbes cites one of the few private equity holdings that Harvard owns that does have a public market - Conversus Capital - which is tradind at a 62% discount to its stated net asset value.</p>
<p>I propose that the Harvard Business School invite interesteddad to present his analysis of this timely and important example of how the mothership handled her resources for its celebrated "case method".</p>
<p>Oh, wouldn't I like to be there for that...rofl</p>
<p>One of the problems here is that there is so much closed-loop cross-pollination of the college's corporate boards, investment offices, and the world of private equity investing.</p>
<p>There was nobody to say, "hey wait a minute, you guys, what if the markets actually went down?", because everyone involved was part of "you guys".</p>
<p>College boards became just a little too heavily tilted towards investment bankers and risk taking with somebody else's money when, in reality, a college endowment should be managed somewhat conservatively.</p>
<p>Totally agree Interesteddad. Add to that the fact that these college endowment managers were competing with each other to post the highest return-sort of like how our kids compete to score the highest SAT. Add that to the incredible compensation these guys were getting based on performance, and then you add the fact that it was easier to score higher returns by investing in things like private equity that make up their own returns rather than public markets that you can't fudge---and you have the making for a big time bubble.
I would argue that these endowments aren't the victims of the current economy but that they are in many ways the ones that helped cause the problem. The massive bets that have been made by the alternative investment companies could not have been made without an initial source of capital. That source largely came from college endowments and pension funds.</p>
<p>The endowments are too small to effect the economy in a material way.</p>
<p>The endowments probably lost $100 billion..</p>
<p>AIG lost 4 times that much by itself.</p>
<p>The endowments probably played a small part in certain areas...like timber.</p>
<p>Pension plans are a different story.</p>
<p>Trillions lost.</p>
<p>
[quote]
I generally agree with Interesteddads points but where I would disagree is where you say I would take a bigger endowment everyday. The big problem facing schools like Harvard and Yale that use their endowments to cover over 40% of their costs is that this source of income truly is being wiped out and they really don't have many good alternatives to reduce costs or increase revenue to cover this 40% haircut in income.
[/quote]
</p>
<p>It seems like that would be the case, but it's really not. Let me use a concrete example of a big endowment school versus a similar small endowment school. I apoligize for always using LAC examples, but their financials are so "clean" in terms of simplicity. The only revenue streams are student revenue, endowment spending, and a small percentage of the budget from gifts, grants, research funding etc. They don't operate hospital chains or medical practices or drug development R&D companies, so it's much easier to compare apples to apples.</p>
<p>In this case, I'll use two extremely well managed Pennsylvania LACs: Dickinson (2008 endowment: $300 million) and Swarthmore (2008 endowment: $1400 million). I'm going to use June 2008 FY year end numbers. I'm going to assume a max of 5% annual endowment spending. I'll use per student numbers for direct comparisons. I'm going to assume a 30% decline in endowment. I'm also going to assume that the colleges immediately implement the required spending cuts in one fell swoop, rather than phase them in based a 3 year rolling average of the endowment.</p>
<p>Dickinson has been written about as a model of effective fiscal management. They stick to an endowment spending limit (5% last year) instead of floating upwards like many LACs. They have a model "enrollment management" operation using outside consulting firms to maximize revenue from a merit-aid strategy. They net $25k per student in revenue which is outstanding in Dickinson's class. It's $3k more than Grinnell and only $3 k short of Williams and Oberlin. </p>
<p>Pre-crash:</p>
<p>Before the crash, Dickinson was spending $43, 357 per student consisting of $25,198 from tuition and $3,855 from the endowment. The endowment provided 9% of the total operating budget.</p>
<p>Before the crash, Swarthmore was spending $81,350 per student consisting of $32,252 from tuition and $36,361 from the endowment. The endowment provided 45% of the total operating budget.</p>
<p>Post-crash:</p>
<p>OK, let's see what our 30% decline means.</p>
<p>Dickinson's per student endowment spending drops by $1,156 to $2,698. Since they are already at the 5% limit of endowment spending, that's the new number. This brings total per student spending down to $42,201 and the college has to find savings of $1,156 per student or 3%.</p>
<p>Swarthmore's per student endowment spending drops by $10,908 to $25,452. However, they were only at 3.75% spending from endowment in 2008 so they have room to increase that percentage up to our 5% limit of endowment spending. That's a 33% increase that offsets most of the decline in endowment (not quite all, Swarthmore's built-in cushion would have fully offset a 20% to 25% market decline). This brings total per student spending down to $78,926 and the college has to find savings of $2,424 per student or 3% of the operating budget.</p>
<p>Now, which school is in a better position regarding other revenue streams? It is almost impossible to think that Dickinson will increase the percentage of full-pay students and increase revenue. Swarthmore, on the other hand, isn't even at the high end of its peer group. By emphasizing costly diversity less than Swarthmore, Haverford around the corner rakes in $2,200 more in net tuition than Swarthmore does. So, by simply going with Haverford's mix of full-pay and aid (both are "need-blind"), Swat could offset almost the entire shortfall from the endowment.</p>
<p>Or, they could offset it with a small increase in enrollment. They have excess dorm capacity with the construction of two new dorms in the last five years. It would take a monster increase to change their 8:1 student faculty ratio into Dickinson’s 10:1 ratio.</p>
<p>Or, Swarthmore could offset the decline almost to the penny by moving back away from their no-loan policy. Or, by cutting out any number of frills. 24/7 infirmary care. Subsidized birth control prescriptions. Free printing. Computers and printers in every dorm. The most expensive writing workshop among LACs with a special semester long academic course for credit (basically a grad school writing course) required for all of the student writing mentors. And, on and on and on down the list.</p>
<p>And, at the end of the day, the big endowment school is still spending double per student than the small endowment school which is huge in attracting applications and maintaining enrollment revenue during challenging times.</p>
<p>I don't envy schools, in any financial tier, having to make the very real budget cuts. I don't think there is a college in America that will escape cutting bone and muscle this time around. I don't think Harvard's job is easy. I don't think Swarthmore's job is easy. I don't think Dickinson's job is easy. The reality is that all of these schools are going to have to cut budgets more than itemized above. Tuiton revenue is likely to fall at all schools. Charitable contributions are likely to fall at all schools. Research and community service grants are likely to fall at all schools. Incidental income from renting the schools to summer soccer camps or extension courses or sales of logo merchandize are likely to fall. I think most will eventually be looking at cuts of $10% to 15% over the next three years.</p>
<p>
[quote]
Pension plans are a different story.
[/quote]
</p>
<p>I was mentally lumping the endowments and the pension funds together in terms of wagging the dog, since they tend to travel in the same packs.</p>
<p>re post #38
all it demonstrates is that neither college has changed position in relative terms which, considering the base-line disparity between them, redounds all the more to Dickinson's credit, IMHO, since intuitively, you'd ecpect the poorer school to be in the relatively poorer position.</p>