Harvard officials have announced that they expect that the university's endowment will have dropped by 30 percent when the accounting for 2008 is done. But Steven M. Davidoff, a professor of law at the University of Connecticut, argues that the university may be in worse shape than it has so far conceded. In his view, the grimmest effects of the popping of the "education bubble" -- the unsustainable spending-and-investment strategies pursued at Harvard and elsewhere -- will unfold over the next few years.
The problem, argues Davidoff, a former corporate lawyer at the elite firm Shearman and Sterling, in a piece published on the New York Times's Dealbook, lies in the proportion of Harvard's endowment tied up in illiquid assets -- in private equity and real-estate, for example. That's money Harvard does not have immediate access to (doubly so in a bad economy). In 2007, Davidoff estimates, 26 percent, or $11.2 billion, of the endowment was illiquid, including $5.16 billion in private equity.
Not only has private equity taken a bigger hit than stocks, but many private-equity arrangements include a commitment for continued payments by investors. Harvard has in the neighborhood of $8 billion in payments committed to private equity through 2017, Davidoff estimates.
One possible result: a downward financial spiral. The proportion of Harvard's endowment that is illiquid could grow, through 2012, from roughly 25 percent to 40 to 44 percent. That will happen as Harvard uses its liquid holdings to meet its private-equity obligations (which will compete with academic needs). And the growing portion of the endowment that is basically untouchable will magnify the strain caused by low or negative returns from the rest of the endowment.
It's complicated stuff, but the implications are clear, if Davidoff's assumptions hold: scaled-back plans and across-the-board austerity -- on a campus that once had money to burn -- as the education bubble goes pop.
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