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Harvard's endowment: the worst yet to come?

Posted by Christopher Shea  March 3, 2009 11:44 AM

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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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4 comments so far...
  1. Poor Harvard! They may have to go back to teaching students again, instead of flying high with fanciful plans.

    Posted by Faustian Leadership March 3, 09 05:28 PM
  1. I am disappointed that such a supposedly professional money management team could have been exposed to that high a percentage of private equity investments in their portfolio, particularly when a certain percentage of the endownment is earmarked for annual contributions to the University itself.
    I am not happy to see them lose money, any more than I am of those scammed by Madoff, or who have last a ton of money in their 401/investment accounts. Some of our "brilliant" money managers need to get back to a more disciplined strategies and, if using alternative investments, apply more stringent stress tests.

    Posted by mathilda March 3, 09 10:01 PM
  1. Harvard isn't what it used to be. It attracts a large percentage of people that will stop at nothing including lying and cheating in order to achieve the reputation rather than real skills and talent and it shows in the lack of ability of its undergraduates to be interesting. A proportional decrease in funding for the decrease in talent at Harvard is very appropriate.

    People interested in changing the world, become a top researcher in a specific field or art go to Stanford, MIT, Columbia, etc.

    Posted by Paul Norvig March 24, 09 01:14 PM
  1. This is nothing less than a complete disgrace and validation that these so called investment professionals are worthless. They do not generate consistent alpha particularly when Harvard needed to beat the market most. They basically just float in and out with the tides and the indexes. For all their efficient frontiers, regression and monte Carlo analysis they sure weren't able to do anything but replicate LTCM. These guys are a bunch of overpaid phonies. Should just go back to a 06/40 Stock bond split and let the market do what it will. You could lose all the BMW driving buttondown pricks in the process and get better and more consistent long term returns. I cannot even begin to stress how fake, and illegitimate the investment professionals at Harvard are. They basically played a shell game that was fun while the tide was rising. But now it is clear they add no value and should all be fired.

    Posted by David F. Swensen March 25, 09 02:46 PM
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