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Amherst endowment
goeast
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goeast
71 replies9 threads- New Member
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Replies to: Amherst endowment
https://www.amherst.edu/aboutamherst/economy
Amherst's endowment fell to $1.3 billion. It would have fallen more except that Amherst borrowed $100 million in taxable bonds in January to cover operating expenses instead of taking an endowment draw due to liquidity problems with the endowment.
The $100 million taxable bond issue for operaitng expenses (the first in the school's history), brought Amherst's total debt to $320 million. A significant percentage of that is variable rate bond debt with ratest that would increase quickly with inflation.
In addition to the debt, Amherst has an additional $500 million in cash call commitments to private equity endowment funds. These cash calls produced the liquidity crunch that necessitated borrowing, as happend due to similar mismanagement of endowment liquidity at Havard, Yale, and Princeton.
Amherst is currently planning to increase enrollment by 200 students (100 planned and underway plus an additional 100 to increase revenue). They cancelled 15 of the 18 approved new tenure track faculty slots. They cut visiting professors for this year, will hold steady next year, and cut three more the following year. This is all part of $48 million in budget cuts over the next three years. That will still leave unsustainalble endowment spending rates, so they anticipate additional adjustments.
Also while Amherst may have significant capital call obligations to private equity firms, the capital has to be called first and since private equity activity is also at historically low levels, not much capital is being called.
In the privacy of board meetings, I don't think any college Presidents are really patting themselves on the back about having to issue taxable debt to put this year's operating expenses on the credit card.
Amherst has a $1.3 billion endowment. Let's go crazy and predict a 9% annual return over the next 8 years. That's $104 million a year in endowment return. Gotta pay the debt service off the top. I don't know the new figure until the annual reports come out, but figure $13 million a year.
So now we've got $91 million left over. Let's say that the $500 million in PE cash calls will be spread evenly over the next eigtht years at the rate of $62.5 million a year. That leaves us $28.5 million left over towards operating expenses. They've been spending $50 to $60 million a year from the endowment. And that's assuming a 10% annual return.
And to equate a triple A rated credit borrowing in the capital markets to using a "credit card" is silly. Leverage has its place.
I haven't seen the terms of the taxable bond offering. Boston Biz Journal does say that one was fixed rate. However, the same article points out that Amherst already had $165 million in variable rate demand bonds in June 2008. In addition to the $100 million taxable bond issue in February, Amherst also issued a $50 million variable rate demand bond to pay for new dorm construction. So they have in excess of $200 million in variable rate demand bonds:
Amherst plans $100M bond to offset losses - Boston Business Journal:
The reason they borrowed money for operating expenses is that they had very little liquidity in the endowment. On June 2008, they only had 25% invested in publicly traded equities or $425 million. That fell by 30%+ during the crash, so there just wasn't much to sell off in February. Had they done so, the endowment would have shifted even more towards non-liquid assets. On June 2008, they had 10% of the endowment in cash and bonds, or about $170 million.
See page 13 of the 2008 Financial Report:
https://www.amherst.edu/media/view/85137/original/Annual%2BReport_2008.pdf
Amherst is certainly not alone. Harvard, Yale, Princeton, and Stanford all had to borrow to cover operating expenses this year. Amherst is alone, among its closest peers, in the extent of its budget cutting planned over the next three years -- $48 million in cuts. That's a combination of several factors. They suffered heavier endowment losses and the cost of debt service adds significantly to the operating costs and the size of the outstanding cash call commitments creates ongoing liquidiy challenges. Neither Williams nor Swarthmore reduced their equity positions after the market crash to fund operating expenses. Both had adequate cash to cover their needs (although Williams was initially a little nervous with the wild fluctuations in variable rate demand bonds last fall). Swarthmore had moved more than 16% of its endowment into cash and bonds by June 2008, so they had $230 million in readily accessable cash -- enough to cover endowment spending for four years. They actually bought positions from other endowments looking to generate cash (I suspect, from Harvard which was forced to sell some good positions).
Just look at the debt. Amherst has $320 million (over $200 million variable rate). Williams has $260 million ($108 million variable). Swarthmore has $180 million (no variable rate).
Cash call commitments: Amherst $503 million. Williams $267 million. Swarthmore $236 million.
I haven't found a darn thing about Pomona since last spring when the market was at absolute rock bottom. I have no idea. Haven't found anything on Wellesley either.
Other northeastern LACs have also announced plans to gradually increase enrollment, but Amherst's may be the largest. For comparison, Wesleyan plans to increase enrollment by 120, Bowdoin by 50.
https://www.amherst.edu/aboutamherst/news/news_releases/2009/11/node/142095