<p>Jc, I’d definately agree with you that the colleges are using estimates given by the pe companies. My point has been how reliable are those estimates though. You just don’t know and when the college is unable to exit their investments you really don’t know. One of the biggest hedge funds-Cerberus- asked their investors to not ask for their money back in return for lower fees and around 70% said no thank you and now Cerberus is going to let whatever they have trickle back to investors over years. Florida here is littered with private equity residential, commercial, resort, condo ghost towns. Yet the PE firms keep right on operating as if everything is ok. I don’t know how they do that. </p>
<p>Getting back to your question as an extreme example there were colleges invested with Bernie Madoff and they used his estimates - you could say one difference between Madoff and Private Equity companies is Madoff made the mistake of listing public positions that he had to pay off on where PE’s have the luxury of blocking the exit door.</p>
<p>What I find interesting is that the 2 universities-Harvard an Yale-that were clearly the richest in the world were also the 2 that took the most risk with their endowment, spent the highest percentage from their endowment, and in pursuit of their glory went on the biggest unfunded building binges. Contrast that with a school like Notre Dame that does not build until it has all the money in hand, spent only about 3% of their endowment annually, and has very little debt. Hopefully these schools will learn some lessons here and Boards will take their jobs as financial trustees a little more seriously.</p>
<p>JCBK, interesting short article in the Philadelphia Enquirer this week illustrates the “subjectivity” of valuing private investments. It looked at real estate returns in the Pennsylvannia teachers pension fund. It compared reported performance of 2 large funds that many university endowments also own-Morgan Stanley and Lubert Adler. Morgan Stanley reported a 73% decline in the value of its 2006 fund, and an 80% decline in the value of its 2007 fund. Lubert Adler reported a decline of 6% in its 2006 fund and 7% in its 2007 fund. </p>
<p>Whats interesting is they both own the same sort of real estate, in fact down here in Florida they own 2 very large developments that are right next to each other, and both are ghost towns.</p>
<p>Thanks for all your answers re the stated values of illiquid investments. I hear that these values may be “optimistic”, but I would guess that there has to be some OBJECTIVE standards that these PE firms use to value the illiquid investments. If not, then who can believe what any illiquid investment is worth? </p>
<p>Is anybody here suggesting that the PE firms are in cahoots with the universities in overvaluating the investments’ worth? Meaning that both parties know that the asset is worth X, but (wink, wink) they agree that it should be on the books at 1.5X.</p>
<p>I don’t believe the pe firms are in cahoots with the Universities. I think the Universities simply report what they are told by the PE’s. Do the endowment managers have a sense for who is being more “optimistic” than others-I think yes.</p>
<p>However, I do believe that if you look at how pe firms and endowment managers are incentivized that the system is ripe for fraud and abuse. There is a reason why so many wall street guys were opening pe firms. If you could tap into some pension funds or endowments you could make 10’s of millions of dollars, some became billionaires overnight. You just had to show a good return in your first fund, which I think many legitamately did, and then the pension funds and endowments would beg you to allow them in your fund. You just needed to keep that performance going. As far as the endowment managers they made their millions by out-performing the market and their peers. Private Equity comes along with out sized returns and something really useful no public markets to establish value.</p>
<p>So you have endowments who have , they think, no immediate need for cash, who are looking at investments for the really long term, and desperately want to report high returns, and private equity firms who want cash and partners who don’t need it back and don’t ask questions as long as they report good returns. You have a match made in heaven. </p>
<p>The only point of control is the Boards of the Universities and Pension funds who it is clear have been MIA.</p>
<p>Your other point about what any illiquid investment is worth I don’t think you can be confident without hiring a truly independent entity and going investment by investment. Which I don’t believe any University has done.</p>
<p>In some cases, “cahoots” is probably not a strong enough word. Take New York financier Ezra Merkin. He sat on Bard College’s board, his funds managed a chunck of Bard’s endowment, which he funnelled to Bernie Madoff’s ponzi scheme. He sat on the board of Yeshiva University and he funnelled over $100 million of the school’s endowment to Madoff. His funds lost over $20 million for Tufts and $24 million for NYU, “investing” with Maddoff.</p>
<p>On top of that, he was on the board of Cerebus, the much-talked about private equity fund that has lost its shirt with its Chrysler and GMAC investments.</p>
<p>One of the troubling things is how colleges invest in funds managed by members of their Boards and investment committees. The relationships between college endowments and fund managers is fraught with problems of accountability and transparency.</p>
<p>I believe Merkin was also the Cerberus installed President of GMAC. And who has been asked to bail out Cerberus and their wonderful investments in Chrysler and GMAC-me and you.</p>
<p>Great quote in today’s NYTimes from Guy Hands-a very wealthy private equity guy who bought EMI- “Many PE firms are hoping that daylight doesn’t shine on the corpses of their companies, so they are reluctant to restructure too quickly”.</p>
<p>Stanford is the latest to put its private investments up for sale on the secondary market. I think they will discover what Harvard found out earlier that they are shocked at how little others are willing to pay and in the end will not sell much. Between capital calls, hitting limits on borrowing ability, and shrinking endowments some of these colleges are really going to be facing some very tough decisions.</p>
<p>The only thing I have read is that some are getting out of some of their capital committments. As far as selling about all you hear is that the prices being offered are too low. They own alot of different funds though so they might have success selling a few of their funds.
Apparently Stanford has $5 billion in capital committments to private investments. Other Universities that have been mentioned in the past as trying to sell include Harvard, Columbia, Duke, Virginia. While they deny it I think selling into the secondary market is a pretty good sign of desperation.
Based on my own set of criteria I’ve come up with the SMNews ranking of scariest endowments:
<p>Rice has about $700M in debt which is about 20% of its endowment. Thats not too bad compared to others that are in the 40-50% range. Most of that has been taken out in the last 3 years.</p>
<p>Yes. Harvard has unloaded some. They’ve reduced their outstanding cash call commitments from $8 billion to $5 billion. </p>
<p>Universities have been able to move some positions in good private equity funds – mostly positions from before 2006. Funds that have been closed for a period of time that other investors would like to get into. Some college and university endowment funds have had plenty of liquidity over the past 12 months and have taken advantage of some distressed sale pricing to acquire good positions.</p>
<p>The problem is that the stuff that can be sold is not really the stuff that Havard wants to unload. It’s just that the cash squeeze puts them in a position of selling off whatever they can. That means selling off the good stuff.</p>
<p>To be fair to Stanford, Stanford is saying that in 2 to 3 years…the school’s financial condition will be back to where it was at its peak. The endowment will be less, but the financial condition will be restored.</p>
<p>Interestedad, something I don’t understand is how or if colleges include the debt that they issue when they calculate their returns. Seems like the numbers they are reporting don’t include debt which because the bond issues are so large would have a meaningful impact on their returns. Do you or anyone else have any insight on this?</p>
<p>Those brave (in view of all the talk of sucker’s rally etc.) enough to stay with the market have made back a big chunk of the losses. Now maybe it will still be a sucker’s rally but there was lots of money to be made in it. If you jumped into bonds at the lows you are doubly screwed.</p>
<p>Just back from a PE CFO conference and talked to a few secondary firms. As has been noted in the thread, the first thing that endowments did when they figured out how bad things looked was try to sell their illiquid PE positions in the secondary market. However, they found that all of the supply pushed prices offered down into the fifty cents on the dollar range. At that point, the endowments decided not to sell many positions.</p>
<p>That left them subject to significant amounts of future capital calls that they did not have the cash flow to support. The secondary firms have stepped in to offer new structures which, in effect, amount to loans to meet cash call requirements. The economics of these instruments result in lower realizations for the endowments. But, they are structured to not result in immediate writedowns.</p>
<p>Finally, as someone who works every day to value privately-held stock positions, it is neither easy or straight forward. However, it does have a lot more rigor to it than it did even five years ago when I joined the industry. One problem that LPs have in their own valuations is that the sum of the parts does not necessarily equal the value of the whole. A venture capital fund may accurately report the value of an LP’s share of underlying investments as $X. However, if the LP can only sell its interest in the VC partnership in the secondary market for .5X, what value should that LP show on its Balance Sheet?</p>
<p>Interesting quote in the UK Telegraph paper yesterday from “one of the (PE) industry’s consumate deal makers” says “The party is over, the model is broken, private equity is dead”.</p>