<p>That’s the problem, isn’t it? Sure, they can refuse to put more money in. Then, the underlying companies run out of cash, go belly-up, and the investments are worth zero. The condundrum is: put more money in so the investment is not worth zero or don’t put more money in and value that portfolio at zero. Either way is a hit.</p>
<p>I agree that, ultimately, there will be negotiations on these cash calls. However, one would think those negotiations would have begun before borrowing a billiion five to meet cash needs! </p>
<p>We already see one of these funds, Cerebus, playing hardball by threatening to just go belly up.</p>
<p>BTW, Harvard only thinks that half of their $11 billion in cash call commitments is the max that could hit in the next 12 months. Thank goodness for small favors, huh? Only $5 billion more poured into private equity!</p>
<p>It’s so incestuous between the private equity managers and the endowment managers that it’s easy to imagine a lot of mutual back-scratchng and butt-covering. Some financial company CEO’s believe there was already an orchestrated move by fund managers to hammer the stocks back in February while the hedge funds were making a killing on short sales.</p>
<p>My guess is that the funds in which Harvard has invested are in touch all the time. Maybe not daily, but certainly monthly, and probably a lot more than that. Remember, the fund in which Harvard’s commitment is still open is Fund #6, and Funds #4 & 5 are still in existence, and everyone knows in the first place that the commitment for #6 was a rollover of capital from ##3-5. So, yeah, I’d guess the discussions have been going on for a year or more, and that funds whose investment period is about to close have already been modified. But that’s just a guess.</p>
<p>Throwing good money after bad is not an unheard-of event in the private equity world. So . . . sure. Sometimes it even works.</p>
<p>I bet one thing Harvard has to worry about is having Fund A sell a company to Fund B, and Harvard is an equal investor in both funds. Harvard pays the respective managers two big fees, and it still owns the same damn company.</p>
<p>“I bet one thing Harvard has to worry about is having Fund A sell a company to Fund B, and Harvard is an equal investor in both funds. Harvard pays the respective managers two big fees, and it still owns the same damn company.”</p>
<p>In fairness, Harvard has been making some pretty aggressive cost-cutting moves. Harvard is too big to get your arms around the entire issue, but I think they deserve some praise for dealing with the budget issues head-on. They’ve just whacked a lot of jobs, which is more than many schools are doing.</p>
<p>On the other hand, Harvard does deserve some serious questioning. Not so much for their own mismanagement, but questioning about what they have been teaching at the Harvard Business School. I think we’ve seen a comprehensive failure of fianancial system, actually probably even a comprehensive looting of the financial system by people HBS has been training. IMO, that warrants some real soul-searching. Or, at least a little common sense. Why on god’s green earth does Larry Summers have a position setting economic policy for the United States of America when his decisions have proved disasterous for Harvard?</p>
<p>“Throwing good money after bad is not an unheard-of event in the private equity world. So . . . sure. Sometimes it even works.”</p>
<p>Is this required by owners of a fund? Or if an institution declines, does the institution just see its holdings diluted?</p>
<p>I remember a friend of mine in the private equity business said that not only are institutions losing in the fund, but they are committed to putting up more money. I forgot to ask her if that was money for new ventures or new funds, or money to shore up old ventures. She’s not around and I have to know now. :)</p>
<p>It’s supposed to be money for new ventures. And, that money was supposed to come from the too-good-to-believe returns from the the old ventures after looting their balance sheets, loading them up with debt, and selling them to a bigger fool in a never-ending bubble market. Alas, just like with Bernie Madoff, the ponzi scheme falls apart when there is nothing to loot, no more bigger fools, an end to the never-ending bubble market, and no returns from the old ventures.</p>
<p>So I guess if I’m invested in Plan A thinking I was going to fund Plan B with the profits, and there are none, I might be able to get out of my commitment to fund Plan B. Which if true, means Harvard will probably try and get out of some of its commitments.</p>
<p>Investor returns on venture capital the last 9 years stink.</p>
<p>“And, that money was supposed to come from the too-good-to-believe returns from the the old ventures after looting their balance sheets, loading them up with debt, and selling them to a bigger fool in a never-ending bubble market.”</p>
<p>The problem for Harvard in this scheme is that they are the “biggest fool”, and hence have no one to sell to.</p>
<p>Princeton parent here. FYI, we are being told so far that the only impact to us and our kids is that the Neuroscience Institute construction will be delayed for a year.</p>
<p>Harvard has been making cuts all over the place. Almost every day there is another headline in the Crimson similar to today’s: College Consolidates Offices for Student Life, Cuts 5 Staff Positions. They have not, however, cut their financial aid one bit.</p>
<p>Princeton borrowed $1 billion in taxable bonds because they had to raise cash to pay the light bill, too. That’s tens of millions of dollars a year in additional debt service that has to be offset by budget cuts somewhere. As far as I can tell, Princeton is in the same boat as Harvard and Yale when it comes to liquidity issues.</p>
<p>It’s a double whammy. All big endowment schools are having to make budget cuts to offset reduced endowment spending. OK. That’s life. Nobody is going to be bunking in tents and eating gruel at these schools. Then, there is the other issue: they can’t get their hands on any cash from their endowments. That’s a unique problem that is only impacting a handful of schools, due to what appears to be terrible mismanagement (greed) of investments, with absolutely no concern about liquidity needs.</p>
<p>It’s like if you turned 65, retired, and then suddenly realized that your entire nest egg was invested in CDs that won’t mature for another 15 years, when you turn 80 and you’ve got nothing to pay the light bill this week.</p>
<p>The biggest cut Harvard has made so far, in terms of dollars, was to cease construction on the Allston expansion project. Which probably thrills most of the faculty, because you never get anything but vehement protest out of any department when they find out they are slated to move out of the Yard and into Allston.</p>
<p>Another WSJ update-Sun Capital, another very large private equity firm-announced bankruptcy of KellwoodCo. purchased in Feb. 2008 for $542Million. Their 12th bankruptcy since 2008 out of 85 companies.
Given that the type of investments private equity has made–buying distressed companies during good times like Sun has, commercial real estate, condominiums and condominium conversion, resort and second home developments–its real hard to understand how in this kind of recession that any of these private equity investments are worth much of anything.</p>
<p>Blaming Summers is a cheap shot by Forbes - even they acknowledge the positions made sense at the time - Summers was rightfully concerned about rising interest rates and locked in a fixed rate through the swaps - Between '04 and '06, the FED raised interest rates 17 times. His trade no doubt saved the University a lot of money in net debt service in that time frame.</p>
<p>Summers left in 2006.</p>
<p>In August of 2007, the FED changed course, lowering rates 4 times in 2007 and 7 more times in 2008. There was plenty of opportunity after Summers left for the manager to first observe the sea change and then act on it before the end of 2008 when according to Forbes, the positions went to hell.</p>
<p>They’ve cut hot breakfast food at Harvard, for the coming year. We are wondering if this includes oatmeal. Maybe, as in Dickens, seconds won’t be possible.</p>
Didn’t go to the right schools. :)</p>