Very interesting article on university endowment gains from PE and VC investments:
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Lots of thoughts on this. The quality of the disclosures definitely needs to improve.
-Part of that is guidance related to ESG, which I know groups like the AICPA are working through right now.
-Another issue is disclosure around less transparent and less liquid funds. VC valuations use market inputs, but they aren’t “market tested” via regular transactions of the bloc sizes the endowments hold. If there is put language in these investments, it would be useful to get some disclosure around the imputed gain if an investor was to liquidate a position.
-better required disclosure around endowment restrictions and earmarks. A 50% gain in the overall endowment doesn’t tell anyone the growth and fund balances related to certain types of use: what is restricted to medical, law, engineering, art, architecture, capital improvements for educational facilities, capital improvements for research facilities, off campus property investment, undergrad education, need-based assistance, athletics, faculty hiring/retention. etc. institutions should be able to identify maybe 8 categories of restricted use and then highlight how other uses tap into the unrestricted pool.
People are pretty eager here in STL to see WashU go need blind. But that really depends upon how much of the endowment can be tapped for aid and what the true endowment growth is considering the illiquidity of certain investments. That all relates to the prior points.
Lack of disclosure can create PR problems. WashU is a great example of that. Per 2020-21 CDS
40.7% FT undergrads get grants for aid. Average grant package 53,553 per recipient or 21,806 per total FT undergrad.
31 need blind peers: 45.0% get grant aid. 47,513 per recipient. 21,367 per FT undergrad.
It’s pretty much a “wash”. WashU is missing 1 in 10 aid recipients vs peers. But they’re giving 12% more per recipient.
If they can’t go need blind with a 65% endowment boost, they need to be able to highlight: a) they are already providing need based aid at the level of their need blind peers. They’re just doing it differently and b) why the pool may not increase 65% or even 30%, which would make this a non-issue anyway?
There is a big public perception problem between all of the wealthy colleges and unis and what they are trying to achieve. 20 years from now, 40 or so institutions should be cheaper than in state flagships for students outside of the top 15% of household income. But to do that, payout rates need to be kept in check at a decent rate while the fund appreciates. And they should probably stop flouting huge annual returns without the required context. Long-term, alternative investments should appreciate at far higher rates. But year over year volatility is appreciably higher.
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Does anybody really know what goes into the NAV of a private firm? Is it just a matter of book value, or am I missing something?
It’s a mark to market exercise which depending upon the asset in the portfolio can be more/less difficul. Tier 1 would be identical regularly traded assets. Cash is worth cash. A share of Pepsi is worth its current price. Easy. As you get into derivatives, illiquid or closely held investments, etc it becomes more abstract. Cash flow projections, applicable discount rates, different bundles of rights associated with different classes of investors for the same company/fund/etc. You’re effectively taking market derived inputs to model value at a point in time. There are differences in accounting policy too. When do you mark to market?
It’s not as straightforward as it seems. Which is the big problem with implementing a wealth tax (for example).
That’s basically what I do for a living. Value closely held/illiquid interests in assets for tax restructuring, M&A, managing portfolios, etc.
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My take-away is that it’s got to be (as the title of the attached article implies) a bit of a tightrope walk when it comes to university presidents taking credit for their endowment’s huge returns because you can only imagine what it would be like explaining industry-wide accepted accounting practices to a lay audience.
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It’s really not that hard to communicate this.
“Because some holdings in the portfolio are not regularly traded, valuations of some asset categories are subject to estimate uncertainty. We estimate that the value of the portfolio is at least $x with a 95% level of confidence.”
Anybody who willing to read an endowment report will understand what that means. If an endowment is only cash, public equities and publicly traded debt, then then the report wouldn’t need this disclosure. Because it is all regularly traded.
I think the bigger problem is unrelated to endowment performance disclosures. It’s more about what can be spent on what functions. LACs are more transparent because they perform far fewer functions than major research institutions. Alumni and outsiders are often under the impression that college X has Y billion. Why can’t they do Z? Z isn’t covered by restricted endowment funds. It comes out of the unrestricted budget. And it shares those funds with 20% of this function, 100% of these three things, etc.
Tuition may only be 10% of a university’s operating revenues. And they can’t take research money or charge grandpa more for his colonoscopy to reduce Timmy’s tuition bill.
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I would expect conservative valuation for alternative investments, meaning that investments should be valued at book value until there was a reason to change the valuation, such as a private equity fund selling one of their portfolio companies, or writing down the valuation due to financial distress.
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I can see you don’t hang out with a lot of skeptical, overly analytical, twenty year-olds. 
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In my experience, there are two types of wrong when it comes to these things:
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the type you mention who think there is “the” answer and someone is scamming them with lies. You can generally show them that it is highly probable something is worth 90-110 bucks and it’s definitely not worth 150 bucks.
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really smart over educated analytical people who manage to convince themselves in a 23 step process, each step in isolation making sense, that 3+3=8.
The second group is why the first group is so cynical. The second group is why I have a job telling them that they’re deluded. It’s also why I didn’t buy a house in 2005. When you see 25 year olds working for you getting loans for 500,000 for homes that you can’t afford, something is wrong. You don’t need to be right. You just need to know what is definitely wrong.
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