<p>susan4, I think you have it partially right and partially wrong.</p>
<p>You are right that too much of Harvard’s and Yale’s endowments are in illiquid assets – I think everyone would agree with you on that. It might not have been too much when they had more liquid assets, but it is now.</p>
<p>Of course, the illiquid assets themselves are not a greater percentage of endowment than they used to be, because they have lost value, too. But the future cash commitments for private equity funds are too high relative to the value of everything else. However, those future cash commitments are not coming due anytime soon – they aren’t being drawn down now, and fund managers are going to be very gingerly about putting the screws to Harvard, Yale, and other university endowments and cash-strapped public pension funds, which together have been the fund managers’ gravy train for the past 20 years. The cash commitments are a problem that can and will get worked out over a period of years.</p>
<p>Second, private equity values reflect stock market values. Not instantly, and liquidity discounts matter, and the financing environment widens the spread. But ultimately the value of private companies is closely related to the value of public companies, and if the public market rebound is permanent then it will be reflected in the value of private equity investments over time. (And note that no one has lost any money yet on the future cash commitments. That money will buy into new companies at much lower valuations than were paid for investments a couple of years ago.)</p>
<p>Third, a separate aspect of the cash crunch is the historically low interest rates being paid on high-quality debt. Harvard and Yale have enormous endowments, but they can’t earn more than a pittance on their most liquid, most secure holdings. No one expects that situation to continue much longer, however. Eventually, the Fed is going to start raising interest rates to keep the stimulus from turning into the hyperinflation.</p>
<p>Before the deluge, Harvard’s endowment was contributing about $1B annually to the university’s operations. That was a very low payout based on the then-value of its endowment; but it is well within traditional bounds of prudence as applied to today’s endowment values. And – precisely because of the cash squeeze – I don’t think they are planning to have it contribute as much as $1B for several years to come. So belts are definitely going to be tightened. But financial aid is such a core mission of the university, and such a small component of its overall spending projects, that it’s hard to imagine that the university can’t make good on its pledge not to reduce funding.</p>