Tuesday, March 3, 2009

The coming pain at Harvard

There have been a number of bubbles over the past decade that we now know about. Unfortunately, we are also about to find out if there was an education bubble. ...

In 2007, approximately $5.16 billion of Harvard’s total portfolio was in private equity, and by my estimate, a total of $11.2 billion, or 26 percent, in all kinds of illiquid assets (the others being real estate and land). ...

Calculating the losses in year-end 2008, I estimate that Harvard’s total private equity portfolio declined 40 percent to around $3 billion. ...

This is the general point of these numbers: Even as you adjust them, Harvard is about to go from an asset illiquidity level of 26 percent (and a target level of 31 percent) to a much higher level [of 42 to 44 percent].

The reason the illiquid part grows is future investment commitments by the endowment to private equity and real estate partnerships. The 2007-2008 report did not disclose these commitments, but the 2006-2007 report stated they were $8.17 billion through 2017. Assuming that this commitment stayed the same or went down by no more than $1 billion in 2008 (Harvard last year said they were going to grow the portfolio), Harvard is going to have to follow through on about $7 billion to $8 billion in commitments in the coming years.

So, my numbers are rough, very rough estimates — but the problem is apparent. In the short term, unless it boosts its liquid returns, Harvard is going to have to raise a lot in donations or eat up its liquid assets to fund university obligations and its private equity commitments. This results in a spiraling decline in Harvard’s liquid assets as each year they go lower to meet these needs and more and more assets become tied up in private equity. This assumes the markets stay where they are in the next three years — there are scenarios where liquid assets do worse (like yesterday), or better, of course.

This is likely why Harvard recently sold $1.5 billion in debt, and unsuccessfully tried to sell $1.5 billion of its private equity portfolio. ... Other universities may be in worse positions. Duke, for example, sold $500 million in bonds, and Princeton $1.5 billion. Again, the reason appears to be to fund liquidity.
--Steven M. Davidoff, NYT, on universities' liquidity problem

No comments: