Harvard University's admission that it lost $8 billion from its $36 billion endowment fund, as staggering as it sounds, may grossly underestimate the true magnitude of the loss between from July 1 through Oct. 31 2008. According to a source close the Harvard Management Corporation (HMC), which runs the fund for Harvard, the loss is closer to $18 billion if the losses on the fund's illiquid investment are realistically appraised.

To be sure, the highly-talented-- and highly- incentivized- MBAs at HMC did exceedingly well for Harvard during the early years of the new millennium. From 2000 to 2008, they more than quadrupled the notional value of Harvard's wealth through a strategy that involved shifting the lion's share of Harvard's money from American stocks, bonds and cash to to highly esoteric investment which were not only illiquid but whose imputed value often could not be easily determined by outside parties. So, by the time the bubble burst in the fall of 2008, less than a fifth of Harvard's endowment fund was invested in exchange-listed stocks and bonds. Where was the rest of Harvard's money? Nearly 28% of Harvard Endowment fund was in what the fund manager's called "real assets," a category comprised of timber forest and arable land in remote areas, commercial real estate participators, and huge stockpiles of oil and other physical commodities. Such "real assets" plunged in value, if they could be sold, much more severely than the stock market averages. Oil, for example, one of the fund's largest investment, lost about t two-thirds of its value. Another huge chunk of the endowment was in private equity placements and hedge funds which imposed restrictions on withdrawals. In the case of so-called "gated" hedge funds, some of which suffered enormous losses, Harvard could only extract its investment by selling its participation at a steep discount to a "secondary" hedge fund. Another 11 percent of Harvard's money had been sunk in volatile emerging markets. Here the investments took a double hit: First, the local stock markets collapsed in most of these countries, with, for example, Russian stocks, losing 80%, of their value. Second, on top of these losses. the local currencies lost much of their value against the dollar, with the Brazilian Real, for example losing 40% of its value. Given the true cost of getting its money out of this financial exotica, my knowledgeable source finds the claim by Harvard's money managers that the fund only lost 22 percent not only "purely pollyannaish" but self-serving (they got increased bonuses for 2008). But while Harvard's money managers may chose to look through rose color glasses at the value of their portfolio , Harvard University, which relies on the interest from its endowment fund for one-third its budget, needs to be more realistic. As its President, Drew Faust, noted in letter to the Harvard faculty, "We need to be prepared to absorb unprecedented endowment losses and plan for a period of greater financial constrain,"

(http://www.autoadmit.com/thread.php?thread_id=905322&forum_id=2#10589067)

http://www.huffingtonpost.com/ed-epstein/how-much-has-harvard-real_b_152711.html

The collateral damage goes far beyond the ivy-covered walls of Harvard. Money managers at other non-profit institutions, no doubt inspired by the dazzling success of the Harvard Management Corporation in rapidly multiplying the notional value of its endowment fund adopted similar strategies, including plunging their funds into the murky get-rich-fast universe of illiquid investments. Consider, for example, the adventures of Calpers, the giant pension fund of the California Public Employees' Retirement System, I which heavily invested in the same sort of "real assets" as Harvard. Leveraging its own funds, It bought so much undeveloped real acreage, that by 2008 it became the largest private land owner in America, and as the real estate bubble expanded, it marked up the notional value of its portfolio accordingly. Then came the subprime debacle, and the real estate bubble imploded, leaving Calpers with unsalable land and, because of its borrowed funds, a 103% loss. Together with other losses in hedge fund and conventional investments, Calpers found that it had lost nearly 40% of the value of its entire pension fund. In Calpers's case, it had little choice other than to realistically report its enormous losses since it had pension obligations that now might require raising money from local governments in California. Other nonprofit funds with more leeway, such as Harvard, have yet to fully come to grips with the problematic value of their illiquid investments.

(http://www.autoadmit.com/thread.php?thread_id=905322&forum_id=2#10589073)

Wells.

If Harvard fails to survive, it should ask for help.

(http://www.autoadmit.com/thread.php?thread_id=905322&forum_id=2#10589680)

Author: truthinlending

10 November, 2008

LPs may not be able to fulfill capital calls

The economic slowdown is forcing many limited partners to not consider new VC and PE funds next year

If you�fre thinking about raising a fund next year, think again.

The downturn in the public markets has had a significant impact on limited partners, throwing their allocations out of whack, and there is growing anecdotal evidence that venture and private equity firms are being affected.

Take for example Alpinvest Partners, which has more than $51 billion under management. The LP is currently evaluating about $3 billion worth of secondaries �gwith a short fuse,�h according to a VC source. The investor says that Alpinvest told him that it has no interest in new funds because �gso many great managers can be had for 50 cents on the dollar�h on the secondary market.

The VC source says that he was also recently approached by another LP with several billion dollars under management. (He declined to name the investor.) The LP has seen the value of its liquid securities decline from about $2 billion to $1 billion and is now concerned that it won�ft have the cash to fund $1.5 billion in commitments to VC and PE firms.

The VC says that to make certain it has cash, the LP is begrudgingly selling stock and pulling money out of hedge funds. It has also reached out to every one of its fund managers to let them know about its situation and ask for their help.

It doesn�ft want to have to sell its stakes on the secondary market, so it�fs asking funds to transfer parts of its commitments to other LPs, the VC says.

In the case of this particular VC, the LP committed less than $20 million and is looking to reduce its commitment by 50% to 75 percent. Though the commitment is relatively small, the LP is pursuing the reduction. �gThey�fre looking for scraps anywhere they can,�h the VC source says.

This VC�fs experience is not unique. The Wall Street Journal reported last week that the California Public Employees' Retirement System, the nation�fs largest public pension fund, �ghas been unloading stocks and other assets in a falling market to make sure it has enough cash to meet its obligations, including capital calls due to private-equity partners.

CalPERS has asked some of its partners to delay their capital calls, according to people familiar with the matter. A CalPERS spokesperson said that CalPERS has been �eworking with its private-equity partners on the timing�f of the capital calls.�h

Other LPs are also trying to raise capital. Harvard Management Co. has retained Cogent Partners to sell about $1 billion worth of stakes in venture and buyout funds, as first reported in mid-October by PE Week affiliate peHUB.com.

Last week, VentureWire reported that, in addition to CalPERS and Harvard, the list of LPs asking their GPs to delay capital calls, looking to sell stakes on the secondary market or sell other assets to raise capital includes the university endowments of Brown University, Columbia University Investment Management Co., Duke University Management Co. and University of Virginia Investment Management Co. �\Lawrence Aragon

(http://www.autoadmit.com/thread.php?thread_id=905322&forum_id=2#10590030)

They are highly talented because they made an amount of money taking less risk than current market would charge for making that amount of money.

18 billion dollars later, they don't deserve the benefit of the doubt

(http://www.autoadmit.com/thread.php?thread_id=905322&forum_id=2#10589271)

Their Private Equity investments require cash calls

and H has a cash flow problem right now.

(http://www.autoadmit.com/thread.php?thread_id=905322&forum_id=2#10589121)

To me, what is intriguing is the back story: Why did Harvard go public with this, when it did not need to? To manage expectations? To address questions arising out of the internal memo, which probably leaked to the press? Institutions like Harvard guard their public image and press as much as they can.

When I was an employee there, I coordinated many an emerging issue with public affiars folks. They are good, they know their job, and they are real guardians of the image.

So, did this spin out of control? Sure got a lot of what appears to be mostly negative press - NYT, WSJ, probably Newsweek or Time next week? The level of detail in the articles I read tell me that someone was pretty frank with reporters, in ways they did not need to be.

Or, was this a planned "leak" to alert their constituents (alums etc) about coming changes?

I don't know, but I wonder.

I used to know Harvard finance well. Harvard and its sister institutions use tax exempt bond issues because they are much cheaper to do - the tax exemption of interest is a "gift" to the debt issuer by the government in the form of lower interest rates.

The point is that, to the degree they can use tax exempt bond proceeds for things, that frees up other cash they might have. The fact that they don't have any other cash to free up points to a cash flow problem that can only be fixed by issuing taxable bonds. There were times in the past when Harvard did not even resort to tax exempt bonds for projects, so much of this is curious.

Needless to say, Harvard would rather get cheaper funds than through a taxable bond offering. In fact, I don't think they've ever had to do this before. If you have decent data access, maybe you can check.

So why would an institution issue "taxable" debt? I can think of only two reasons: They're tapped out for tax exempt debt (a real possibility) or the markets are so hostile to tax exempt that they must go the taxable route. Keep in mind that tax-exempt borrowing is tied to the secured asset, not the use of funds. I know of at least one case (can't give details for obvious reasons) where H used existing buildings as collateral for tax exempt bonds to get money for a new project. Because money is fungible, it is rarely a problem to obtain funds through a tax exempt offering that frees up cash to be used for things like investments. The fact that H is not doing this is, in fact, most curious.

While it may be possible to play some games saving cash for investments (if you have cash lying around), the tax-exempt HEFA bonds have to be tied to capital construction or renovation projects.I think the size of the taxable borrowings (and the size of the endowment cash calls), is going to pretty much preclude playing any games.

The State of New Jersey pension funds just answered an emergency cash call of $155 million to a Black Rock hedge fund. Remember, Harvard just tried (aparently unsuccessfully so far) to unload $1. 5 billion in private equity commitments. We are talking serious coin, cash that even Harvard can't raise without borrowing.

Harvard didn't have to say that their taxable borrowing would be "substantial". They volunteered that information, which suggests to me that it will probably be VERY substantial.

n recent years, Harvard has raised significantly more through taxable bonds than tax exempt bonds. In the first six months of 2008 alone they raised $722 million out of which more than $500 million was in taxable bonds. That is not counting another $350 million in taxable commercial paper.

The funds raised through non-taxable bonds are for specific purposes and the amount is controlled by the state of Massachusetts. They could not use a taxable bond issue to cancel the swap agreements, a major purpose of the current offering. As of June 2008, the cost of cancelling these interest rate swap agreements was over $330 million (up from $13 million in June 2007).

Despite the size of its endowment, Harvard badly needs cash as most of its holdings are highly illiquid. Only around $6 billion of its endowment funds (as of June 08) were unrestricted, most of that also illiquid. They are also getting a number of cash calls on their private equity and venture deals forcing them to dump $ billions worth of these investments at a fraction of their cost. By the time the dust settles, the value of the endowment could drop by 50%.

I found it interesting that Harvard did not choose to state their outstanding capital call obligations. The annual reports I've been looking at from other schools do state them in the notes: $200 million for Swarthmore, $268 million for Williams, and so forth. With an endowment 20 times larger and a more aggressive investment strategy in alternative funds, I'm guessing Harvard's obligations are somewhere north of $5 billion.

(http://www.autoadmit.com/thread.php?thread_id=905322&forum_id=2#10589145)

As does Penn.

(http://www.autoadmit.com/thread.php?thread_id=905322&forum_id=2#10597369)

(http://www.autoadmit.com/thread.php?thread_id=905322&forum_id=2#10597387)

seriously unless they had a bunch of lehman swaps, those alt investments and commodities are going to hold value way better than whatever you and i have

(http://www.autoadmit.com/thread.php?thread_id=905322&forum_id=2#10589146)

Hey, Harvard has a chunk of this asset so it won't go down as much. Not how it works.

(http://www.autoadmit.com/thread.php?thread_id=905322&forum_id=2#10589704)

Not necessarily true. Investing in Private Equity partnerships give you alot of implied leverage. Oil has been beaten down much worse than the S&P over the last year.

(http://www.autoadmit.com/thread.php?thread_id=905322&forum_id=2#10591702)

Evaluation loss.... downgrade...cash call...evaluation loss....downgrade...cash call.....and....

(http://www.autoadmit.com/thread.php?thread_id=905322&forum_id=2#10589168)

Harvard is a non profit and they will be fine

(http://www.autoadmit.com/thread.php?thread_id=905322&forum_id=2#10589177)

Despite the size of its endowment, Harvard badly needs cash as most of its holdings are highly illiquid. Only around $6 billion of its endowment funds (as of June 08) were unrestricted, most of that also illiquid. They are also getting a number of cash calls on their private equity and venture deals forcing them to dump $ billions worth of these investments at a fraction of their cost. By the time the dust settles, the value of the endowment could drop by 50%.

I found it interesting that Harvard did not choose to state their outstanding capital call obligations. The annual reports I've been looking at from other schools do state them in the notes: $200 million for Swarthmore, $268 million for Williams, and so forth. With an endowment 20 times larger and a more aggressive investment strategy in alternative funds, I'm guessing Harvard's obligations are somewhere north of $5 billion.

(http://www.autoadmit.com/thread.php?thread_id=905322&forum_id=2#10589195)

YOU'RE A FUCKING FINANCIAL GENIUS!

(http://www.autoadmit.com/thread.php?thread_id=905322&forum_id=2#10597320)