The Rich Get Richer ? The wealthiest universities report spectacular returns on investments


The high-flying performance of venture capital has sent investment returns for several of the country’s largest university endowments to dazzling levels.p. Duke University and theUniversity of Notre Damereported returns on investments of nearly 60 percent for the fiscal year that ended June 30. Another six institutions — Dartmouth College, the University of Chicago, the University of Michigan, the University of Southern California, the University of Virginia, and Yale University — reported returns exceeding 40 percent. Earnings for Harvard, Northwestern, Princeton, and Vanderbilt Universities topped 30 percent.p. Twenty of the nation’s 25 wealthiest universities saw their endowments grow by about $22-billion in the past year, according to Chronicle reporting.p. “I’d have to say it’s unprecedented,” said Larry Goldstein, senior vice president and treasurer of the National Association of College and University Business Officers, which surveys college endowments each year. He could not recall so many high returns among major institutions in 15 or 20 years. The average return reported in NACUBO’s 1999 survey was 11 percent; the highest reported by a single college was 29.3 percent. Only 11 of the 503 institutions in last year’s survey reported earnings of 20 percent or higher.p. All of the top performers in the 2000 fiscal year attributed their high numbers to the exceptional performance of venture capital, with some institutions citing returns of more than 300 percent for the year on those investments. The venture-capital gains have risen with the heightened popularity of initial public offerings of stocks.p. Experts warned against irrational exuberance over the eye-popping numbers, however.p. “People can seem really, really smart when a lot of that is good luck and one good decision,” said Philip Halpern, vice president and chief investment officer at the University of Chicago, referring to decisions to invest more heavily in private equity. Chicago reported earnings of 40.9 percent for fiscal 2000.p. Venture capital is complex to manage, so only wealthier institutions are likely to invest in it substantially. It requires close monitoring and enough money and stamina to withstand the inevitable down cycles when returns look only ordinary. Several endowment managers warned against letting the excitement over private equities — the asset class that includes venture capital — eclipse the strong showing by other kinds of investments as well.p. “We are very pleased, but we don’t count on that happening all the time,” said L. Erik Lundberg, chief investment officer at the University of Michigan, of his endowment’s overall 43.6-percent rate of return. “It’s a much greater return than you would expect from a diversified portfolio.”p. Even without counting private equities, though, the return would still exceed 15 percent, “which is fabulous,” he said. “I think this is true for a lot of endowments — they had pretty good numbers across the board, but everyone wants to focus on venture capital.”p. Aided by the strong returns, endowments of the richest universities are swelling to unprecedented size. Harvard’s was $19.2-billion as of June 30, while those of the University of Texas System and Yale University reached $10-billion each. At least 10 of the universities with the largest endowments were also raising money for billion-dollar-plus capital campaigns at the same time. The $2.6-billion campaign that Harvard completed a year ago was the largest in the history of higher education. The $1-billion campaign just completed byNotre Damewas the largest ever by a Roman Catholic institution.p. Such huge endowments should obligate institutions to spend more money to improve society, some higher-education observers believe. The current annual rate of spending is said to average about 4 to 5 percent of endowments’ market value. (Spending rates often are formulas based on a three-year average of the endowment’s market value.)p. Leon Botstein, president of Bard College and a proponent of more spending from endowments, said wealthy colleges now have an opportunity to reevaluate their missions and decide where their money and institutional talents can do the most good, whether by promoting the arts, improving the quality of education in high schools and undergraduate classrooms, or supporting pure research in the sciences.p. “These are not banks, and many of them have become banks,” he said of the endowments, arguing that colleges should spend from both their capital and their earnings. Unlike most college leaders, he argues that “it is scandalous for institutions to be risk-averse in this environment. There is an accumulation of wealth and an opportunity to do the kind of institution-building that we associate with the 19th-century Gilded Age.”p. Bard’s 6-percent spending rate exceeds those of most colleges. And its $95-million endowment is minuscule compared with those of the wealthiest universities — and in comparison with its own $62-million annual operating budget.p. Calls to the 25 universities with the largest endowments at the end of the 1999 fiscal year yielded at least some numbers from 20 of them. The others gave various reasons for not releasing the data: Figures were still being calculated by Emory and Stanford Universities (Stanford’s fiscal year ended on August 31). And officials of Columbia University, the Massachusetts Institute of Technology, and the University of Pennsylvania declined to release the numbers before presenting them to the institutions’ governing boards in the next few weeks. In addition, officials of Johns Hopkins University and Washington University, in St. Louis, provided the total values of their endowments but cited institutional policies against releasing the rates of return.p. M. Wayne Coon, chief investment officer at Emory, said he planned to have the figures ready later this year, in time to submit them to the business-officer association’s survey. But he expected a better performance than in 1999, when the endowment’s value dropped 12.3 percent because Coca-Cola stock had fallen. Emory’s century-long tradition of benefitting from Coke executives includes a $105-million gift from Robert W. Woodruff, in 1979, which was the largest ever to higher education at the time. The university sells Coke stock when market conditions are right and buys other kinds of investments, including venture capital, Mr. Coon said. Coke stock now accounts for about 40 percent of Emory’s endowment.p. “Where you have single-stock concentrations like we do, you are either going to look wonderful or not so wonderful, based on what that stock does,” Mr. Coon said. “We’re trying to diversify around the Coke stock. We have 60 percent to put in other places.”p. Endowment managers are circumspect about discussing specific investments, and particularly so when it comes to venture capital, because the sector’s success has increased the competition to get into the hottest funds.p. But even an oblique account of one successful investment, as described by William T. Spitz, vice chancellor for investments at Vanderbilt, explains how such high rates of return are possible. Remarkably, an investment of $2,900 in a venture-capital fund a few years ago reaped a $19.2-million return this year; the fund had put the money into a technology company that the university declined to name, but that flourished and went on to have a successful initial public offering of stock.p. Getting such profits are hardly automatic, though. Colleges must be willing and able to have pots of money tied up in investments that they can’t cash out for years, while a young company grows to the point at which it goes public with a stock offering or is bought by another company — if all goes well.p. Of course, a lot of start-up companies fail, making venture-capital investments riskier than those in companies with a track record. The key to success is going with a venture-capital fund that picks the right young companies.p. Because venture capital has performed so spectacularly in the past few years, however, competition for access to the best funds is keen. The most-respected venture-capital companies often have a preference for investors they know well, through years of handling their money, endowment managers said. And that can increase the obstacles for small colleges that want a piece of the action. “Access has not been a problem for the Harvards, M.I.T.’s, and Stanfords, because they have had long-term programs and have developed good relationships,” saidScott C. Malpass, chief investment officer atNotre Dame, which has invested in venture capital for two decades. “It can be harder for smaller schools that are just starting.”p. Several endowment managers said their universities have invested in venture capital since the late 1970’s and early 80’s. They said they had sold other holdings, such as U.S. stocks, over the past 5 to 10 years to increase the share of their portfolios in venture funds and other risky, high-return sectors, like hedge funds.p. Several managers said their colleges now have a target of investing about one-fifth of their total portfolios in private equities, managers said. Actual holdings for many have risen well above the targets, because the investments have performed so well, but most are expected to drop back to the target levels eventually.p. For Duke, the move toward greater investment in private equities was part of a strategy begun in the mid-1980’s to enlarge the endowment, which historically has trailed those of other elite universities, said Thruston Morton, who became president of the Duke Management Company last month. Duke had invested in venture capital since the late 1970’s, and officials decided that the endowment, which invests over the very long run, could afford to have more money tied up in illiquid assets, in hopes of reaping higher returns.p. “They had the foresight to stick with it during times when the returns weren’t so stellar,” Mr. Morton said. During the early 1990’s, he noted, returns on private equities were much lower than they have been in recent years.p. But keeping an eye on the sector requires a lot of work — one thing that makes it hard for small colleges to pursue. “There is a proliferation of venture-capital partnerships,” Mr. Morton said. "People who had been with Partnership A decide to run their own shop and start Partnership B. The challenge is to figure out who has the edge, what makes sense.p. “It is a very difficult thing, on a pro-forma basis, to figure out. It’s not like looking at an established company and buying its stock. With these partnerships, you are investing in the expertise of the principals. You are relying on them to invest your money in the right places at the right time.”p. Many small colleges prefer to invest in venture capital through asset-management companies. John Griswold, a senior vice president of the Commonfund, one such company that markets many products to colleges, said its venture-capital funds have gained in popularity, although he declined to give details about the funds or their participants.p. With the spectacular returns come calls from many on campus to spend more on students and faculty members. Among the advocates for spending more endowment money is the Harvard Crimson, the student newspaper, which published an editorial after the university announced that its endowment had reached $19.2-billion. “The stunning news should, at the very least, prompt the university to spend more money,” the editors wrote. They suggested spending more on financial aid, improved undergraduate housing, endowed professorships, and the eventual building of a new student center.p. Jack R. Meyer, president and chief executive officer of the Harvard Management Company, said about $600-million had been allocated from the endowment for the university’s needs this year, amounting to roughly 4.2 percent of the endowment’s market value at the end of fiscal 1999.p. Joe Wrinn, a university spokesman, noted that Harvard will soon name a new president, and that one task for the new leader will be to evaluate the university’s spending priorities. But, Mr. Wrinn added, universities have to plan their endowment spending for the long term, through both good and bad economic times.p. “I can’t sit here and say $19.2-billion isn’t a lot of money,” he said. “At the same time, once you get past that initial pleasant surprise in the amount, there are still fundamental arguments and principles that need to be adhered to. We’ve been doing this almost 400 years.”p. Investment officers at several institutions said they do not plan to change their spending rates. Several said the robust returns mean that they can spend much more endowment money without raising the spending rate. Notre Dame has increased its endowment payout by an average of 14 percent in each of the past six fiscal years,Mr. Malpasssaid, while keeping the rate at about 4.2 percent. That money enabled the university to keep the tuition increase for the current academic year at 5.2 percent, to $23,180, the smallest increase in a decade, he said. The endowment also provided much of a 23-percent increase in undergraduate scholarships, which reached $34.4-million this year.p. But he and other managers said they can’t set spending rates based on their most-successful years. “No one is going to plan for a 57-percent return,”Mr. Malpasssaid. “At universities, you have to do these things in a planned way. It’s better to be a little more conservative than to have to step back at some point.” The prospect of an eventual fall back to earth for venture-capital returns doesn’t worry managers who have built substantial investments in the sector.p. “The entrepreneurial environment in this country is so extraordinary. That is not slowing down,” Mr. Malpass said. “I see things moderating, but I don’t think we will have negative returns. It’s still very attractive.”p. “Good deals are going to get done — good concepts and good technologies — and the market is going to buy them.”p. Friday, October 13, 2000

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