Give Me Liquidity! "Maybe being Harvard isn’t so great after all."

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Related, A concurrent session at SCUP–44, July 18–22: Sustaining Small Colleges: Using Models in an Integrated Planning Process

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A very nice article in Inside Higher Ed by Jack Stripling about consequences of past endowment investment practices and current changes:

If there’s any trend emerging, it’s that institutions with endowments of varied sizes are moving toward more liquid investments that allow for speedier access to cash. Met with significant demands on resources at a time when resources are dwindling, colleges simply need money now – like right now. The urgent need for cash on hand, or liquidity, has some finance chiefs looking to disentangle themselves from the complex, long-term investment vehicles that came into vogue across higher education in the last decade.

“It is definitely back to the future in terms of investing,” Nelson said. “You’ll probably see small and medium endowments looking more like they did 10 years ago.”

Is There an 'Education Bubble'? And Not Just at Harvard?

On The Deal Professor blog, Steven M. Davidoff looks closely at Harvard's financial situation and draws potential conclusions about an 'education bubble' potentially being burst by illiquid assets:

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. It needs to cover short-term funding obligations rather than liquidate illiquid assets at fire-sale prices. In essence, Harvard is more like a hedge fund than ever — trading for short-term gain with the same risks involved.

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.