There is a wild-eyed, entertaining, and dishy new looo-ooong piece in the current Vanity Fair on the financial troubles at Harvard. Yes, that Harvard. The university has done a California: extrapolating anomalous gains to infinity, locking in nonsensical spending, and then getting smoked over the last twelve months as its income and financial assets collapsed.
Here is an excerpt:
If Harvard were a serious business facing a liquidity crisis, it would have done something drastic by now: fired senior employees, closed departments, sold off real estate. But Harvard, like most other leading universities, is stubborn and inflexible. “None of these schools has the ability to cut expenses fast enough” is how a hedge-fund manager who counts Harvard among his investors explained the problem. Running the numbers for me, proving how impossible it is for a shrinking endowment to keep up with the university’s bloated, immovable costs, the hedge-fund manager concluded, “They are completely fucked.”
Here’s what we do know about Harvard’s response to the crisis: at some point in the fall of 2008, Harvard Management Company tried to sell off a big chunk of its private-equity portfolio, about $1.5 billion worth of investments that were locked up in such long-term buyout funds as Apollo Investment Fund VI and Bain Capital Fund IX, among many others. The planned auction was a fiasco: no one was willing to pay anywhere near the asking price for those assets.
A money manager I spoke to described his meeting late last year with Jane Mendillo, who in July 2008 became president and chief executive officer of Harvard Management Company. Knowing that Mendillo was trying to unload assets, he offered to buy back Harvard’s sizable stake in his private fund. As he recalls, the surreal dialogue went something like this:
He: “Hey, look, I’ll buy it back from you. I’ll buy my interest back.”
He: “Here, I think it’s worth—you know, today the [book] value is a dollar, so I’ll pay you 50 cents.”
She: “Then why would I sell it?”
He: “Well, why are you? I don’t know. You’re the one who wants to sell, not me. If you guys want to sell, I’m happy to rip your lungs out. If you are desperate, I’m a buyer.”
She: “Well, we’re not desperate.”