Harvard is an easy target for the woes of our economy. Its business school produced George W. Bush, the fellow who's presided over the current economic catastrophe, and Rick Wagoner, the CEO of the largest automobile maker who's led its stock down 95% in the last eight years and now wants $25 billion worth of taxpayer money to keep the millions rolling into his bank account. But Harvard had these folks for just two years, so it's tough to blame the school for the current predicament.
However, with $36.9 billion in assets (as of June 30), Harvard also has the largest endowment of any university. And thanks to its big exposure to very illiquid interests in venture capital (VC) and private equity (PE) firms, Harvard leads a growing list of limited partners (LPs) which are selling stocks and those very illiquid interests in order to come up with the cash needed to fulfill their capital calls to these partnerships.
This requires some explaining. VC firms raise money from limited partners such as wealthy individuals, foundations, pension funds, and endowments. But the LPs don't write checks up front -- instead they hold onto their cash and must write a check when the VC calls and asks for the money when the VC is on the verge of making an investment. The problem for many LPs like Harvard is that much of their stock portfolio is locked up in hedge funds and these illiquid VC and PE interests.
So when the VC calls for its capital, if the LPs lack cash, they have to scramble to sell their most liquid assets to raise the money in 10 days. And in many cases they don't have enough. So they ask the VC for patience in meeting their capital calls, sell their illiquid VC and PE interests in the secondary market at a big discount, or try to sell other assets.
One manager of a $400 million fund that buys these interests estimates that hundreds of funds and thousands of individuals may have capital call problems. In total such secondary funds amount to an industry with $2.5 billion in transactions in 2007 and in June 2008 that manager saw a pipeline of more than $1 billion in possible business. Here's a list of LPs which are rumored to be having such liquidity problems:
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Harvard Management Co. which has retained Cogent Partners to sell about $1.5 billion worth of stakes in VC and PE funds,
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CalPERS,
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Brown University,
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Columbia University Investment Management Co.,
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Duke University Management Co. and
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University of Virginia Investment Management Co.
As I posted, many of these LPs are also finding that with the decline in the value of their stock portfolios, they exceed the limits of what proportion they are allowed to hold in VC and PE funds. For example, Harvard is selling its $1.5 billion to get back to its 13% PE to total portfolio target. This also puts pressure on the funds to dump their VC and PE holdings but could also create some buying pressure for stocks. That would be particularly true if some of the LPs have any luck raising new capital from rich alumni.
Harvard is not single-handedly driving down stocks -- but along with other universities and pension funds, it could be leading the way.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book, You Can't Order Change: Lessons From Jim McNerney's Turnaround at Boeing, will be published by Portfolio on December 26, 2008.
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