RSS
Facebook
Twitter
E-PrinceJust because the University has a $12.6 billion endowment doesn’t mean that it can quickly come up with $12.6 billion to spend on any given day. In fact, the University can only convert about half of its ...(back to the article)
The opinions expressed here are those of the individual commenters and do not necessarily represent the views of The Daily Princetonian Publishing Company, Inc. We do not take responsibility for the opinions, facts, or claims presented by individual commenters, and reserve the right to moderate or delete inappropriate comments.
Nice reporting
This is a great article, and the reporting is impressive, but isn't the lead a little ridiculous? Should we be worried that the University could, in a pinch, only convert $6.3 billion dollars to cash easily? What on earth would we ever need that much money for at any one time?
I realize that this is oversimplifying the issue of illiquid investments (and kudos for Chetan that I do -- I'm terrible at econ), but really?
I don't think that's what the writer was trying to say. I think he's just explaining that having a $x endowment doesn't mean you have $x at your disposal.
A few points to consider:
To say that an investment is illiquid means that there is no market for it. If there is no market for an asset, the present value is ZERO. You can hope hat it has value in the future, but that is hope, and not reality.
If the U has access to so much ready cash, it would not have been necessary to go into the market and borrow $1 Billion, to cover today's operating budget. The interest that we have to come up with as long as this debt is outstanding will be something like $4 Million per year. That will buy a lot of 2 ply toilet paper.
Finally, it's too bad that there is not a provision in our contract with Golden that allows us to "claw back", as it is called in the financial world some of the huge bonuses that Golden got, for getting us into this mess.
I have seen some comments that echo other student sentiments regarding the endowment – it’s so large, what’s the real difference between $12 billion and $16 billion, or whichever numbers are being offered. The point of my letter to the PAW in April was to look at this in a holistic fashion. The endowment income (both cash and gains/losses) supports an extraordinarily large portion of the University’s spending. So when that ‘income’ was bumped up as a percentage of the endowment’s ‘value’ during a period of rampant valuation inflation, it set in motion a spending mindset that created long-term expenses predicated on the sustainability of relatively short-term valuation fluctuations.
In my opinion, the only rational approach would be to view endowment income as a smoothed series of cash receipts – dividends, interest payments and booked gains. Just as a portfolio of bonds shows an increase in valuation during a period of declining interest rates even though the income remains relatively fixed, the changes in valuation of a portfolio heavily invested in illiquid assets could remain independent of a smoothed stream of cash receipts. But the Trustees have decided over the years to use a portion of the reputed current valuation as the withdrawal factor, regardless of the composition of the portfolio. So a question that logically arises is given the cash-flow nature of the portfolio, how exactly does the decline in values reduce the amount available for spending in the current environment?
I believe that the answer to that question has emerged as the key issue. There’s an overwhelming likelihood that the decline in values from 2007-2009 didn’t precipitate the cash crisis so much as illuminate it. But given the scanty reporting by the University, it's extremely difficult to sort out exactly what's going on.
One other thing - if I could borrow $1 billion for $4 million a year in interest (0.4%), I'd do it in a heartbeat. But "...The Princeton sale was split between 10-year 4.95 percent notes and 30-year 5.7 percent bonds, according to data compiled by Bloomberg." So we're talking about $1 million in interest per week, not $4 million per year.
Private equity may have generated solid long-term investment gains but a university that prides itself on national service must question the manner in which those gains are made. If the modus operandi of private equity involves leveraging a company to a point which inevitably requires siginificant job losses, do we want to be a part of that? Just as endowments shed investments in South Africa during apartheid and oil interests in the Sudan, shouldn't we choose managers on the basis of their investment philosophy, especially at a time of 10% unemployment?
Tiger 11:
Your definition of illiquid is wrong. An asset that has no value is worthless. An asset may not have an active market, but may yield cashflows or other utility to its owner.
As an example: consider the 'Market For Lemons' paper about sellers of used cars-- the current owner of an asset may have private information about its value such that the expected value to a buyer given what is known about the seller may be zero. However, the asset still has some utility to its owner; there's just no trading in the asset.
This is similar to the market for certain PE investments.
A better description of illiquidity would be the difference between the expected present value of the future stream of cashflows and the current realizable price.
To Perplexed,
Saying that private equity directly leads to job losses is an inaccurate generalization. While some private equity investments in leveraged buyouts (LBOs) may lead to some job losses (but not as a standard practice), PRINCO also invests in venture capital and growth equity funds. Venture capital and growth equity investments fund start-up and growth businesses that create a significant amount of new jobs for the economy. More so that if the fund invested in a public equity portfolio. So, on the whole, PRINCO's private equity portfolio is most likely a net job creator.
We should avoid managers who have a habit of overleraging a company, taking out a special dividend to pay its investors off, and then firing employees so it can meet its debt load. Simmons mattress is the classic example, but not the only one. Private equity managers that are more financial engineers than business managers need to be avoided.
"“If the University spent more time worrying about asset inflation and less about grade inflation, it would be better for everyone,” he said."
One of the best lines in a Prince article ever. Thank you Tad LaFountain III