Can Harvard's uncalled capital commitments consume the fund?

Here’s a quiz. You have $26 billion in assets. Most of them are liquid, but certainly not all.

You’ve got 13% in private equity, 25% in “real assets”, a chunk of hedge funds, and you “hold” cash at negative 5% (which means you borrow to goose returns). This from the WSJ:

On Thursday, it said its endowment shrank to $26 billion on June 30 from $36.9 billion a year before. The decline also reflects spending from the endowment and donations. The Cambridge, Mass., university’s investment loss itself was 27%, dwarfing the 18% drop in the median return for large endowments calculated by Wilshire Associates, an investment consulting firm.

In Thursday’s report, Jane Mendillo, Harvard’s endowment manager, noted that Harvard achieved an average annual return of 8.9% over 10 years, three times its peers’ — adding $18 billion in value over what would have been earned by a 60%-stock, 40%-bond portfolio.

In Thursday’s report, Harvard said its private-equity funds, which generally represent about 13% of its endowment model, fell almost 32%. Its real-asset segment, representing nearly a quarter of the endowment, lost 38%. Investments in “absolute return” hedge funds, designed to generate positive results in good times and bad, instead posted a 19% loss.

Harvard and Yale, like other schools, also signed contracts that committed them to huge future investments in private-equity and other funds at exactly the time they could ill afford them. In Thursday’s report, Ms. Mendillo said Harvard cut its “uncalled capital commitments” to $8 billion from $11 billion.

With US$8 billion of uncalled capital commitments, Harvard has promised to send out almost one third of its fund’s assets over the next, say, 8 years. If each PE commitment drew down the same proportion per year, and my eight year horizon is accurate, then Harvard needs to generate $1 billion of cash each year just to fund their PE allocations.

If the US$26 billion endowment generates 9% returns for the next 8 years (in keeping with their historical track record), the fund will throw off US$2.36B in income and gains. The first US$517MM goes to pay interest on bonds that have been issued. The next US$1B goes to cover the annual PE commitment draws (less whatever is returned by existing fund management investments). This leaves about US$800MM for overhead and University commitments, amounts which have far and away exceeded that figure for much of the decade.

The big delta is just how “self funding” the PE program will be over the next eight years. No wonder Harvard put such effort into cutting the outstanding uncalled PE commitments from US$11B to US$8B.

Harvard can call on some of the smartest people in the world. Lucky for them.

MRM