Defenders of Harvard's portfolio argue the secondary market is discounting private equity stakes too much. The market is made up of a dozen secondary funds with at most $15 billion available, says Bryon Sheets, a partner at San Francisco secondary firm Paul Capital. That makes it a buyer's market, given the slew of desperate banks, pension funds and endowments looking to unload assets to meet obligations. So what are Harvard's private equity stakes worth? Most private equity investors like Harvard have been waiting for their money managers to finish marking down their assets following a brutal 2008. It is a slow process that lags the public markets by as much as 180 days, says William Frieske, a performance consultant at Northern Trust, which administers endowment accounts.
But one clue to what may be coming can be found in Harvard's own portfolio. It owns units of Conversus Capital, a publicly traded vehicle that holds slices of 210 private equity funds. Conversus has cut its net asset value by 21% since last summer to make a "best estimate." Yet stock investors think things are a lot worse. Conversus shares have fallen 67% since June 30 and are trading at a 62% discount to the net asset value. The Conversus stock drop translates into a potential $168 million loss for Harvard, which, as of Jan. 31, was still listed as a "strategic investor."
Conversus is run by Robert Long, a former Bank of America exec who went to Boston and got $250 million from El-Erian to help him set up the firm and buy $1.9 billion of Bank of America's private equity assets. Harvard also owns a piece of Garnett & Helfrich Capital, a $350 million fund opened in 2004. Garnett has purchased six companies but, five years later, is yet to realize any returns. The value of one of those investments, software maker Ingres, has been reduced by its minority owner to nothing "as a result of reported losses." Then there is Tallwood Venture II, a $180 million fund raised in 2002 to invest in semiconductors. It has hardly exited any of its portfolio companies, according to Thomson Reuters and SEC filings.
The fact that a fifth of HMC's portfolio is in private-equity-like investments makes it vulnerable to the kind of problems HMC faced this fall. HMC has made $11 billion of capital commitments to investment partnerships through 2018, says Moody's. HMC used to make good on those commitments with income generated by the existing private equity portfolio. "Endowments are afraid capital calls will come quickly and far ahead of any liquidity from private equity funds," says Colin McGrady, managing director at Cogent Partners.
Watching all of this, the group of 10 Harvard alumni from the class of 1969 feel vindicated. "The events of the last year show that the whole procedure of rewarding people so handsomely based on increases on paper value of the endowment was deeply flawed," says a spokesman for the group, which recently sent a letter to the Harvard president suggesting HMC staffers return $21 million of their latest bonuses. "Even now, we don't really know how well it has done in the last 10 years."