Mon 25 Jan 2010
With perfect hindsight, we would have entered this fiscal year with greater exposure to fixed income and cash and less exposure to equity-focused asset classes with greater volatility.
- First, we know they borrowed $100 million in taxable bond debt last February to meet liquidity needs. What we didn’t know is that they are paying a 5.875% fixed interest rate on that cash. As all colleges are looking to cut millions from their operating budgets, Amherst is now saddled with needing to cut an addition $5.875 million a year, just to offset the debt service on their “credit card”.
- That wasn’t the end of the liquidity problems. They started the fiscal year with $503 million in outstanding cash calls. During the year, they dumped $51 million of those by selling partial stakes in four private equity investments in the secondary market and taking advantage of buy-back offers from other fund managers. They don’t specify, but it’s a safe bet they got scalped on these transactions.
- They also liquidated $113 million from their public equities, reducing the percentage in the portfolio to just 16% (compared to a target of 30%). These were also, of course, sold at distressed prices.
- And, finally, they liquidated $57 million of hedge fund investments.
Why so desperate for cash? Well, on a new endowment of $1.3 billion, they have $427 million in cash call commitments over the next four years. That’s over $100 million a year. Add in the $50+ million in endowment spending required over and above tuition and other revenue and they’ve got an annual $150+ million cash requirement.
No sweat, right? Just sell some more stocks. Nope. Look at their asset allocation. The first number is their target; the second number is the actual percentage on June 30, 2009.
Public Equity 30% — 16%
Hedge Strategies 30% — 27%
Private Equity/Venture 16% — 22%
Real Assets 12% — 17%
Fixed Income + Cash 12% — 18%
Total Pool 100% — 100%
Not only did they miss most of the rebound in Public Equity, but if they sold every penny of stocks and bonds, they could barely cover the cash calls over the next four years. And, I’m not sure they can even liquidate their stocks. $140 million of their $230 million in public equities are foreign/global stocks listed as Level III assets meaning that they can’t be directly priced. $1.1 billion of their $1.3 billion endowment is in Level III assets with potentially “squishy” valuation. They are over-exposed to private equity, which may or may not be worth what the funds say it is. To the extent that everyone is playing games with the valuations of these private equity and real asset funds (and I think there are big games being played), Amherst’s exposure is off the charts.
Oh, and they ended the year with $321,016,000 in bond debt plus $427 million in short term cash calls. The bond debt is a ticking time bomb as most of it is variable rate. That looks fantastic this year with interest rates near zero, but the exposure as inflation sets in with any economic recovery is hard to grapple with. That, IMO, is why Amherst is so concerned with its out-year budgets and doesn’t think it will bring endowment spending back down to 5% for a decade.
Here is a table comparing the financial returns of the big four. These are all expressed as per student dollars, so they are directly comparable. Note that I’ve used the Fall 2009 enrollments. Also, the spending rate is expressed as a percentage of the beginning endowment number, so it’s really a measure of spending pre-crash. Note that all four were at very low spending rates. They could all go to 5% spending and offset a 25% endowment decline. That’s why these schools (except for Amherst’s liquidity problems) are weathering the storm without having to make brutal cuts.
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