"Far from campus, universities put their money into farms, railroads, oil rigs" by Deirdre Fernandes Globe Staff July 02, 2017
Ambitious plans for New Zealand’s largest dairy operation had collapsed. The investment partners were mired in a bitter squabble, their lenders had grown impatient and wanted their payoff, and the farm’s irrigation systems had fallen into disrepair.
Others may have seen signs of failure, but Harvard University’s multibillion-dollar endowment saw opportunity.
Members of the university’s investment team in Boston knew little about milking cows when they swooped in and bought the 4,350-acre operation in 2010 for about $25 million, but they convinced New Zealand authorities they could turn it around, and make money doing so.
And for years they did, as part of a sizable gamble the world’s largest endowment made on natural resources around the globe, in timber, vineyards, and orchards, from the Amazon to Romania to closer to home in California.
Stocks and bonds may do when you’re an everyday investor. But the country’s elite universities, sitting atop multibillion-dollar endowments, venture into far more exotic and potentially risky realms as they chase higher returns to fund day-to-day operations, from scholarships for students to salaries for superstar professors.
So where are they putting their money?
Harvard has invested in senior housing campuses in sunny California and across the Southeast and in a generic drug manufacturer in India, to name a few. Yale University has put its money in forests in Vermont and Silicon Valley startups. The University of Texas system has bet on oil wells in a shrubby western corner of the state.
The unlikely range of their unorthodox investments was underscored last month when Harvard’s endowment acknowledged it is in negotiations to sell the dairy farms — along with thousands of cows — to the private equity firm KKR & Co. as it restructures its endowment.
For years, Harvard has invested about 10 percent of its $37 billion endowment in natural resources.
These endowments are looking “to discern where these small but significant opportunities lie,” said William Jarvis, executive director of Commonfund Institute, which helps nonprofit endowments with their investments.
Yale University, with its $25.4 billion endowment, hopped onto the China Railway Construction Corp. in 2008, agreeing to buy a $50 million stake in the global giant, which builds tracks around the world. Yale’s endowment subsidiary that bought into the railway company held assets of $317.6 million and brought in income of $119.4 million in 2015, according to tax returns.
Yale has also been active in using its endowment to back startups, from Oracle to Facebook. In 2010, the university noted that a $300,000 investment in Google generated $7.5 million in profit after the Internet search giant went public.
More than 16 percent of Yale’s endowment was invested in venture capital in 2016, up from 11 percent in 2012. Higher education endowments on average invest just 6 percent of their funds in venture capital, according to an annual survey conducted jointly by the National Association of College and University Business Officers and Commonfund.
Yale University officials declined to comment about the endowment.
These large, wealthy universities are different from everybody else, said Lucie Lapovsky, the principal of Lapovsky Consulting, who works with colleges on financial issues.
They have more money, access to expert money managers, and an alumni network that can provide an in, she said.
For example, Harvard is a partner in Washington, D.C.-based Capitol Seniors Housing, which has bought and developed 60 independent living and retirement communities across the country since 2003. The founder of the firm is a Harvard Business School graduate.
These universities also need to ensure that their endowments, which fund a larger portion of their operating expenses than they do at smaller institutions, make money, she said.
Conversely, many smaller institutions, with less-well-funded endowments or smaller staffs, are more likely to stick with traditional stocks and bonds, she said.
They also don’t have the tens of millions of dollars required for entry into some of these more offbeat, private investments.
“You need a lot of money,” Lapovsky said. “They don’t want to raise $10,000 to $100,000 or even $1 million. It’s several million.”
The endowments are also famously tightlipped about their investments, so by the time news filters out that one of the top university funds has succeeded with a little-known investment strategy, it’s usually too late for the smaller players to follow suit, said Jarvis with Commonfund, which helps smaller university endowments with their investments.
Soon after some large universities began reporting hefty returns from their timber investments more than a decade ago, other universities were eager to match that performance. But the opportunity had already passed, he said.
“The first-mover advantage had happened 15 years before, when they first made the investment,” Jarvis said.
But alternative investments, even if financially lucrative, aren’t always winners politically.
After student protests, Columbia University in 2015 divested from companies that operate private prisons, including Corrections Corporation of America. Yale University has been under similar campus pressure over its prison and coal mining investments.
Harvard sold 33,600 acres of Romanian forest to the furniture retailer Ikea Group in 2015 after a contractor the endowment had hired to purchase the land was convicted of bribery and money laundering.
To manage large properties, as Harvard does, university endowments have to hire local people to oversee the investments and fly their own teams to far-off locales to ensure they’re operating properly, said Charles Skorina, an executive recruiter in San Francisco who follows endowments and pensions.
That’s why some universities may be pulling back. “That’s a time suck,” Skorina said.
Some of these bets also lose money.
In 2016, endowments under $25 million, which tend to be invested in more traditional assets, outperformed those managing over $1 billion.
Harvard, in particular, has seen its peers leapfrog ahead, in terms of annual percentage gains. Last year, the university posted a 2 percent loss on its investments, dropping the value of the endowment by $2 billion. Yale, on the other hand, gained 3.4 percent.
Harvard’s natural resources portfolio, which includes timber and agricultural lands, performed particularly poorly — down 10 percent — hurt by conditions in South America, including a severe drought.
Harvard brought in former Columbia University endowment chief N.P. “Narv” Narvekar last year to shake up its strategy. Narvekar announced earlier this year his plans to streamline and simplify the endowment, cutting half of its 230-member staff and entrusting more money to outside firms to manage.
But its natural resources portfolio will remain in-house for the foreseeable future, Narvekar recently said in a letter to the Harvard community.
Of course, sometimes even with all the money and brain power from investment managers, it comes down to a bit of luck.
Texas lawmakers, for instance, set aside what would eventually amount to 2.1 million acres in the late 1800s to help support the University of Texas and Texas A&M University. A railroad company had given the land to the state, because it was considered too worthless to survey. Initially, it was primarily cattle-grazing land, and profits came from leasing it to ranchers.
But by the 1920s, the endowment struck oil. Its first oil well, Santa Rita No. 1, was named after the patron saint of the impossible.
Permanent University Funds, which manages the lands, had assets of $17.8 billion in 2016, ranking it among the largest endowments in the country.
Silly me. I thought college was about teaching people problem-solving and critical thinking skills that would prepare them for life as well as providing a wider cultural overview of the world.