Penn may post fewer endowment losses than other Ivies

Though higher education is beginning to feel the weight of the economic crisis - in recent weeks some schools have explored the possibility of selling off private equity or have implemented hiring freezes - Penn is in better shape than many Ivy League schools.

While Penn saw a 3.9-percent drop in endowment value last fiscal year as other schools eked out gains, the current economic situation at Penn and other schools like Harvard University stem from the schools' past investment strategies.

Penn was not historically invested in alternative asset classes such as private equity and real estate. While this meant that the school's endowment lagged behind peers' earlier in the decade, that former investment strategy formed the foundation for a buffer against the current economic climate.

Since she arrived in 2004, Chief Investment Officer Kristin Gilbertson has diversified Penn's portfolio, which has helped grow the endowment while simultaneously protecting the school's investments.

Harvard - which has the largest endowment in the country with $36 billion - has historically invested about 57 percent of its endowment in illiquid asset classes like private equity and real estate.

Since these alternative asset classes do not report until the end of the calendar year, the data in fiscal-year reports lags behind actual value.

A recent Barron's article estimated that Harvard, Yale and Princeton's endowments could be down as much as 25 to 30 percent since the June 30 reporting deadline because the values of these asset classes dropped.

By contrast, only about 10 percent of Penn's endowment is invested in these asset classes. So far, Penn's endowment is down about 7 percent since June 30, Gilbertson wrote in an e-mail.

While not usually a problem, the high percentage of illiquid investments is making it difficult for the schools to meet capital calls at the moment.

"Private equity funds are dependent on access to capital to leverage their investments," John Nelson, managing director for higher education for Moody's Investor's Service, wrote in an e-mail.

"The outlook for these kind[s] of leveraged strategies is not so good right now, so early exits from some of these strategies [are] being considered to make the cash available for other endowment investments," he wrote.

And while some schools might look at selling public equity to raise the funds, others, including Harvard and Columbia University, are supposedly looking into selling their private equity.

"Rather than looking to sell their public holdings, they're saying, 'Could I reduce my private-equity exposure?'" Executive Vice President Craig Carnaroli said.

Gilbertson wrote that Penn is not currently experiencing any liquidity issues.

The school has "adequate liquid assets to meet anticipated capital calls even under the most drastic scenarios involving no distributions over the next 12 to 24 months."

Penn's operating budget also only draws about 8 percent of its funds from the endowment, according to Penn President Amy Gutmann, making it less endowment-dependent than the schools that have announced hiring freezes.

Still, administrators are accounting for the economic climate in their budget parameters for the 2010 fiscal year, Carnaroli said.

"We have a track record of balanced budgets," Gutmann added.

Some of the new stressors on the budget will include increased demand for financial aid because of the new no-loan policy and a flat outlook for governmental grants because of the economy, Carnaroli said.

At Penn, "we pride ourselves on doing more with less," Gutmann said.

"We're not going to be immune from this economic downturn, but we will balance our budget, we will have liquidity, and we will continue our financial-aid policy."

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