March 31, 2009
But reports that Harvard was forced to sell $1.5 billion in private equity investments for “pennies on the dollar” are completely untrue, Mendillo said. She did begin evaluating options to reduce private equity exposure shortly after joining the firm, she said, but market conditions rapidly deteriorated from “pretty good” to “absolutely horrible.”
“We have not taken a major chunk out of private equity,” she said.
Illiquid investments still constitute a large slice of the endowment’s assets, with 13% in private equities, 9% in real estate, and another 9% in natural resources. These investments were designed to be self-funding, with cash flows sufficient to handle cash calls. That relationship has broken down, as has Mendillo’s appetite for additional illiquid investments.
A staff of approximately 20 individuals oversees those illiquid investments for Mendillo, evaluating and monitoring external managers. When she left Harvard in 2002, 70% of the endowment was managed internally and 30% was managed externally. Today those percentages are reversed; employees have left, started hedge funds and now manage funds for the endowment. Mendillo still relies heavily on her internal staff to manage emerging market equities and domestic and foreign fixed income. By contrast, Yale’s endowment, managed by David Swensen, relies entirely on external managers.
Mendillo mixes active and passive strategies in the public markets, indexing when she believes Harvard has no clear advantage in a specific market. She also uses a subset of hedge fund strategies, and she is not committed to investing in every hedge fund discipline.
Typically, Harvard spends between 4% and 6% of its endowment each year, an amount that funds up to 30% of the university’s operating budget. During years of double-digit returns, Harvard was able to stay in the lower bound of that range while stellar performance enabled Harvard to provide broad scholarship programs on a need-blind basis.
The broader question Harvard, along with other major endowments, must ask is whether the “endowment model” of asset allocation, with its major commitment to illiquid investments, will continue to work in the future. Mendillo’s faith in the approach appears unshaken, but that confidence is being tested in the current environment, as pressure mounts to provide liquidity to support operational needs.
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