View Mobile Site
Text Size: Smaller Larger Normal

Yale and other Ivy League schools under fire for hoarding hedge funds, paying managers

Yale and other Ivy League schools under fire for hoarding hedge funds, paying managers

"Last year," Victor Fleischer argued, "Yale paid about $480 million to private equity fund managers as compensation — about $137 million in annual management fees, and another $343 million in performance fees, also known as carried interest — to manage about $8 billion, one-third of Yale’s endowment."


POSTED August 27, 2015 7:59 a.m.
Share on Facebook Bookmark and Share
A University of San Diego law professor took to the New York Times last week to challenge the tax-exempt status granted to enormous Ivy League endowment funds, particularly in light of the massive fees they pay hedge fund managers to manage those funds.

"Last year," Victor Fleischer argued, "Yale paid about $480 million to private equity fund managers as compensation — about $137 million in annual management fees, and another $343 million in performance fees, also known as carried interest — to manage about $8 billion, one-third of Yale’s endowment."

Fleischer wants universities to be required to spend 8 percent of their endowment annually, to discourage the hoarding that leads to these kinds of massive management fees.

Fleischer's argument reflects persistent resentment of elite schools with already enormous endowments that somehow manage to also keep scoring enormous gifts.

A $400 million gift to Harvard earlier this summer, its largest ever, touched off a debate on social needs and tax exemptions.

"Yet for many others, the gift didn't make sense," Inside Higher Ed observed. "They questioned why wealthy donors repeatedly choose to give large sums to the wealthiest university in the world."

After reading the Fleischer op ed, Malcolm Gladwell went on National Public Radio to echo the concerns over the priorities of monied elite schools. Gladwell focused his fire on the tax-exempt status of these enormous endowment funds.

"It's one thing if a school has an endowment of $500 million, that they are stretching a million different ways to meet the needs of their students," Gladwell said, "to say that they should escape taxes to reserve their funds for education. That logic does not hold when you have $35 billion in the bank, as Harvard does."

"I've grown increasingly incensed at the inequality in higher education," Gladwell said. "There are a handful of schools that just have too much money."

Tax dollars currently lost to enormous endowment funds would be better spent on schools that need the money. "Is our education system better or worse off for having a very small number of schools with a massive amount of money and a very large number of schools that are hurting?" Gladwell asked.

Dan Primack at Fortune responded to Gladwell and Fleischer's attacks by noting that "Yale's private equity program currently represents 33% of its endowment, and has generated 15.4% annual returns over the past decade (a better mark than the S&P 500 over the same period).

"Were Yale’s PE portfolio to make that exact return on its current PE portfolio in its current fiscal year," Primack noted, "the return in hard dollars would be over $1.2 billion. Sure, Yale could pay its private equity managers exactly bupkis, and then be $1.2 billion poorer for its populist pose."

"Private equity is a straw man here," Primack argued. "Set it on fire, and watch the campus burn."
Commenting is not available.

Commenting not available.

Please wait ...