As Congress extracts information from private university endowments, many schools aren’t providing details on one sensitive topic -- fees to money managers.
At least 30 universities, including the eight Ivy League schools, didn’t disclose how much they paid in performance fees to external managers like hedge funds in response to questions from lawmakers about how they manage and spend their endowments. Some schools were forthcoming in divulging lower-cost management fees, with Harvard University saying it paid 1 to 2 percent of assets on average.
As many endowments struggle with returns, which support everything from professors’ salaries to student aid, fees paid to outside asset managers have come under scrutiny. Since fees have a “very material impact” on returns, Stanford University told lawmakers, the school’s internal investment management company routinely rejects external managers whose prospective gains don’t justify their charges. Performance fees are the percentage paid on investment gains in asset classes like private equity.
“Endowments may not have included performance fees because, without the proper context about the returns they generate, it could create all sorts of perception problems," said David Fann, chief executive officer of TorreyCove Capital Partners, which advises global investors including pension funds on alternative assets. “The fee numbers can be so big, especially for the very successful funds, when you include the performance aspects.”
The Senate Finance and House Ways and Means committees are examining how the largest U.S. private-school endowments support their schools and students in light of their tax exemption on investment earnings. The lawmakers sent questions to 56 schools and 46 of them provided their responses to Bloomberg.
One of the 13 sets of questions asks schools “how much” they spent to manage their endowment, including outside asset managers and advisers. “Please provide details on the amounts paid, to whom, and the fee arrangement,” the inquiry says.
Non-Disclosure Agreements
Schools said confidentiality agreements with managers, difficulty in calculating performance fees accurately and competitive considerations prevented them from providing details about the charges. Wellesley College called them “a form of profit sharing" and therefore didn’t include them in its response.
“There is not a standard process among our peers for tracking these fees,” Cass Cliatt, a spokeswoman at Brown University, said in an e-mail. “So of course we would caution against comparisons.”
Orrin Hatch, the Utah Republican who heads the Senate Finance Committee, may put pressure on schools to divulge more details.