How should private universities handle requests for information about their investments? Consider the following two models:
Model A: Students submit a list of companies about which they have concerns to the university investment office. The investment office informs the students how much exposure the endowment has to each company, either through direct investments or through private investment managers.
Model B: Students express concern about a controversial private investment, identified through the university’s tax forms. Weeks later, the university alters the way it fills out its tax forms, making it more difficult for members of the public to identify similar problems in the future. When students attempt to deliver a letter of concern to the university’s investments office, the staff turns off the elevators, expels the students from the building and calls the police.
Model A was seen in action last year at Duke University when students discovered that university money was indirectly invested in PetroChina, a company accused of human rights violations in the Sudan (Duke Chronicle, 1/08/03).
Yale has chosen Model B.
In other words, Yale has opted to decrease the information it provides about its private investments at a time when regulators, investors and stakeholders are all saying that it makes political and even financial sense to disclose more.
That is perhaps why Yale has become an epicenter of the “UnFarallon” campaign, a national effort by students and allies to push a secretive investment manager to disclose more about how it invests university money.
You may recognize the name “Farallon” from the well-known Baca Ranch controversy. In the late 1990s, Farallon invested Yale’s money in a scheme to extract and sell water from Colorado’s Baca Ranch. After Yale’s involvement surfaced in 2002, President Levin told the Herald that “The leadership of the University was unaware of the circumstances regarding the partnership … When it did come to light and we learned of the opposition, we had to reassess our view” (2/1/02). There were three problems with the Baca Ranch investment and Yale’s investment philosophy. The first is that Levin didn’t even know: private companies are not required by law to disclose much about their investments, even to their own investors.
What if Yale’s officers had known the details of the Baca Ranch investment? “We have no misgivings about what our partner did or how he acted. He behaved responsibly throughout the entire process,” Chief Investment Officer David Swensen told students at a Master’s Tea in 2002. The Baca Ranch “was OK from an environmental perspective,” but encountered “political problems.” That’s the second problem.
It is arguable that Yale would have never stumbled into the Baca Ranch debacle if members of the university community knew about it in advance. That introduces the third problem: “It is Yale’s policy not to disclose individual security positions in its Endowment portfolio or in the portfolio of any person in which the Endowment holds an interest. Consequently, you may assume nothing on the basis of our failure to confirm or deny your speculations as to what securities Yale owns.”
In the wake of the Baca Ranch controversy, David Corson-Knowles ’03 told the Herald, “when things like [the Colorado investment] do come to light, the University stands to lose not just the valor of its name, but also the profits from its ventures, as in this botched water stealing plan. The converse is also true: when the University lets information about its private equity investments see the light of day, it not only upholds its commitment to free and open public debate, it also lowers risk of ‘political problems.'”
Disclosure not only encourages ethical investing in the traditional sense but can also bolster fiduciary responsibility. One of the opening salvos of the disclosure movement came in 1999, when the Houston Chronicle requested information about the private equity portfolio managed by the University of Texas Investment Management Co. (UTIMCO). “The paper reported that almost a third of the investments made between 1995 and 1998 — totaling $1.7 billion — were firms having political or personal ties to either UTIMCO’s then chairman, Thomas Hicks … or then-governor George W. Bush.” (Institutional Investor 8/1/03)
Around the same time, the San Jose Mercury News began seeking information about private equity investments made by the California Public Employees’ Retirement System (CalPERS) and the University of California Endowment. The Mercury News wanted even more detail: information about companies owned by funds in its portfolio, and in the case of the UC system, minutes of UC investment officers’ meetings. While not permitting public access to details of portfolio companies, the settlement was nevertheless a “clear sign that the private equity asset class had grown to big and prominent to maintain its clubby and secretive ways,” according to Institutional Investor. (8/1/03)
Private equity investors predicted that the sky would fall. It has not. In fact, “more public awareness of [return] data could bring more questioning of the accuracy of portfolio company valuations and an improvement in transparency that many investors would welcome.” (Institutional Investor 8/1/03) Nevertheless, private equity investors are reacting to the disclosure movement. “We’re beginning to see some [investment advisers] restricting the information they’re providing to us,” explained the head of the Washington State Investment Board.
One of the virtues of the UnFarallon campaign is the fact that it is pushing Farallon Capital Management to disclose more information to its university investors, which include University of Michigan, CalPERS, Stanford, UTIMCO, University of Pennsylvania, Yale and Duke University. Duke has created a model that Yale ought to follow.
Matthew Schneider-Mayerson is senior in Davenport College.