Hedge Fund Harvard
Calls to divest endowment funds from Raytheon bring up a question: Who do these endowment funds serve? Hint: It's not actually students, according to the NBER
What’s Happening in the Market
Abre raised a $24M Series A round (ETCH). Abre’s value prop is that they connect the many disparate tools that a school district uses to provide a holistic view of students: Everything from their IEP, behavioral incidents, grades, assessment scores, and even payments.
NativeX, a Vietnamese startup, raised $4M in seed funding, less than 8 months after their founding. The company connects students to foreigners to plug the gap for English-proficient talent, specifically in IT. This points to two trends: A lot of EdTech companies in Southeast Asia and South Asia are focused specifically on English proficiency, and a lot are specifically focused on helping firms who are outsourcing talent from the US.
What We’re Talking About
West Virginia received a waiver from the federal government for repaying $465M in COVID relief funding. The funding had initially been contingent on the state keeping education funding at the same level or higher than it was during the pandemic, but West Virginia has actually seen an 8% decrease in education funding (from 51% of the budget to 43% last year).
Nexus Capital Management is partnering with the ACT (CNN). They’re spinning out the ACT assessment into a for-profit entity, while Encoura (the ACT’s research agency) will become a public benefit corporation. The ACT has lost money the last few years (although the losses softened from $60.5M in 2020 to $12M in 2022). Many educators are worried about private equity taking control of the ACT.
One Big Idea: In Service to Whom?
When we were in college at Tufts, there was a lot of student activism around the university endowment fund divesting from companies associated with the Keystone XL Pipeline. Protesters across campuses, such as at Yale and Texas A&M, have called on their universities to divest from military weapons manufacturers.
Delegates from Yale had signed the Port Huron Statement and had been the soul of the anti-war protests during the Vietnam War. Now these same universities are funding Lockheed Martin, Northrop Grumman, Booz Allen Hamilton, and other firms with questionable value alignment (although maybe they do actually have bottom-line value alignment). The Yale-affiliated Yale New Haven Health System had even hired Raythen’s former head of pension investments to lead their investment fund.
These protests often highlight a strange dynamic on college campuses: Who do administrations really serve?
This reminds me of a quote possibly attributed to Oscar Wilde: “The bureaucracy is expanding to serve the needs of the expanding bureaucracy.”
The Bureaucracy
Tuition is about 4x what it was in the 70s, despite controlling for inflation. Student debt has doubled over the last two decades alone. So it begs the question as to who benefits from these endowment funds. It’s not necessarily your average student.
The American Council of Trustees and Alumni, a conservative-leaning think tank, released a report that found that per capita student spending on student services (including for DEI) has declined over the past decade.
Okay, so students aren’t benefitting from a cost perspective for a product that is essentially the same as it was fifty years ago. But maybe professors are? Maybe, the quality of instruction merits those tuition increases?
Nope.
From 2016 to 2021, instructional spending (salaries for professors, deans, etc.) at public universities declined by nearly 5%.
Where did the money go?
Administrative spending increased by 6.3% during that same time period.
In 2021, researchers from the Review of Social Economy found that from 1976 to 2018, full-time faculty increased by 92%, the student population increased by 78%, and “full-time administrators and other professionals employed by those institutions increased by 164% and 452%.”
In a report put out by the Progressive Policy Institute, a center-left think tank, they found that at the top 50 most elite universities, the ratio of faculty to students is 1:11. It makes sense why we’d want a ratio like that. The purpose of a university is to educate. But the ratio of non-faculty to students at those institutions is 1:4. This doesn’t necessarily include essential services like janitorial staff or cafeteria cooks, because those are contracted out. But it does include public relations, legal, career services, and fund managers.
In Service to Whom
Think tanks from both sides of the political aisle as well as student protests all point to a sentiment that is growing: What is the point of universities, if not to educate and empathize with their students?
In January 2023, the University of California made a $4 billion investment in Blackstone’s REIT to purchase rental properties (Business Insider). NYU meanwhile owns 115 buildings in NYC across 14 million square feet. Georgia Tech, University of Washington, and UT Austin have all partnered with private real estate firms to develop retail spaces and offices leased to private companies (so not in service to their students, just to the bottom line).
What happened? In “Bankers in the Ivory Tower: The Troubling Rise of Financiers in US Higher Education,” author and professor Charlie Eaton posits that it all started at the 1988 Harvard-Yale football game, when Tom Steyer convinced David Swenson, the endowment manager of Yale, to park $300M into his new fund, Farallon Capital. Yale’s endowment grew from $1.2 billion in 1988 to more than $44 billion 2022.
Prior to his death in 2021, David Swenson was earning nearly $5 million per year from Yale (Peter Salovey, Yale’s President, makes $1.9 million). Narv Narvekar, the head of Harvard’s endowment fund and previously the head of Columbia’s, makes more than $6.4 million per year (Larry Bacow, Harvard’s President, made about $1.3 million per year). The data suggests where the real priorities are.
University endowment funds now account for about $130 billion across hedge funds alone.
A paper from the National Bureau of Economic Research found that income from these endowment funds isn’t used to expand enrollment or increase student aid (despite fund managers’ claims that they do support student aid, George Bulman, the economist at NBER, found contributions to be statistically insignificant). Tax breaks for endowment funds now cost the federal government nearly $20 billion per year. A New York Times investigation found that many of the wealthiest public and private non-profit universities (such as Indiana, Colgate, Dartmouth, Harvard, and Duke) use tax shelters in the Cayman Islands and British Virgin Islands to further obfuscate their assets.
More students rely on Pell Grants and state or federal financial aid, as tuition has exploded. The benefactors of exponential tuition increases and the proliferation of hedge-fund investments haven’t been students or the general public.
To be clear, this is predominantly a problem of the wealthiest institutions (about 11% hold 75% of assets among all national colleges and universities). These universities are acting like oligarchs caught in the Panama Papers. They drive up tuition, plow the money into hedge funds and private equity, hide assets abroad, and even , only partially, report their investments to the public (only about 1% of Yale’s assets are publicly disclosed). They use that money to pay salaries to their fund managers that are higher than most Wall Street executives’ salaries.
It’s time to reevaluate the non-profit statuses of universities. They might ostensibly serve the public good, to the extent that other for-profit companies can serve the public good. But many of them have become glorified real estate firms that happen to have instruction on the side. More problematically, many have become glorified hedge funds and act accordingly.
Guest Post
We’re so excited for next week’s guest post, from Kaitlin Dumont!
Kaitlin Dumont’s expertise lies at the intersection of higher education and workforce learning. "The Mrs. Maisel of EdTech" to those in the know, she takes an observational humor approach as she partners with an ecosystem of stakeholders ranging from senior university leaders to corporate learning executives and state government officials.
With a background working in and with some of the world's leading business schools, she has a special interest in applying classic business strategy to higher education as an industry. Dumont has been featured in several publications, including Inside Higher Ed and Education Technology Insights. She recently took center stage as a speaker and member of the host committee at StartEd’s 2023 EdTech Week in New York City, further solidifying her influential presence in the education technology landscape.