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Elite private universities got much wealthier while most schools fell behind. My research found out why.

Insiders helped out insiders, and the rich got richer

- October 28, 2021

In recent weeks, elite universities announced some of their largest-ever endowment investment returns. In the Ivy League, MIT led with a 56 percent annual return, growing its endowment from $18 billion to $27 billion. Brown University’s returns also topped 50 percent, and Dartmouth, Cornell, University of Pennsylvania and Yale University were all above 40 percent.

Between 1980 and 2016, the wealthiest 1 percent of university endowments had already grown tenfold — from an average of $2 billion to $20 billion, after adjusting for inflation. Harvard University, Yale and Princeton University did this by averaging annual return rates nearly double those of endowments valued below $100 million, as are those of most investment funds for public, private and community colleges. Similarly, this year’s median endowment among all schools gained 27 percent, roughly half the rate for the top Ivies.

Social scientists have long noted that schools with smaller endowments lack resources to deliver educations that equal the Ivies. So what’s behind the expanding endowment gap?

In my forthcoming book “Bankers in the Ivory Tower,” I show that elite schools grew their endowments by investing large amounts early in private equity and hedge funds led by their own alumni — which helped both the schools and their graduates. Here’s how that worked to expand the gap.

How I did my research

I used the Voluntary Support of Education survey and NACUBO Endowment Study to build an endowment asset database covering 1,143 colleges and universities’ assets back to 1973. The database includes nearly all institutions that operated endowments for two decades or more, and tracks types of investments and return rates from 2003 to 2013.

I linked that to data compiled with Albina Gibadullina for more than 5,000 university governing board members at the top 60 private and public schools in the Times Higher Education rankings.

South Dakota’s wealth is in finance. South Dakotans still think it’s in farming.

The wealth gap between elite schools and the rest grew during the 1980s

Our data show that elite endowments began their exponential growth in the 1980s, as private equity and hedge funds also took off. Throughout the 1970s, endowment values stayed flat for all the schools we looked at — both those in the top 1 percent for endowment wealth and the rest.

But in 1983, endowments began to increase rapidly at Harvard, Yale, Stanford, Princeton and MIT — which have made up five of the six private schools in the top 1 percent for endowment wealth every year since 1973.

In the 1980s, endowments surged as private equity and hedge funds used new financing techniques such as junk bonds for leveraged buyouts and derivatives. These practices captured windfall profits from corporations that laid off workers, cut wages, eliminated employee benefits and busted labor unions. Private equity and hedge funds netted larger long-term returns by tolerating greater short-term risks around these strategies.

University social ties helped these financiers get endowment managers to bet on their funds’ unproven strategies. For example, hedge fund billionaire Tom Steyer learned from a friend at the 1988 Yale homecoming football game that Yale’s endowment manager, David Swensen, was considering investing in hedge funds. Steyer reached out and, after some persuasion, raised $300 million, a third of his initial capital, from Yale’s endowment.

The mutual benefits of university board seats for financiers

As their shared wealth grew, financiers increasingly accepted board seats on top private university boards. Part of our analysis uses data for the Forbes 400 list of the wealthiest Americans in 2003 and in 2017. We found that private equity and hedge fund billionaires were three times as likely to join top-30 private university boards as others on the Forbes list. Not a single Forbes 400 member from private equity or hedge funds joined top-30 public university boards, which do not provide a comparable hub for elites.

Private equity and hedge funds gain private information on investment opportunities through social ties with other economic and political elites — like those appointed to prestigious university boards. Financiers then return the favor, donating more than other rich donors and helping the endowment earn higher returns.

From 2003 until at least the 2008 financial crisis, schools with more board members from private equity and hedge funds tended to invest more with those types of firms — and tended to earn larger returns. Top-30 private universities averaged 2 percentage points more in annual investment returns for every 10 percentage points of their board seats awarded to financiers, even after accounting for endowment size and college acceptance rates. Top-30 public universities had no equivalent relationships.

University leaders have said board ties give them opportunities that financiers otherwise keep secret. Dartmouth held investments in six different funds with ties to its board members in 2013, including Leon Black, disgraced founder of the private equity giant Apollo Global Management. A Dartmouth trustee told the New York Times Dealbook that several of the investments were presented as a “special opportunity.” Harvard, Brown, Columbia, Cornell, Penn, Princeton and Yale all disclosed in 2013 that they also had investments involving at least one board trustee.

Top public institutions and universities abroad commonly lack access to the highest-performing funds. A financial administrator with a top British university told me, “We did not have the contacts with Wall Street hedgies.” The few instances where elite public universities do have high finance ties often flout norms of public sector transparency. Speaking out to oppose endowment disclosure requirements, University of Michigan chief investment officer Erik Lundberg, where the endowment benefited from such relationships, told the Detroit Free Press, “The reality is nobody gives away their secrets.”

If Democrats want to dramatically expand the social safety net, taxing the wealthy won’t be enough.

Public policies could reduce endowment inequalities

If policymakers wanted, they could undo endowment inequalities by applying the capital gains taxes proposed in the Democrats’ Build Back Better plan, being negotiated in Congress. Higher capital gains taxes would constrain the profits that private equity and hedge funds could pass on to endowments. Congress could also increase the tax on large endowments established by the 2018 Republican tax bill.

When first proposed by President Biden, the Democrats’ bill used capital gains taxes to fund free community college and grants for low-income students, although those provisions may not survive. These programs would go further for underserved students than the dollars flowing into elite endowments. Elite private universities primarily enroll students who come from families more like those of the financiers than the families of the average community college student.

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Charlie Eaton (@charlieeatonphd) is assistant professor of sociology at University of California at Merced and author of “Bankers in the Ivory Tower: The Troubling Rise of Financiers in U.S. Higher Education” (University of Chicago Press, 2022).