Saturday, July 30, 2016

Carlyle's Rubenstein to Help Harvard Invest After Years of Underperformance

Harvard University announced over a year in advance:

David M. Rubenstein, co-founder and co-CEO of The Carlyle Group, the private-equity and investment-management firm, will join the Harvard Corporation in July 2017
Two weeks prior to the news release on Rubenstein's appointment Bloomberg reported:

Harvard University disclosed Friday that former investment chief Jane Mendillo received $13.8 million, reflecting 18 months of compensation at the largest endowment in higher education.
Mendillo, 57, ran Harvard Management Co., the university’s nonprofit investment arm, for more than six years, leaving at the end of 2014. Mendillo declined to comment on her compensation.
With a $37 billion endowment, Harvard is known for paying top dollar to investment staffers. Its top six endowment managers earned a combined $50 million in 2014, up slightly from $49.3 million in 2013.
Rubenstein will join the board that manages the Harvard endowment.  It operates much like a private equity underwriter (PEU) in trying to maximize investment profits on behalf of the University.  Harvard's announcement gave a shout out to other alumni who benefit from America's perverse taxation of private equity and other investment firms.

Unusually among private-equity managers, Rubenstein is outspoken on certain public issues, perhaps reflecting his prior experience in private law practice and in government.

A recent New Yorker-ProPublica “Letter from Washington,” focusing on the favorable tax treatment of private-equity and hedge-fund managers’ “carried interest,” reported on Rubenstein’s leadership role for his industry in defending that tax provision
Due to Rubenstein's success secretaries, chauffeurs and gardeners can continue paying a higher tax rate than their billionaire PEU employers.

Carlyle is having a hard time generating returns according to comments made last week on Q2 earnings.  That fits with Harvard's Management Co.'s experience:

After years of missteps, controversy and even crisis, Harvard Management Corp., which oversees the university’s $37.6 billion endowment, began assembling a new corps of equity traders and analysts in 2014, in hopes of recapturing a part of the investment magic that had once made the fund the envy of the world.

Only now, just two years later, that plan has collapsed.
Harvard has a year to right the ship before Rubenstein joins their investment arm as a board member.

Harvard decided to dismantle the in-house equities team after concluding that it would lean more on outside money managers “who have the resources, skill and experience,” Paul Finnegan, chairman of HMC’s board, said in a statement Wednesday.
Carlyle might even help in between as HMC invests between 13 and 23% of its assets in the PEU space.  

Update 1-25-17:   ZeroHedge reported Harvard's endowment will fire half its staff as it turns to outside money managers.  Their story said the endowment managed just shy of $36 billion.  That's a drop of over $1.5 billion.