PRRC’s letters to SEC on their proposed changes to private fund disclosure rules and Kelly Grotke’s “Standing Up to Money and Power with Cross-Sector Organizing”
This post presents two comment letters we wrote to The Securities and Exchange Commission on their proposed changes to private-fund (i.e., hedge funds, private equity, etc) disclosure rules. The letters are followed by “Standing Up to Money and Power with Cross-Sector Organizing,” PRRC founding partner Kelly Grotke’s article for the American Association of University Professors (AAUP), published in the Fall 2022 issue of Academe, their national magazine. The AAUP article is part of a special issue on budget activism and problems with financialized higher education organized by Aimee Loiselle and Jennifer M. Miller. The issue is useful as a map of the main critics of contemporary higher education budget/finance and the approaches they bring to bear on the subject. We were pleased to take part.
The letters to SEC illustrate our double orientation: critically detailing the consequences of financialization in higher education (the 1833 Just Transition Fund letter) and demystifying finance (the Pattern Recognition letter). “Standing Up to Money and Power with Cross-Sector Organizing” updates, expands upon, and deepens themes introduced in the letters, while also bringing to the mix our concern with activism as a space through which ways of seeing beyond financialization may emerge.
College and university endowments with holdings valued at USD 1 billion or more are mostly invested via a strategy derived from the so-called Yale Model. The model’s defining characteristics include an expansion of asset-classes within a portfolio, going beyond traditional stocks and bonds to include so-called “alternatives” or “private funds” —hedge funds and private equity chief among them.[1] For many years, these instruments benefitted from the 3c1 exemption to the Investment Advisor Act of 1940, which excludes such private funds from most regulatory oversight.[2] Whence their opacity, which has enabled a proliferation of predatory tendencies from fees (eye-wateringly expensive) to contractual asymmetries (unlike nearly everywhere else in finance, fiduciary responsibilities within private funds are simply whatever the contracts that link investor to fund say they are). Readers can find additional information about the contexts that inform our letters to SEC in the Introduction to this collection.
Taken together, the letters to SEC and Kelly’s article for Academe foreground Oberlin as a case study of the deeply problematic effects of financialization on college and university governance: the centralization of power; an intertwined lack of transparency and autocratic management style; the imposition of austerity, couched in the language of necessity (inevitably directed downward) that imposes the costs of the resource misallocations coterminous with the Yale Model on faculty and students, workers and communities.
The pieces also highlight the innovative and ongoing work in political organization across sectors—administration and faculty, students, alumni and workers. Although the interests of each group have historically been distinct, they all now find themselves rendered equally excluded from power. The texts in the next section of our collection emphasize that similar organizing efforts are happening on a national (and international) scale.
We reject the separation of financially-driven decisions from their extra-financial consequences, of who or what gets counted from who or what does not count. This separation is embodied in the private fund business model---and in the relative invisibility of the profound socio-economic damages that model has caused.[3] The separation of finance-driven decisions from their extra-financial consequences is routine across finance industries, as well as the agencies that regulate them.[4] This mindset pervades the majority of the other comment letters SEC received on its proposed rule changes on private fund disclosure rules, the directory for which can be accessed here. The separation involves the substitution of accounting time (for which the present resembles the past just as the future will resemble the present, every moment the same as every other except with details rearranged) for the complexity and irregularity of the everyday experiences of actual human beings, for the particularities of institutions and histories and hopes for a future radically different from what is. It becomes, as Kelly argues in her piece for AAUP, a variety of kitsch.
The 1833 Just Transition Fund Letter
April 24, 2022
Vanessa A. Countryman, Secretary
Securities and Exchange Commission
100 F Street NE Washington, DC 20549-1090
Re: File No. S7-03-22
Submitted via email
Dear Secretary Countryman:
The Board of the Oberlin 1833 Just Transition Fund (JTF), the Executive Committee of the Oberlin College Chapter of the Association of American University Professors (AAUP), the Oberlin College UAW Local 2192, and the Oberlin Student Labor Action Coalition (SLAC) welcome the opportunity to comment on the SEC’s proposed new rules re: the Investment Advisor’s Act of 1940 that would substantially increase transparency and disclosures for private funds. We fully support the SEC’s efforts to shed much-needed light on both investment performance and fees within the private fund industry. In our experience, the current and near total climate of secrecy and obfuscation on these matters has had a substantially negative effect on governance at Oberlin College, which will be our focus in what follows.
Oberlin College is unique among private, non-profit institutions of higher education in that it is governed by the Finney Compact of 1835, adopted less than two years after the College’s founding in 1833. In addition to calling for the admission of students regardless of race, the Finney Compact established the fundamental importance of faculty control over the internal affairs of the College. In recent years, however, the Compact has been jeopardized by the College’s increased reliance on alternative investments such as private equity and hedge funds, which currently make up over 67% of Oberlin’s endowment (now evidently valued at over $1 billion).
In what follows, we will explain how the current lack of disclosures re: private funds has directly and profoundly negatively affected both the character and governance of the College. We offer this detailed case-study in the hope that it will underscore the urgent need for greater transparency re: private funds that the SEC’s proposed changes would advance.
Case Study: Oberlin College
Just before the COVID pandemic began in 2020, the Trustees of Oberlin College announced that this traditionally progressive College would be outsourcing its unionized dining and custodial workers, in evident disregard of the College’s historical commitment to labor rights, in order to save over $2 million per year. Despite substantial opposition from students, faculty, staff and alums, the College fired or outsourced over 100 workers in the midst of a deadly pandemic, only agreeing to extend their health care coverage for a year under pressure from members of the college community and alumni. The alumni-run non-profit JTF was formed in response, and one of its first actions was to raise money via its alumni network for the workers who had lost their jobs, resulting in payments of at least $3,000.00 to each.
The JTF also began focusing on the College’s endowment and investing strategies, resulting in a detailed account published in The American Prospect on February 12, 2021. We found that Oberlin College declared on its 990s that it had routinely paid out more in investment management fees each year than it claimed to save by firing and outsourcing union workers. However, the true amount paid out in fees is of course much higher, possibly amounting to as much as 5-6x the figure stated on the 990s. So, while “officially” the College paid out $14,872,522 in investment management fees between 2013 and 2017, the actual amount could easily be as much as or even more than $75,000,000. Faculty and alumni requests to the Trustees for the actual annual amounts paid out in fees each year have gone completely unanswered.
So too have questions about the actual annual rates of return on the College’s endowment since the 2008 financial crisis. This is concerning, not least because there is a growing body of research demonstrating that returns on alternative investments are basically comparable to those of more plain-vanilla and far less expensive index funds. In 2020, Professor of Financial Economics Ludovic Phalippou of Oxford’s Saïd Business School published “An Inconvenient Fact: Private Equity Returns & The Billionaire Factory”, arguing that “private Equity (PE) funds have returned about the same as public equity indices since at least 2006” while at the same time observing that the private equity industry has made some people very, very rich indeed, with PE “multibillionaires” increasing from 3 in 2005 to 22 in 2020. These parallel findings certainly cast doubt on the claim made by Oberlin’s Board of Trustees Chair Chris Canavan, in a 24 February 2021 meeting with faculty, that the College was justified in paying out huge, if undisclosed, fees because “you have to pay for talent.”
Roughly a year after the Trustees declared their plans to fire and outsource union workers, Canavan announced that the endowment had exceeded $1 billion for the first time in the College’s history. While this news might well have a favorable effect on Oberlin’s position within the various college ratings schemes, it certainly puzzled those of us trying to understand the financial condition of the College. For its size, after all, Oberlin is evidently a very wealthy school. Nevertheless, the imposed austerity measures continued: first, the College effectively gutted its famed OSCA co-op system, destroying in the process the uniquely collaborative Kosher-Halal Co-op. Then, the College imposed a sub-par one-option “consumer driven” health plan on its employees beginning in 2022, which has caused some employees’ monthly medical expenses to triple. Meanwhile, faculty salaries have stagnated despite a 2013 agreement on compensation, provoking demonstrations on campus and statements of solidarity from other institutions.
Despite the Finney Compact’s foundational principle of faculty control over the College’s internal affairs, it has become quite clear that the Trustees are continuing to act in ways that directly challenge and directly undermine faculty control over both the character and priorities of the College. One very important element of that process is the dense cloud of secrecy surrounding what, exactly, is going on with the money. Again, despite numerous queries, no one within the college and alumni communities has been able to get clear, unambiguous responses to questions about actual rates of return over time or total costs/fees of the College’s endowment investments. Instead, the Trustees increasingly rule by autocratic fiat. The dynamic is clear: high allocations to highly secretive “alternative investments” have undermined faculty control over their institution and conditions of work because, given current disclosure limitations, they cannot get the information needed to assess the actual financial condition of the College. Evidently enormous sums in the form of undisclosed fees and expenses have gone into the hands of investment advisors and fund managers, instead of being used to further the mission of the College and preserve its unique and historically progressive character.
Conclusion
We fully support the SEC’s efforts to improve disclosures for private funds, especially when it comes to fees/costs and actual rates of return. After all, as Phalippou’s research has demonstrated, “internal rate of return” is an incredibly flawed measure and can be “dramatically misleading.” Oberlin and its Trustees, in choosing to follow the so-called “Yale Model” of heavy allocations in alternative investments, may actually be undermining the financial stability of the College – such a possibility seems distinctly plausible in the face of continuing austerity without accompanying transparency. And basic institutional trust has also been severely undermined by that complete lack of transparency about what is happening with the money. Information about real rates of return and costs/fees are absolutely central for prudent and effective governance in the service of the public good of nonprofit higher education. Withholding them is, in effect, an assertion of prerogative and privilege that goes directly against the long-established commitment to self-governance as established by the Finney Compact.
As SEC Director William Birdthistle said recently in his remarks at the ICI Investment Management Conference (28 March 2022):
“Indeed, it’s striking to me that investors do not receive a uniform statement explicitly identifying the dollars they paid in the last year. Banks offer their customers a statement of fees; home mortgage and car lenders offer a statement of fees; credit cards offer a statement of fees. How is it that there is no comparable requirement on statements on the individualized costs for all of those trillions of dollars in life savings vouchsafed to investment companies?”
It is striking: and as with pension funds, so with endowments. We are very concerned that nonprofit institutions of higher education are being jeopardized by the influence and power of private, profit-seeking interests that are currently under no obligation to disclose either how much they have made from institutions such as Oberlin or how much they have earned for them. This state of affairs, if not remedied, threatens to undermine both the independence and integrity of our nation’s institutions of higher education. We urge the SEC to do everything in its power to implement the proposed changes so that all higher-ed stakeholders may be clearly informed about the investments being made in the name of supporting their institutions.
We would be happy to discuss these issues in greater depth and answer any questions you may have. Please do not hesitate to contact: Kelly Grotke, JTF Board Member and/or Matthew Senior, McCandless Professor of French & President of the Oberlin AAUP Chapter.
Thank you for your time and consideration.
Sincerely,
The 1833 Just Transition Fund Board
Executive Committee, Oberlin College Chapter of the AAUP
Oberlin College UAW Local 2192
Oberlin SLAC
Pattern Recognition Research Collective’s Letter, submitted April 25.
Vanessa A. Countryman, Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090
Re: File Number S7-03-22
(Submitted via email)
Dear Secretary Countryman,
Pattern Recognition: A Research Collective welcomes the opportunity to comment on the SEC’s proposed rule on “Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews.” We are a consultancy organized around the consequences of financialization, with a particular focus on higher education. Our publication platform, Recognitions, is directed toward a broad range of stakeholders in higher education (faculty, staff, administrators, students, alumni). One key aspect of that project is helping people in the humanities in particular understand finance and financialization so that they may better comprehend and respond to the kind of pressures under which they find themselves, especially since it has become fairly routine for the humanities to be targeted by budget cuts.
We applaud the Commission’s initiative in requiring disclosures of private-equity fees and discriminatory side-letter arrangements as well as disclosures of portfolio holdings from private fund advisors. With respect to institutional investors as limited partners (e.g., pension funds, foundations, and university endowments) we think it would be highly beneficial for disclosures re: fees, real rates of return, and portfolio holdings (by sector, at the very least) be made public and available to all institutional stakeholders. For endowments, stakeholders would include alumni, trustees (especially those trustees not directly involved with endowment oversight), administrators, faculty, staff, and students (both graduate and undergraduate).
In what follows, we focus primarily on higher education and what we have learned from our work in that sector, but we also draw on decades of previous experience with regulatory research on fair-value measurement and accounting. We begin with a discussion of governance issues and challenges related to the current lack of disclosures, moving on to address problems of oversight. In conclusion, we offer some remarks on IRR, valuation complexity, and the use of the NAV expedient.
Governance
The scope, volume, and influence of private investment vehicles has increased substantially since the Investment Advisor Act of 1940, a circumstance acknowledged by the far-reaching and important changes that the SEC is now proposing. Although institutional investors like endowments are still routinely characterized as “sophisticated” investors, it would be a mistake to conflate them with the high-net-worth-individuals initially designated by the term. A nonprofit entity providing a public good like higher education is not meaningfully comparable to a high-net-worth individual pursuing private gain. This terminological ambiguity often results in downplaying or overlooking the central importance of stakeholder engagement with institutional governance and the centrality of transparency to that engagement.
Non-profit colleges and universities have historically been more democratically governed institutions than for-profit, private corporations, which are generally much more hierarchical in form. The existence of faculty councils, senates, associations, and unions attests to the fundamental institutional importance of collaborative, cooperative governance. Consequently, stakeholders need to be knowledgeable about and involved with fundamental decisions about how their institutions are governed and have clear channels for providing input.
However, in keeping with many endowments’ increasing reliance on highly secretive alternative investments and private funds, many key stakeholders have been effectively excluded from obtaining information that would allow them to assess the financial condition of an endowment and its relation to general budgetary matters. For example, the current popularity of the so-called “Yale Model”, which allocates high percentages to alternatives, has resulted in an extremely information-poor environment for the vast majority of stakeholders, who are generally unable to obtain clear, accurate information about costs/fees, returns, and types/sectors re: these investments. As Harry Truman once said, “Secrecy and a free, democratic government don’t mix” – something as pertinent for university governance as it is for the country at large.
A severe and institutionally consequent informational asymmetry can result, in which typically only a handful of people possess information about what is actually going on with the endowment’s investments, at the expense of everyone else. In our experience, this particular form of asymmetry is more than a merely routine, convenient, and necessary division of institutional labor because it undergirds a destructive dynamic, one in which democratic and participatory governance increasingly gets undermined by autocratic managerialism related to the withholding of information such as total costs/fees and actual rates of return.
Currently, most stakeholders also have little or no access to basic information about the underlying investments, industries, and sectors included within their endowments’ alternative holdings. Considerable research has been done on the extra-financial implications of alternatives’ business-models, demonstrating, for example, the (often profoundly negative) effects of private-equity LBOs on labor and employment[5] and the ways they have exacerbated inequality.[6] Similar concerns have been amply documented regarding alternative investments in particular industries, such as healthcare/medicine.[7] Despite this wealth of research and materials, however, it can still be very challenging for individuals to figure out what their institutions are actually invested in. While sector or industry type can sometimes be ferreted out, we think that basic information concerning portfolio holdings should be a routine disclosure available to all stakeholders. Such information would be neither costly nor burdensome to provide, and would allow stakeholders a much clearer picture of where their institutions stand in relation to particular industries as well as the broader global economy.
Further, the complete lack of transparency concerning fees and actual rates of return leaves stakeholders without crucial information needed to assess, or challenge, austerity measures and cuts at their institutions, or even to understand basic budget flows.[8] In our experience, faculty and other stakeholders are routinely rebuffed or ignored when requesting information on actual returns and total costs/fees. At public institutions of higher education, which are accountable to the public because they are (though in increasingly smaller part) funded by taxpayers, such information cannot be obtained even with a FOIA request, which means that true accountability is effectively limited. The Commission’s proposed disclosures of fees, made available publicly, would allow much-needed light to be shed on what has till now remained a matter of stubborn and needless opacity.
Oversight
The opacity and secrecy of private funds create significant problems of both process and oversight for both pension funds and endowments, and the issue of private-equity fees - the ways they are disaggregated, reported and/or hidden – offers clear evidence of those problems (see pp. 24-7 of the current rule proposal and SEC’s June 2020 Risk Alert).
Secrecy remains almost total when it comes to limited-partner agreements (LPAs). The blog Naked Capitalism has collected an archive of 23 LPAs, which has been an important resource for researchers. In a forthcoming article, William Clayton provides a glimpse of the process whereby the contracts are fashioned. LPAs are shaped fundamentally by a division of labor in their production that separates investment managers who initiate them from the legal representatives who negotiate them. This division of labor is physical and intellectual; because LPAs are quite technical, the latter extends to professional-linguistic competencies. Contract negotiations proceed through thousands of very expensive hours: they do not rely on boilerplate language to expedite the proceedings. Clayton’s description of the process brings to mind Jorge Luis Borges’ Pierre Menard and his project of writing--not copying--Don Quixote word-for-word.[9] Logically, it is obvious that this division of labor determines how fees are defined and distributed for accounting purposes and is the condition of possibility for the recurrent problem of institutional investment managers not knowing how much their funds pay for their alternative investments. But the climate of secrecy prevents us from saying more.
LPAs are highly technical documents. Investment manager oversight of their content happens in a context framed by attorney-client relations. Trustee oversight of these investments is more problematic. Given that endowments gambling with a college or university’s educational mission is less existential than is a pension fund’s doing so with the retirement benefits of working people, it is perhaps not surprising that oversight problems with the latter have drawn considerable critical attention. Jeffrey Hooke provides a striking image of these problems at the beginning of his recent book The Myth of Private Equity. He focuses on the social composition of the board of a Maryland public pension fund, one made up of political appointees, party donors, and people with significant social connections (all of whom have in common little-to-no expertise in finance), and describes a mode of oversight that essentially involves wielding a rubber stamp and passing the buck.
Available documentation and case-studies show problems of oversight to be widespread, as well as complex and conflictual, particularly where whistleblowers are involved. In addition to the archive of LPAs noted earlier, Naked Capitalism has been tracking oversight problems with CalPERS for years and maintains an extensive archive of reporting, one that, read in chronological order, is like a modern-day version of Paolo Sarpi’s History of the Council of Trent.[10] Edward Siedle and Chris Tobe have done some important work on exposing the links between alternative investments and the remuneration structure of officials at Ohio STRS in cooperation with the pro-transparency group Ohio STRS Watchdogs.[11] This work is most illuminating, but there needs to be much more light shed on problems of oversight and incentivized behaviors in the realm of institutional investors.
While we enthusiastically support SEC’s proposed disclosures and the move to increased transparency that informs them, we also wonder to what extent regulation can address problems of oversight, in line with William Clayton’s “Public Investors, Private Funds and State Law”.[12]
IRR, Valuation Complexity, and the NAV expedient
We support SEC’s proposed disclosures of assumptions and methodologies in the reporting of internal rates of return (p. 71). The Commission is aware of the problems with IRR[13] (note 85, for example) apart from a very narrow range of uses.[14] However, if IRRs are going to be used as the “least unwieldy” performance indicator, then we agree that more disclosures are better than fewer.
We think third-party fair-valuation specialists can play a useful role in stabilizing IRR and/or checking GP figures: they already engage the matter of comparability with Level 2 in the fair-value hierarchy; and, as Appelbaum and Hooke point out in their Comment Letter on S7-03-22 (18 March 2022), Prequin and Pitchbook already employ the requisite datasets,[15] so expanding from fair-valuation to include IRR would not be problematic.
At the same time, our experience with fair-value has shown that competence in valuation is not evenly distributed, even among auditors.[16] Especially with modelled calculations of fair value for illiquid instruments, the ability to understand how pricing information is arrived at and used is crucial, not least since the use of the NAV expedient may suggest an illusory liquidity for what amount to Level 3 instruments with no observable inputs. We would therefore suggest that adoption of the proposed disclosures on IRR and other metrics be supplemented by attention to training, possibly on the order of AICPA’s offerings for fair-valuation.[17]
In passing, we should note that endowment size is defined as a prestige indicator by US News and World Report rankings of colleges and universities. Institutions who invest using the “Yale Model” treat positive IRRs as marketing material.[18] This is one among a host of perverse side-effects to these metrics.[19]
We call the Commission’s attention to the criticisms of private fund usage of NAV as a practical expedient in the context of fair-value reporting outlined by Jeffrey Hooke in The Myth of Private Equity.[20] We also appreciate the SEC’s attention to problems of funds delivering required disclosures to investors noted on p 85. Based on what the Commission adduces there, as well as the chicanery that has sometimes attended funds’ “publication” of NAVs, it is clear that the Commission would have to stipulate exactly what that would entail materially, should it make the proposed disclosures as to holdings and fees public.
Recent events have drawn considerable attention to money-laundering. In closing, we would also urge an end to the exemption from money-laundering reporting requirements instituted by the Patriot Act which was extended to private equity and hedge funds (as well as to real estate).
We thank the Commission for the opportunity to comment on the proposed rule change for private funds. Should the Commission have any questions, please feel free to contact us via email.
Sincerely,
Kelly Grotke, Partner
Stephen Hastings-King, Partner
Pattern Recognition: A Research Collective
Standing Up to Money and Power with Cross-Sector Organizing around Endowments
Collaborative communities of shared interests unite.
By Kelly Grotke
In “The Man Who Corrupted Hadleyburg,” Mark Twain spins a devious little tale about a man determined to exact revenge upon a town that prided itself on being the most virtuous and upright place, where honesty and resisting temptation were central to both educational principles and collective life. Despite this, the town had badly offended him during a visit. With monomaniacal dedication, he began to plot his revenge, eventually devising a scheme that would corrupt the eminent citizens of the town by provoking avarice and mistrust, leaving the town’s reputation in tatters.
At the center of his scheme is the tantalizing illusion of an enormous pile of cash—the reward due to one of the town’s residents for the kindness of having given a ruined gambler a second chance with gifts of money and advice. To get the reward, the benefactor would have to reveal the precise words of the advice given to the gambler. A fiction within a fiction, this purported kindness never really occurred. Before long, and unbeknownst to each other, the town’s leading members began receiving notes informing them of the words needed to claim the reward at a forthcoming town meeting. Predictable chaos ensued, and the plotter unmasked the personal greed and vanity behind the community’s façade of upright honesty. “Why, you simple creatures,” he wrote to them afterward, “the weakest of all weak things is a virtue which has not been tested in the fire.”
I first heard about Twain’s story when I was an undergraduate at Oberlin College: one of my professors told me that Twain had used Oberlin as a model, having once visited the town and not cared for what he’d found there. Like Twain, he was skeptical about virtue reliably residing in towns, colleges, nations, or other types of collective groupings. Although he didn’t put it this way, the notion of kitsch captures what it means to take pride in a commodified “brand” exemplified by virtues that are asserted but never seriously tested. Most college mottos these days, for example, are ultimately kitsch in the sense Milan Kundera described in The Incredible Lightness of Being: “the aesthetic ideal of the categorical agreement of being in a world in which shit is denied and everyone acts as though it did not exist . . . kitsch excludes everything from its purview which is essentially unacceptable in human existence.” For example:
Lux et Veritas (Yale University)
Think Big. We Do. (University of Rhode Island)
More. From Day One. (Indiana State University)
Think One Person Can Change the World? So Do We. (Oberlin College)
Truth Even Unto Its Innermost Parts (Brandeis University)
Not Unmindful of the Future (Washington and Lee University)
The Wind of Freedom Blows (Stanford University)
Veritas (Harvard University)
And so on, with nothing to suggest even a hint of the complex or corrupted, the unpleasant or uncertain, never mind trial by fire. Twain’s story was published in 1900, during our last Gilded Age, and now we find ourselves in another. The facts are brutal and, frankly, atrocious: according to a recent study by Oxfam, the pandemic period has created a new billionaire every thirty hours, and Oxfam predicts that a million people will fall into poverty at the same rate during 2022. Nationally, the pattern is similar: billionaire wealth increased by 58 percent while the farm workers we depend upon for food are forced to sleep in cars. In theory, we are still a democracy but ever less so in practice, given the immense power of money in politics.
Financialized Austerity in Higher Education
The current situation in higher education, from community colleges to the Ivy League, cannot be understood apart from the ever-widening gap that separates the wealthy from the rest of us. After all, a similar gap is evident within higher education itself, as elite institutions’ endowments have boomed while the vast majority of institutions are burdened by ever-increasing austerity measures and growing precarity. As the AAUP has documented, more than 70 percent of instructional faculty positions are now contingent. The economic conditions of the profession are in clear decline and no longer reliably offer the employment and benefits that would make possible even a modest, reasonably secure, middle-class life. Neither does earning a college degree, since the education “industry” has left millions of students, many of them women and people of color, holding trillions of dollars in debt.
I expect that most Academe readers are familiar with these miserable facts. And I trust that there are administrators, faculty members, staff, alumni, and students who are working in various ways to improve things, in recognition of the appalling waste of human abilities and time the current system perpetuates. Resistance to the status quo can and should take many forms, and I am grateful for the opportunity to participate in this special issue of the magazine focused on budget activism because I want to consider one possible avenue for action: the big piles of money otherwise known as endowments. Whether or not they have been corrupting, like the pile of money in Twain’s story, I leave to the reader’s judgment.
In what follows, I discuss organizing campus community members around problems with endowments, including the widespread use of the so-called “Yale model” of high allocations in secretive, expensive, and hard to value “alternative investments” (also known as “private funds”) which has tied our institutions ever more tightly to the imperatives of finance and for-profit revenue extraction—often at the expense of the institutions and their educational missions. Because such investments have few, if any, disclosure requirements, it is almost impossible to get a sense of what is really going on with the money. Information such as actual rates of return, the amount of money paid in fees to external managers, possible conflicts of interest, and investments in socially or environmentally damaging companies remains hidden.
At Oberlin, the alumni-led 1833 Just Transition Fund (of which I’m a member), the executive committee of the Oberlin AAUP, Oberlin United Auto Workers Local 2192, and the Oberlin Student Labor Action Coalition joined together to protest the college’s increasing financialization—particularly through its nontransparent investments—and the imposed austerity that follows from it. One aspect of our coalition’s ongoing struggle against this disturbing trend was the submission of a letter to the Securities and Exchange Commission (SEC), which is contemplating greater regulation of the private fund industry. We support this objective, arguing that the impossibility of obtaining even basic information about the college’s investments from administrators and trustees has undermined the 1835 Finney Compact, which holds that faculty retain control over the internal affairs of Oberlin. But faculty obviously cannot retain that control when they are unable to get answers to questions about the financial condition of the college. And secrecy here means power, as top-down austerity and abuse of authority increasingly replace more inclusive approaches to governance. Organizationally, this means that a very small number of people have an immense amount of control over the condition and quality of other people’s lives and are rarely, if ever, held to account for the damage they cause. This is not a recipe for good governance.
Last year, the student-run Oberlin Review published our 1833 Just Transition Fund Board list of questions about endowment rates of return, fees, sector investments, and other important details necessary to assess the financial condition of the college. We received no response. Several faculty members had made similar requests for information, which were also ignored. Looking at our list will give readers a sense of how little information is publicly available.
Our cross-sectoral approach has been premised on a collaborative community of shared interests, one that is fundamentally threatened by repeated, top-down impositions of austerity. We do not dispute that financial matters need to be handled prudently, but, in an environment so lacking in transparency, cannot trust that they are. Another letter to the SEC that also focuses on higher education and that I cowrote with my research partner Stephen Hastings-King notes that the humanities in particular are disadvantaged by the current climate of financial secrecy and the treatment of budgetary logic as a veritable fact of nature—rather than as historically conditioned and contingent choices. Often portrayed as the least “efficient” academic disciplines in an environment increasingly dominated by concerns about return-on-investment (ROI), the humanities are under constant threat because their “value” is often measured in exclusively financial terms (so central has ROI become that it has even been turned into a metric by Georgetown University’s Center on Education and the Workforce). This is more than ironic, given how central expressions of extra-economic “values” such as freedom and civil rights have long been to American political culture. But who needs serious study when one can just substitute rhetorically appealing kitsch?
Running the College Like a Business
As Davarian Baldwin notes in his interview with Jennifer Mittelstadt in this issue of Academe, endowments are a primary interface between institutions of higher education and our culture of growing inequality and precarity, in which wealth flows ever upward and labor has become chiefly something to be managed rather than valued. Even at institutions with enormous endowments, the imposition of austerity measures continues—though with increasing opposition, chiefly from unions, as the examples of Columbia University, Rutgers University, MIT, and Harvard University, among others, have lately shown. Oberlin, which boasts an endowment of over $1 billion, is a case in point, as I chronicled in detail across two pieces for The American Prospect dealing with endowments and financialization. In 2020, just before the pandemic, the college announced that it would be laying off or outsourcing the positions of more than a hundred dining and custodial workers. Despite opposition from faculty, staff, and students, the college went ahead with its plans after the pandemic emptied the campus, refusing to bargain in good faith with the union. Health insurance for those laid off was extended for a year but only after organized alumni opposition.
The fact that Oberlin, a college that prides itself on its progressive values and history, could effectively ignore labor rights is shameful but not entirely surprising. Within the mentalité of neoliberal managerialism, everything is best “run like a business,” with the maximization of so-called “efficiencies” being both a social and an institutional good. Elizabeth Popp Berman has dubbed this approach the “economic style of reasoning,” one that has broadly taken hold across managerial sectors and professions and across political divides since the 1970s. She describes it as “a framework for decision-making whose influence is closely tied to its ability to claim political neutrality. It portrays itself merely as a technical means of decision-making that can be used with equal effectiveness by people with any political values. This, though, is a ruse: efficiency is a value of its own.” Efficiency-driven austerity is, in other words, an inherently political practice.
Thus, at Oberlin, the union-busting and outsourcing commenced, reputedly to save around $2 million per year, which is much less than it routinely pays out to Wall Street money managers in fees for the college’s extensive endowment portfolio of “alternative investments” and private funds. Board of trustees chair Chris Canavan insisted—in uncanny resemblance to Margaret Thatcher—that this was the only way forward, that there was no alternative. Many faculty members, too, acceded to the notion that “One Oberlin” (the name of the college’s most recent “strategic plan”) effectively excluded dining, custodial, and other service workers. This was unfortunate, not least because the austerity measures kept coming and would eventually hit the faculty too. If the majority of faculty members had opposed the initial cuts and union-busting, it is quite possible that many workers would still have their jobs.
Oberlin is a small town, and the college is central to it and the local economy. College service jobs had been prized positions: pay and benefits were good and came with the added bonus of tuition remission. People tended to keep those jobs for years, something that contributed to a sense of continuity, community, and collegiality between and among students, faculty, and staff. One might think treating all workers well and paying a comfortable living wage plus benefits would be a matter of institutional pride and accomplishment, but evidently and unfortunately the upper administration and trustees didn’t.
In the aftermath of union-busting and outsourcing, the culture and quality of service work at the college have declined. Some workers who had been earning an hourly rate of twenty-one dollars are now earning sixteen, which represents around ten thousand dollars in lost annual wages. I suspect that someone, thinking in terms of “efficiencies” that are purportedly politically “neutral,” thought Oberlin’s workers were “overpaid” compared to average hourly rates in the state and considered it a brilliant idea to bring salaries in line with that average. Wages, however, have stagnated for decades: according to the Economic Policy Institute, if the minimum hourly wage had risen with productivity, it would be eighteen dollars. In essence, progressive Oberlin is now helping to depress wages, driving people from the middle into the lower classes and contributing to ever-deepening inequality. Austerity and its accompanying “efficiencies” are, again, hardly neutral.
In line with what Jill Penn illuminates in her article for this special issue of Academe on the workload “stretch-out” in higher education, the pace of work also accelerated, with cuts to custodial staff amounting to more work for fewer people. Turnover increased as the jobs and wages declined from desirable to average or even worse. At least one worker was forced to put her house up for sale, and others had to pull their children out of college, since tuition remission benefits were cancelled too. Metrics and quotas contribute to an ever more instrumentalized and hierarchical approach to work, further eroding morale and contributing to a work culture in which disrespect, distrust, and hostility have become the norm. Conditions were so bad that some of the workers who had managed to hold onto their jobs throughout the outsourcing subsequently quit. The sense of being part of a community has been utterly broken. One former custodial employee told me that many dismissed workers are “devastated.” As she also pointed out, “social justice begins at home”—that is, on campus.
It remains to be seen if Oberlin’s renowned reputation for progressivism can ever recover. So far, the college’s situation continues to deteriorate: after students left for the summer, the administration announced it was outsourcing student health services for the second time to Harness Health Partners. Despite the college’s announcing that affected healthcare workers would have the opportunity to reapply for their jobs, none received an invitation to do so, nor were any rehired. Harness is a subsidiary of Bon Secours Mercy, a Catholic healthcare provider known to restrict certain services, especially those related to sexual and reproductive health. The reasons for this astonishing development remain unknown so far, but it is a shocking move for the first coeducational institution and one known to be a good place for LGBTQ+ students. Is austerity really more important than vigorously defending people’s control over their bodies, especially now that Ohio has become one of the more restrictive states with respect to abortion rights?
University Endowments, the “Yale Model,” and Governance
Most institutions are run along similar lines as their peer institutions—which is why so many of us who have worked in or proximate to higher education find it grimly comic when the conservative media depict colleges and universities as bastions of illiberal un-American radicalism. Our universities and colleges are also places where people are trained in concepts and practices that normalize the financialization of society and are often governed by administrations and trustees who contribute to this shift, especially as governing boards have become increasingly dominated by financial, business, and legal professions. But, again, their perspective is not a neutral one at all, and it can and should be challenged.
Such thinking is widespread at private and public institutions, whether they have significant endowments or not. At those that do, however, one can observe an interesting tension developing between two simultaneous priorities: on the one hand, fidelity to “efficiency-think” that leads to cuts, often recommended by expensive consultants who often serve as scapegoats for unpopular decisions; on the other hand, accumulating as much money as possible by whatever means. Paradoxically, the wealthier Oberlin has become and the bigger its endowment, the more it has fixated on austerity measures: after busting the union and outsourcing jobs, it imposed a single, subpar health plan on employees and reneged on a 2013 agreement about faculty compensation.
Why? The short answer is that we don’t—and can’t—know. One reason we don’t know is that Oberlin has chosen to follow an investment trend that has become widely popular among prestigious and wealthy institutions: over 65 percent of its endowment is invested in expensive, secretive, and difficult-to-value alternative investments and private funds.
This means that only a handful of people know what is actually going on with that money, and that handful, moreover, may not even include all members of the board of trustees and administration, who are often reliant on external managers for obtaining information about investments and how well (or poorly) they are performing. Such informational asymmetry inevitably erodes faculty governance and results in the running of institutions like Oberlin by what has begun to resemble autocratic fiat. Morale declines too because the lack of transparency and financial accountability works against building a culture of trust and cooperation.
On many occasions, faculty members at various institutions have been shocked when I have described these endowment investment patterns and their institutional effects. In an age when metrics for faculty, staff, worker, and student performance have become increasingly (if absurdly) important, it seems perverse that the people handling the money are free of any obligations to make disclosures that would show how well or poorly they’ve done their jobs. Opacity is, indeed, a prerogative of power.
Considering the ever-escalating requirements for ever-dwindling tenure, it is ironic that those charged with managing the money and imposing “efficiencies” and austerity measures will likely pay no penalties and face no real professional consequences, even if they lose millions of dollars of a college’s money and profoundly alter its culture for the worse. So great is the allure, power, and prestige of money in our time that you can inflate your hedge fund’s values, commit fraud, run an institution rife with conflicts of interest, destroy a company and offload its pension obligations onto taxpayers, open an account in a tax haven to shield the profits you’ve made from an invention subsidized by taxpayer money at a public university, and even get investigated by the SEC yet still retain your position on a college or university board of trustees. All these examples are drawn from real-life cases. They suggest that “running things like a business” really means that people with money are rarely if ever held accountable and that people at the widening bottom will be the ones who truly pay, over and over.
There is no moral distance between this finance milieu—which gives lip service to meritocracy or to what a libertarian might consider the “natural order”—on the one hand, and the dehumanizing and destructive fact of a society whose economic and financial order encourages extreme divisions of wealth, on the other. They are of a dysfunctional piece. That is not a politically neutral position, though it certainly crosses present-day party lines, and it should be deeply repugnant in any society claiming, even tenuously (like ours), to be a representative democracy. If there are values apart from monetary ones worth defending, and if our institutions of higher education are to research and teach what we value, then we have some serious work ahead of us.
Endowments are a signature aspect of the extreme and systemic inequalities in higher education. First, it is essential to understand the extent of their current opacity and how it influences governance and the exercise of power within and across different institutional contexts. That is a good starting point. At Oberlin, that influence has been overwhelmingly negative: despite a billion-dollar endowment, the austerity measures keep coming, without anything close to transparency. Second, it is important to understand that the imposition of austerity measures, even at incredibly wealthy institutions, is political and not a neutral fact of nature. Our coalition at Oberlin was premised on such an understanding. Alumni, faculty members, union members, and students banded together in opposition to what we find to be an unacceptably damaging and unaccountable mode of governance, one that has transformed Oberlin’s longstanding reputation for progressivism into mere kitsch.
We recognized that cross-sector organizing was essential because, politically speaking, imposed austerity succeeds when it sets people and interests against each other, breaking solidarities. It took us over two years, with lots of work, to reach that point. It is not clear to me what the future holds, at Oberlin or for higher education. But I know I am not alone in hoping that it is much better and fairer—less of what Kundera called a “world in which shit is denied”—than the current status quo. Complacency offers nothing worth fighting for.
Kelly Grotke is a member of the Oberlin 1833 Just Transition Fund board. She worked in securities valuation for over fifteen years and is currently a partner at the consultancy Pattern Recognition: A Research Collective. She is grateful to an anonymous donor for funding that enabled her to write this piece. Her email address is kgrotke@patternrecognitionresearch.com.
©AAUP
[1] Throughout this collection, private equity is used primarily to refer to leveraged buyout funds, which are private mutual funds that use debt instruments to fund the acquisition of a company. PE is the very embodiment of financialized thinking. An overview/definition can be found here: an industry-sympathetic primer is available here. PEStakeholders is an excellent critical resource on private equity. Hedge funds use a similar model but primarily invest in securities (including distressed debt). Hedge funds have shorter lifespans than do PE, and this is important in differentiating the sectors’ respective valuation uncertainties. We use the terms “private funds” and “alternatives” interchangeably.
[2] For more information, see David Dayen’s 2016 essay “What Good Are Hedge Funds” in The American Prospect.
[3] For a primer on the private-equity model and the myriad ways in which it has wreaked havoc on companies, working people and communities see the excellent PE Stakeholders.
[4] For example, auditing standards are absolutely saturated with agency theory.
[5] See Eileen Appelbaum and Rosemary Batt’s Private Equity at Work: When Wall Street Manages Main Street (New York: Russel Sage Foundation, 2014) and, for more recent case studies, the excellent work of The Private Equity Stakeholders Project, linked here.
[6] See for example: Ludovic Phalippou, “An Inconvenient Fact: Private Equity Returns and the Billionaire Factory” https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3623820; Institutional Investor’s “The Rich List: the 21st Annual Ranking of the Highest-Earning Hedge Fund Managers” available here.
[7] For example, the COVID-19 pandemic was exceedingly difficult for hospitals, particularly where private-equity ownership had already transformed their medical business models into the image of shareholder sovereignty. PE ownership of nursing homes was shown to be deeply problematic and deadly during the pandemic, and PE ownership of group homes has resulted in declining care and preventable deaths. PE has also moved into ambulances while, at the same time, PE ownership (with its business-restructuring and emphasis on GP profits) has also been linked to increases in surprise billing. There is an important social policy question of whether private-finance investment in public health is a destructive contradiction in terms—but ahead of Congressional action, pension-fund stakeholders in particular have begun to mobilize. One example of this emergent fight was documented on 6 April 2022 in The Lever, in an article detailing efforts by PA State Senator Katie Muth (a trustee of the Pennsylvania Public School Employees’ Retirement System, the state’s largest) to get information from the fund’s staff on portfolio holdings in alternatives invested in hospitals and ambulance companies—she had to sue the fund’s staff for the information she requested. This is a clear oversight problem.
[8] The widespread adoption of the “Yale Model” (against David Swensen’s own advice) should be understood in the context of broader and ongoing conflicts within higher education that fall outside SEC’s remit. For simplicity’s sake, we follow Jerry Z. Muller’s Tyranny of Metrics (Princeton UP, 2018) in characterizing those conflicts in general as centered on the question of whether a university should be run on the model of a for-profit corporation and, if so, how the transpositions from one domain to the other should best be carried out. Metrics play a fundamental, and ambiguous role in all that. See Muller’s Chapter 7, “Case Study, Colleges and Universities” pp.67-87.
[9] Clayton 2022, pp. 25-6. Borges’ wonderful “Pierre Menard: Author of the Quixote” can be read here.
[10] Basic information on Paolo Sarpi can be found here.
[11] See also note 4, above.
[12] Clayton 2020, Section B, “Problems with freedom of contract in private funds” pp. 308-310 and, especially, section C.1 “Pension Fund Management Problems.” The Commission references this piece in the proposed rules at notes 8, 173 and 192. The second shows the SEC writers aware of the importance of the piece. His article raises questions about the enforceability of the proposed rules, if they are approved. Clayton notes that most PE funds operate in a legal context shaped by two main statutes: Delaware’s Revised Uniform Limited Partner Act (because the vast majority of funds are registered in Delaware—that is to say offshore) and the federal Investment Advisor Act of 1940. Clayton explains that “the Delaware L.P. Act explicitly states that its guiding policy is “to give maximum effect to the freedom of contract and to the enforceability of partnership agreements.” One consequence of this is that “investors can (and often do) even agree to contractually modify, or waive entirely, the default fiduciary duties owed to them by private fund managers under the Delaware L.P. Act.” Under the Investment Advisor Act of 1940, Clayton argues, SEC has the authority to enforce the terms of the Investment Advisers Act, but, in practice, “this authority does not allow them to do very much.” In n. 54, Clayton continues: “The SEC’s authority is generally limited to policing fraud and enforcing the terms of the contracts between private fund managers and their investors.” (307). SEC appears to share Clayton’s understanding of the legal context in/on which it proposes to operate on pp. 150-3 of the rule proposal, in the one place that “onshore offshore” laws are mentioned, where the Commission asserts its authority to combat fraud and, by extension, to obviate specific LPA provisions that might be permitted under Delaware or Cayman Island law. But, if Clayton is correct, the question remains: is fraud prevention an adequate basis for the proposed rules as a whole? There is abundant research from inside and outside the academy to suggest that fraud is a non-trivial feature of alternative investments, but we are not sure that resolves the matter of enforceability. But we are not lawyers.
[13] In his Private Equity Laid Bare, Ludovic Phalippou refers to IRR as a “junk number.”
[14] Rule Proposal, pp. 204. The Commission notes public-market equivalent (PME). For a short discussion see pp. 2-3 of the comment letter by Eileen Appelbaum and Jeffrey Hooke available here
[15] Ibid, p. 3.
[16] See Daniel Souleles (2019): “The distribution of ignorance on financial markets”, Economy and Society, DOI: 10.1080/03085147.2019.1678263 for an interesting dismantling of the (ideologically informed) assumption that economic actors have complete knowledge, done from an economic sociology perspective.
[17] This training should include issues of valuation fraud for which SEC’s recent complaint against James Vesselaris might be a useful point of departure.
[18] The effects of this are bad for higher education but outside SEC’s remit. They include (accusations of) endowment hoarding, one consequence of which is that stellar returns do nothing to alleviate the financial pressures under which a given college or university might be suffering. For a more detailed (and important) analysis of these and related problems, see Charlie Eaton’s Bankers in the Ivory Tower: The Troubling Rise of Financiers in US Higher Education (Chicago: University of Chicago Press, 2022) Chapter 3, “The Top: How Universities Became Hedge Funds” pp. 54-75.
[19] While to the side of the Commission’s remit, these side-effects are nonetheless important distortions in higher ed. For a primer, see Cathy Davidson’s Weapons of Math Destruction (New York: Crown, 2016).
[20] Hooke, Myth of Private Equity pp 112ff.