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Dartmouth's Conflicted Guardians?; College, Leaders Profit From Investments

Published in print on October 31, 2010

Editors note: In 2010 and 2011, the VALLEY NEWS explored the financial relationships between the Dartmouth trustees and the college's endowment. Links to follow-up stories are at the end of this story.

By Rick Jurgens, Special to the Valley News

Hanover — The 2008 global financial crisis hit Dartmouth College hard, as college trustees and administrators ordered $40 million in budget cuts to help offset a stomach-churning $835 million decline in the value of its endowment.

Yet even as the college laid off employees, scaled back financial aid and delayed construction projects, it invested $44.4 million during the 2008-09 fiscal year in private funds run by prominent alumni active in the governance of the college, according to a public federal tax filing.

The investments came during an extraordinarily difficult time. But the college's decision to put millions of dollars into funds run by its alumni leaders was a decidedly ordinary event -- one that provides a window into the way some Dartmouth alumni who volunteered to lead the nonprofit college have also built multimillion-dollar private enterprises, in part, with cash from their alma mater.

In fact, investing in funds run by alumni has been central to the college's stewardship of its endowment, according to Charles Haldeman Jr., a trustee who chaired that board from 2007 until June.

"Some of (the) world's leading money managers are Dartmouth alumni involved with their alma mater," he said in a statement responding to questions from the Valley News. "Had we chosen to exclude these funds as an option for our investment staff simply because of a connection to an alum involved in the governance of the College, our endowment returns would have been lower."

By the end of June 2009, decades of such investments had boosted to about $224 million Dartmouth's stake in funds run by firms where current and former members of its Board of Trustees and its related investment committee are owners or managers, according to public filings and nonpublic information reviewed by the Valley News. That was about 8 percent of the total value of the college's endowment at the time.

About $110 million — nearly half of the stake in investment vehicles tied to Dartmouth insiders — was invested in funds affiliated with Lone Pine Capital, a firm controlled by billionaire Stephen F. Mandel Jr., who served as chairman of the college's influential investment committee until, in June, he replaced Haldeman as chairman of the Board of Trustees, Dartmouth's top governing body.

Such overlaps between the financial interests of the college and those of alumni-affiliated private firms have sparked concerns in some corners of the college community, including some disaffected alumni.

"It's ethically wrong, I think, for people to use the responsibility entrusted to them for their personal benefit," said Frank Gado, a retired college professor and Dartmouth alumnus who has worked to support dissident trustees and trustee candidates.

Mandel declined to discuss Dartmouth's holdings in his funds, referring questions to the college.

Dartmouth officials say college rules require alumni leaders to recuse themselves from decisions about investments in their private firms, and that Dartmouth makes such investments only when they clearly benefit the college.

"The College has strict policies governing any potential conflicts of interest involving related party investments," Haldeman wrote. "These policies meet or exceed the requirements of all applicable state and federal regulation," he added. "We believe they have served to appropriately protect the interests of the College, while allowing us to benefit from the expertise of alumni who are respected investors with outstanding track records."

Nonpublic information reviewed by the Valley News supports the college's contention that it has posted substantial gains from its investments in these "related party" funds. As of June 30, 2009, the college had accumulated net gains of $137 million from its investments of $264 million in private equity, venture capital and real estate funds run by firms owned or managed by members of its Board of Trustees and its related investment committee.

But even when such decisions are made with the best of intentions, some outside experts say, overlapping interests can cast a shadow over an institution like Dartmouth. Trustees and investment committee members who also get compensated as private managers of an institution's endowment are "a real world example of well-intentioned people who are putting themselves in a place where there might be questions," said Stephen Hudspeth, a Yale Law School lecturer and expert on the ethics of nonprofit governance.

Those questions are amplified by the fees that private firms collect for managing college money. According to nonpublic information reviewed by the Valley News, Dartmouth pays private firms that receive endowment investments management fees ranging from 1 to 3 percent of the assets managed by or committed to a fund. And when funds generate profits, managers receive between 10 and 30 percent of that gain — bonuses that can yield tens of millions of dollars in additional fees.

Such fees are standard in the investment industry, experts say. Do Dartmouth's alumni leaders give their alma mater a break by waiving some or all of them? Most of the alumni/fund managers did not respond to requests for interviews or declined to answer questions publicly about their funds and fee arrangements. But Mandel — the largest potential beneficiary of the payments — indicated that the answer is no.

Asked in an e-mail query about the terms of his contract to manage Dartmouth endowment funds and whether Dartmouth got any special consideration in fee arrangements, Mandel declined to get into specifics but stressed: "No one gets a special deal though — everybody (is) treated exactly the same."

Soh Won Cha, a college spokeswoman, said that fee arrangements in Dartmouth's current portfolio "vary by partnership" and were "one of many important criteria that we examine when looking at potential investments." She added that Dartmouth monitors those contracts to ensure that the fees don't exceed those paid to other funds with no alumni connections.

Dartmouth discloses few details about the composition of its investment portfolio. However, nonpublic information reviewed by the Valley News shows that Dartmouth's holdings in all private investment partnerships have yielded an average annual return of 17.8 percent after management fees were paid, while those partnerships affiliated with influential alumni yielded 26.5 percent through June 2009. Haldeman, in his statement, cited the 26.5 percent return as evidence of the strategy's effectiveness.

Carolyn Pelzel, Dartmouth's senior vice president for advancement, said she had reviewed and found "inaccuracies" in the Valley News summary of such investments, but declined to specify which information the college was challenging, or to supply alternative information. Cha, the college spokeswoman, did say that "in all cases, Dartmouth's initial investments with firms related to College trustees occurred prior to the principals becoming trustees."

'Charges of Favoritism'

Hefty performance fees help make managers of hedge and similar private investment funds effective stewards of the college's money, say proponents.

"Steve Mandel's money is right there in the hedge fund," said Julian Robertson, a legendary hedge fund owner and early mentor to Mandel. "He has the most to gain and the most to lose."

But those payments also create the potential for conflicts of interest, say some outside observers. "Allowing trustees to do business with a college ... leaves the institution open to charges of favoritism," the Chronicle of Higher Education wrote in March in an article about the issue nationwide. "That is even more likely when a college has multiple financial connections."

Besides the stake in Mandel's Lone Pine funds, as of June 30, 2009, endowment assets managed by funds affiliated with firms where current or former trustees are owners or managers included:

• $26 million in six funds run by Apollo Global Management, where Leon Black, a trustee since 2002, is chief executive.

• $33 million in nine funds run by Welsh Carson Anderson & Stowe, where Russell Carson, a trustee from 1999 to 2009, is a general partner.

• $11 million in three funds run by Morgan Stanley, where R. Bradford Evans, a trustee since 2003, is a senior adviser.

• $10 million in six funds run by Greylock Partners, where William Helman IV, a trustee since 2009 and chairman of the trustees' investment committee, is a partner.

• $7 million in two funds run by Technology Crossover Ventures, where Richard Kimball, a member of the trustees' investment committee, is a general partner.

• $26 million in six funds run by TA Associates, where P. Andrews McLane, a member of the trustees' investment committee, is a senior adviser.

• Some experts suggest that educational institutions shun such investments, according to the Chronicle. "Colleges should almost always avoid doing business with trustees' companies," it wrote in a summary of the views of Richard Chait, a professor at Harvard's Graduate School of Education. Chait declined to be interviewed for this article because of a client relationship with Dartmouth.

But many colleges have ignored that advice. An investigation of 618 private colleges found that one in four had "financial ties with trustee-affiliated companies," the Chronicle reported.

Dartmouth officials point out that the college's policies require trustees and investment committee members to disclose situations where their personal financial interests and the college's might conflict. These policies don't prohibit such investments but require college leaders to refrain from participating in discussions and official votes on them.

After Mandel was elected chairman of the Board of Trustees, in April 2010, then-college spokesman Roland Adams told The Dartmouth student newspaper that Mandel had "recused himself from both discussions and actions by committees of the Board and the Board as a whole about investing with any firm in which Mr. Mandel has a significant role."

Dartmouth's practices surrounding potential conflicts of interest among alumni leaders probably meet the requirements of the school's and related state rules, said Hudspeth, the Yale Law School lecturer. "Under existing rules, I don't think you could say they had acted inappropriately."

The task of vetting potential conflicts of interest of college trustees and investment committee members goes on mostly behind closed doors, a process overseen by the trustees' chairman — currently, Mandel.

For example, in April 2010, the Dartmouth trustees voted to invest $10 million in a $350 million venture capital fund in which a partnership that included trustee Helman had a financial interest, according to a record of the meeting obtained by the Valley News. Helman recused himself from the discussion and vote, which approved a finding by college officials that the deal "when viewed in the context of existing College investments involving related parties, does not pose an unreasonable risk of appearance of conflict of interest."

Helman did not respond to a request for an interview, and Dartmouth would provide no further details. "We're not going to comment on confidential discussions that took place in trustee meetings," said Cha.

Healthy Returns

Dartmouth's trustees have been good stewards of the endowment, according to Haldeman, the former board chairman. "The Board takes extremely seriously its role to ensure the integrity of the College's financial condition, including the maintenance of a healthy and sustainable endowment," he said in an e-mail. "In doing so, we take a long-term approach that incorporates careful oversight and scrutiny of our investments."

On Sept. 24, the college announced that at the end of the 2009-10 fiscal year the value of its endowment was about $3 billion, up about 6 percent from a year earlier. Dartmouth's investments of its endowment funds had yielded an annual return of 5.1 percent over the preceding decade, which placed the college in the top one-fifth of college endowments surveyed by Bank of New York Mellon, the college said.

A year earlier, the college reported that its endowment investments had yielded an annual rate of return of about 8 percent over the preceding decade. That was better than the 6.1 percent average posted by all colleges with endowments valued at more than $1 billion in a survey done by the National Association of College and University Business Officers and the Commonfund Institute.

Even some frequent critics of the college's administration and alumni leaders have been pleased with their financial acumen.

"I think they've managed the endowment pretty darn well over the last 20 years," said Joe Asch, an unsuccessful candidate for a seat on the trustees during the 2010 election.

A private college, Dartmouth declines to disclose much information about the inner workings of its investment system. As a nonprofit institution that benefits from tax deductions, it is required by federal and state law to publicly disclose a limited amount of information about its services, management, finances, most highly compensated employees — and transactions in which college insiders have a financial interest.

For example, the Form 990 for fiscal 2008-09, which the college filed with the IRS and is legally obligated to make available to the public, discloses that during that year the college made "capital contributions" of $36 million to two of Mandel's Lone Pine funds, $4.9 million to three of Black's Apollo funds, and $3.5 million to three of Carson's Welsh Carson funds. That same year the college collected distributions of $4.2 million from Black's funds and $1.7 million from Carson's funds.

But those disclosures don't show the details of its endowment holdings, including the portion invested in the firms owned or managed by alumni leaders.

That lack of public detail has led some, including Joe LaVigna, a critic of the college's current investment approach, to call for more "transparency, disclosure, scrutiny" of investment decisions and management. "They don't want to open for scrutiny to the alumni what's going on in the funds," said LaVigna, a retired investment banker who graduated from Dartmouth in 1959.

Those left in the dark by the college's limited disclosures have included some members of the college's governing bodies. Todd Zywicki, a law professor at George Mason University and former Dartmouth trustee, said that when he joined the board, he thought investments in firms owned or managed by other trustees were unusual. Eventually, he came to think otherwise: "Every year I was on the board we were voting on tens of millions (of dollars) of these transactions."

Zywicki said it was difficult to develop an overview of such dealings. "They never told us what happened in the previous transactions," he said. "They never told us how much this was adding up to be."

Zywicki said he pushed for that information and eventually learned that "up to 15 percent of the endowment was invested in" funds managed by trustees and investment committee members. "It took a long time to get that information," said Zywicki. "I had to keep asking repeatedly."

Zywicki, who had been nominated for the Board of Trustees by college alumni, was not reappointed to a second term and left the board in 2009.

Cha, the Dartmouth spokeswoman, said the 15 percent estimate "substantially overstates the actual level." Cha declined to provide the actual figure.

According to nonpublic information reviewed by the Valley News, Dartmouth estimated its stake in funds with ties to current and former trustees, investment committee members and an additional group of wealthy alumni donors known as the President's Leadership Council at 11.6 percent of the endowment as of June 30, 2009. That was about $328 million of a nest egg then valued at $2.8 billion.

Some observers say such overlapping interests can undermine the effectiveness of the investment committee, the panel that at Dartmouth (and other colleges) directly oversees the selection of fund managers and asset allocation.

John Griswold, executive director of the Commonfund Institute, a think tank on endowment issues, said that financial dealings with trustees' firms put a special burden on a college's investment committee. Committee members need to be clear that they are working in the best interest of the institution, he said. And when investment managers sit on the committee and their funds perform poorly, he added, there is "always the difficulty of telling someone who is a fellow committee member 'you're not doing the job.' "

That task could be especially awkward for Dartmouth's investment committee, where six of the 14 members -- including Mandel, whose funds include 4 percent of the endowment's assets — also act as the private managers chosen and overseen by that committee.

Even if the college can handle that difficulty, it might want to reconsider its widespread placement of assets with the firms of well-placed alumni, according to Hudspeth, the Yale Law School expert on the ethics of nonprofit governance.

Besides following the letter of their conflict of interest policies, he said, institutions like Dartmouth "need to be in the position of Caesar's wife."

"Appearances are sometimes every bit as important as reality."


For more information about the size, performance and composition of major college endowments, see information from the 2009 National Association of College and University Business Officers-Commonfund Study of Endowments posted online at

For a critical look at endowment management at Dartmouth and other leading universities, see Educational Endowments and the Financial Crisis: Social Costs and Systemic Risks in the Shadow Banking Systems by the Center for Social Philanthropy and the Tellus Institute, posted online at

Rick Jurgens is a freelance writer from Boston. From 1994 to 1998, he was a staff writer for the VALLEY NEWS. He also has been a staff writer for Dow Jones News Service and the CONTRA COSTA TIMES in California and has reported for THE WALL STREET JOURNAL and CHRISTIAN SCIENCE MONITOR. He also works part time at the National Consumer Law Center, a nonprofit organization advocating for low-income families.


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