Leon Black Investing Dartmouth Money Stirs Ethics Debate

Photographer: Bob O'Connor/Bloomberg Markets)

Leon Black's Apollo Global Management manages money for Dartmouth College, where until recently he was also a trustee. Some 13.5 percent of Dartmouth College's endowment is managed by firms that are related to trustees or investment committee members. ( Close

Leon Black's Apollo Global Management manages money for Dartmouth College, where until... Read More

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Photographer: Bob O'Connor/Bloomberg Markets)

Leon Black's Apollo Global Management manages money for Dartmouth College, where until recently he was also a trustee. Some 13.5 percent of Dartmouth College's endowment is managed by firms that are related to trustees or investment committee members. (

It’s not hard to see what Dartmouth College’s wealthy alumni have given to the 244-year-old Ivy League school, nestled among pine trees in Hanover, New Hampshire.

A 9-foot-tall (2.7-meter-tall) bronze spider sculpted by Louise Bourgeois is the latest arrival. It teeters menacingly on long legs in front of the Black Family Visual Arts Center, built with $48 million from buyout billionaire Leon Black, who graduated in 1973. Other contemporary buildings have sprouted up among the rows of brick Greek- and Georgian-style buildings on the Dartmouth campus in recent years, financed by hedge-fund manager Stephen Mandel (class of ’78) and private-equity investor Russ Carson (class of ’65), Bloomberg Markets will report in its February issue.

More from the February 2013 issue of Bloomberg Markets:

Less evident is what Dartmouth has given to these wealthy alumni -- all of whom are, or have been until recently, trustees or members of the school’s investment committee. Black’s Apollo Global Management LLC (APO) invests money for Dartmouth. So do Mandel’s Lone Pine Capital LLC and Carson’s Welsh, Carson, Anderson & Stowe.

In all, about 13.5 percent of Dartmouth’s $3.5 billion endowment is managed by firms that are related to trustees or investment committee members, says Justin Anderson, the school’s spokesman. The school says it pays standard industry fees on the money but declines to specify how much. For hedge or private-equity funds, annual fees are typically 2 percent of the money managed plus 20 percent of profits.

Harvard, Yale

Dartmouth isn’t the only U.S. university whose trustees also invest money for it. Harvard University, Yale University and Stanford University have all engaged in the practice, often citing the trustees’ expertise in financial matters. Entrusting money to firms that employ trustees can be controversial. The University of Pennsylvania, Columbia University and the University of Texas all bar investment committee members from managing endowment money.

Howard Marks, who was chairman of Penn’s investment committee for the decade ended in 2010, says that while schools might miss out on some stellar funds, they also avoid the risk of board members getting assignments because of connections and not merit.

‘Too Thorny’

“It could be challenging to turn down an investment committee member seeking a money management assignment, or to fire him or her or even decline to re-up,” says Marks, who’s chairman of Oaktree Capital Group LLC (OAK), which manages $81 billion of distressed-debt investments. “At the hypothetical extreme, member A could vote for member B in the hope member B will reciprocate. For me, it’s all just too thorny.”

Trustees shouldn’t manage university money because of the potential for self-dealing and other abuses, says Mark Williams, a former Federal Reserve bank examiner who teaches risk management at Boston University.

“Even the appearance of conflicts of interest can create reputational risk and harm the institution,” Williams says. “The perception is almost as bad as the act of conflict. It does damage to that reputation, which has taken many universities centuries to create.”

Todd Zywicki, a Dartmouth trustee from 2005 to 2009, agrees. “It dawned on me that we seemed to be spending hundreds of millions on conflicted transactions,” says Zywicki, who’s now a law professor at George Mason University in Arlington, Virginia. “We’re talking about the money of students and parents and alumni who have entrusted their money to be managed by Dartmouth.”

Pension Plans

It isn’t illegal for U.S. college endowments, which manage more than $400 billion, to have their trustees manage money, says John Griswold, executive director of the Commonfund Institute, research arm of a money manager for nonprofit organizations.

Colleges face fewer restrictions than other institutions such as public pension plans. The California Public Employees’ Retirement System, for instance, prohibits board members from managing the pension plan’s money.

“This would be a conflict of interest if they were being paid to manage money from a fund they had authority to oversee and also decision-making authority,” says Brad Pacheco, a spokesman for Calpers in Sacramento. The $242.7 billion fund -- the largest in the U.S. -- also discloses the fees it pays for private-equity and hedge-fund investments.

Quitting Boards

Some money managers have resigned from boards of their alma maters so they can invest for them without the appearance of conflict. Eric Mindich quit the board of Harvard Management Co., which administers the university’s endowment, when he left Goldman Sachs Group Inc. (GS) to start his Eton Park Capital Management hedge fund in 2004. Julian Robertson left the investment committee of the University of North Carolina at Chapel Hill so he could manage money for the school at his Tiger Management LLC.

Yale, which had the best-performing Ivy League endowment in the decade ended on June 30, has invested with three or four firms that employ investment committee members, says Rick Levin, the university’s president.

For example, the school was an early investor in private-equity firm Bain Capital LLC. Josh Bekenstein, a managing director at the firm co-founded by Mitt Romney, sits on the school’s investment committee. Bekenstein leaves the room and recuses himself from decisions related to Bain, such as whether the school should invest in a new fund, Levin says. Bain didn’t respond to requests for comment.

“It’s not at all like the caricature of people sitting around dividing the investment portfolio between the firms,” says Levin, who plans to retire in 2013 after two decades as president.

Harvard

Harvard has also farmed out some of its $30.7 billion endowment to firms that employ trustees. William W. Helman IV, managing partner of Greylock Partners, a Menlo Park, California-based private-equity firm, is on the board of directors of Harvard Management. Greylock manages money for Harvard, according to two people familiar with the matter. Helman, who’s also a Dartmouth trustee, declined to comment. Harvard also declined to comment.

The potential conflicts can be thrown into high relief when funds lose money. As chairman of Yeshiva University’s investment committee, J. Ezra Merkin funneled the school’s money via his hedge funds to con man Bernard Madoff in return for fees. The $1.1 billion endowment lost $14.5 million when Madoff’s Ponzi scheme blew up in 2008.

Madoff Settlement

In June, Merkin agreed to settle with New York Attorney General Eric Schneiderman for $410 million a lawsuit over claims that his funds had secretly placed client money with Madoff. The settlement has since been contested by the Madoff bankruptcy trustee. Merkin declined to comment.

Endowments were once considered the most stellar investors among institutions, taking bets on so-called alternative assets, such as hedge funds, real estate and private equity. Many of the same illiquid investments then stung university funds in the 2008 financial crisis, as capital calls on the hard-to-sell stakes squeezed schools for cash at the same time as their fund managers reported record losses.

In 2009, after Dartmouth’s investments plunged a record 20 percent, the school sold $415 million in bonds to finance construction, a move that cost Dartmouth its top, AAA rating from Standard & Poor’s. Since then, Dartmouth’s endowment has crept back up close to its pre-crisis high of $3.76 billion, while the debt remains rated AA+, one level below AAA.

Top Performer

The fund was the top performer in the eight-member Ivy League in the year ended on June 30, with a return of 5.8 percent, after being the worst a year earlier. During the past decade, it had an 8.2 percent average annual gain, behind the 10.6 percent gain for No. 1 Ivy Yale, located in New Haven, Connecticut, and the 9.5 percent increase for Cambridge, Massachusetts-based Harvard, the richest university in the country.

In February 2012, an anonymous group of whistle-blowers calling themselves the Friends of Eleazar Wheelock, after the school’s founder, complained to the New Hampshire Attorney General’s Office. “For over a decade, we have been witnessing the quiet takeover of this great college by a cabal of external, wealthy alumni of the college,” the group said in the letter. The group said the alumni took fees on investments they managed for the school.

The allegations are baseless, Anderson says. “Dartmouth meets or exceeds all the requirements of New Hampshire law with regard to its endowment investments, including investments with firms managed by trustees or investment committee members,” he says.

IRS Filings

The school says in its annual Internal Revenue Service filings that any investment committee member associated with a firm involved in an investment must be recused from the discussion and the vote.

Anthony Blenkinsop, a senior assistant attorney general in New Hampshire who oversees charitable trusts, says he reviewed the group’s claims and determined that there was nothing fraudulent.

New Hampshire restricted board members from managing money for nonprofits such as universities until 1996, when it made the practice legal, so long as fees are disclosed. Jim Rubens, a Dartmouth alumnus and former state senator who sponsored the bill, says Dartmouth still hasn’t disclosed the fees.

‘No Sunlight’

“Providing no information, as the college has done for many years, is not upholding its end of the bargain,” Rubens says. “There is no sunlight. They’re saying, ‘Trust us.’”

Anderson says Dartmouth pays standard industry fees on funds managed by its trustees but is unable to break them out because of the way hedge-fund and private-equity investments are structured. “Dartmouth pays the same fees as other investors,” he says. “Any management fees we pay support the operations of the firms we invest with and do not accrue to the benefit of any one individual.”

One person troubled by the lack of information is Karenina Rojas, an aspiring filmmaker and one of a handful of student activists on campus.

“A lot of students here are complacent; they say the trustees are heads of successful companies and that’s good for us,” says Rojas, 21, who says she was attracted to the school parodied in the 1978 comedy Animal House because of its need-blind admissions policy and generous financial aid.

“There is no check on the trustees,” she says. “If they invest money in their own companies, there’s no one above them to say that’s wrong.”

Anderson says the annual IRS filing the school makes as a nonprofit is an example of oversight.

Outperforming

Investments by firms related to trustees such as Mandel outperformed the rest of Dartmouth’s endowment, Anderson says. They gained an average of 11 percent annually in the decade ended on June 30, 2011, compared with a 7 percent increase for the endowment overall and a 2.7 percent rise in the Standard & Poor’s 500 Index.

Mandel is the star of the pack. With about $23 billion under management, Mandel’s funds generated more than 20 percent in the first 11 months of 2012, according to a person familiar with the matter. Peers were up only about 1.4 percent in the period, according to data compiled by Bloomberg. Dartmouth was an early investor in Mandel’s fund. He started Lone Pine in 1998 with the backing of Robertson, his old boss at Tiger.

Mandel, Carson

Mandel and at least seven other firms associated with investment committee members or trustees have managed Dartmouth money, according to internal documents from 2009 obtained by Bloomberg. That included $105 million the school pledged to 11 funds run by Welsh Carson, $60.8 million to at least 11 Greylock funds run by Helman and $75 million to six of Black’s Apollo funds.

Carson stepped down from the board in 2009, while Black left in 2011. Helman and Black declined to comment. Carson didn’t respond to multiple requests seeking comment.

Mandel initially managed $10 million for Dartmouth. The university’s stakes -- across his Lone Cedar, Lone Pine, Lone Sierra and Lone Dragon Pine funds -- had grown to $128.3 million, or 3.9 percent of the endowment, as of September 2009, the documents show. Mandel declined to comment.

Mandel also stepped in to help run the endowment after David Russ resigned in 2009 and the school searched for a replacement. Dartmouth then picked Pam Peedin, a former Cambridge Associates LLC consultant who ran Boston University’s endowment. She joined in February 2011 and now runs the investment office from Boston. She declined to comment.

Like many U.S. schools, Dartmouth has used its investment profits as well as donations to finance new buildings as it competes for students and top professors. At the sprawling Class of 1978 Life Sciences Center on its north campus, donors’ names are engraved on a glass plaque that flashes red, blue, green and purple. Nowhere in sight is there a monument commemorating the contributions made by -- or the fees earned by -- Greylock, Lone Pine or Apollo.

To contact the reporter on this story: Gillian Wee in New York at gwee3@bloomberg.net

To contact the editor responsible for this story: Laura Colby at lcolby@bloomberg.net

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