Dartmouth Controversy Reflects Quandary for Endowments

By the numbers, the endowment at Dartmouth had a banner year. The $3.49 billion fund returned 5.8 percent for the 12 months that ended in June - the best in the Ivy League.

But the performance has been clouded by controversy. Last year, an anonymous letter signed by “the friends of Eleazar Wheelock,” referring to the university's founder, asked New Hampshire state officials to investigate the endowment over potential conflicts of interest raised by trustee-related investments.

Although the state attorney general's office decided that an investigation was not warranted, the situation highlights a thorny problem for college endowments.

Trustees' connections can prove profitable for the universities, offering access to top-performing hedge funds and private equity firms that may not be open to other investors. But they can also create the appearance that the colleges may have nonfinancial motives for picking investments. And if the investments do not perform well, it can be stickier to fire the money manager.

“It's probably better not to” engage in such transactions, said John S. Griswold, executive director of the Commonfund Institute, the research arm of a money manager that caters to educational endowments in Wilton, Conn. “It avoids the perception of conflict of interest and self dealing.”

Universities like Dartmouth rely on endowments to help pay for financial aid, academics and operations. As part of their core fund-raising, colleges hunt for big donations from their most successful alumni, a group that is often heavily populated by financiers and professional inv estors. The trustees at Dartmouth, a board that oversees the university, include James G. Coulter, a founding partner of the private equity firm TPG Capital and Stephen F. Mandel Jr., the head of the hedge fund Lone Pine Capital.

Dartmouth has frequently tapped that pool to fill its endowment portfolio. In July, the university said that 13.5 percent of the assets were in funds led by trustees or members of the college's investment committee. Those included investments managed by Lone Pine, whose chief, Mr. Mandel, has been a Dartmouth trustee since 2007; by Welsh, Carson, Anderson & Stowe, a private equity firm whose co-founder, Russell L. Carson, was a Dartmouth trustee until 2009; and Apollo Global Management, the private equity firm run by chief executive Leon D. Black, a Dartmouth trustee until 2011.

Dartmouth is not an outlier in the practice. A 2011 study by the National Association of College and University Business Officers and the Commonfund Institute fo und that 56 percent of the 823 endowments surveyed allowed board members to do business with their university, as long as the relationship is disclosed.

But Dartmouth, which has six funds with trustee ties, appears to be among the more aggressive. Among the Ivy League universities, Brown and Cornell have disclosed five trustee-related investments. Princeton, Yale, Columbia and Pennsylvania have reported just one. Harvard has not reported any trustee investments, but its reports do not include investments managed by firms of board members of Harvard Management, which runs the university's endowment.

“Dartmouth is proud that some of the world's leading money managers are Dartmouth alumni,” said the college's general counsel, Robert B. Donin, adding that the picks were “based on a manager's strategy, expertise and performance history,” rather than ties to the university.

Over all, the strategy has been sound. The Dartmouth-related managers produced average annual returns of 11.1 percent over the 10 years that ended in mid-2011. By comparison, the endowment as a whole is up 7 percent on average in the same period.

Even so, the practice has prompted concern within the ranks of the Dartmouth trustees. Roughly five years ago, the group debated such transactions, according to Charles E. Haldeman Jr., a Dartmouth trustee from 2004 to 2012 and the former chi ef executive of Freddie Mac. “We understood there was a potential negative perception,” Mr. Haldeman said. But the trustees concluded that the potential for “a higher return on the endowment” justified the risk of a “perception issue.”

In the depths of the financial crisis, the issue came up again. Like many colleges, Dartmouth's endowment suffered during the market downturn, forcing the fund to sell assets and cut staff to bolster its cash cushion.

At the time, one trustee raised concerns that the endowment was overly invested in illiquid high-fee products, which could not be easily sold. By then, Dartmouth's exposure to alternative investments like hedge funds, private equity funds and venture capital had swelled to 48.5 percent of assets, well above its target of 35 percent.

The cash squeeze als o prompted questions from the trustee, Todd J. Zywicki, a law professor at George Mason University, about the amount of alternative assets that were devoted to firms led by Dartmouth trustees.

Initially, Mr. Zywicki said in an interview, he got the impression that such investments were a “special opportunity.” But by the time of the downturn, he said that it had become routine. “Every year they would bring more of these things,” he said.

After Mr. Zywicki was voted off the board in 2009, the endowment issue was swept up into a larger, decade-long battle between alumni factions over whether Dartmouth should try to compete globally by expanding its top graduate schools, or focus on its traditional undergraduate core.

But the concerns did not go away. In February 2012, a group sent an anonymous letter to the office of the New Hampshire attorney general. “Who really runs Dartmouth College and for whose benefit?” the letter asked. “For years, Dartmouth has been run by and has paid sky-high fees to a group of investment manager trustees, all Dartmouth graduates, who have then recycled some portion of the fees” back to the college “as generous ‘donations,' ” often getting a building named for them in the process.

The letter cited donations by some of the same trustees. For example, Mr. Black contributed $48 million for a Black Family Visual Arts Center, and a building to house Dartmouth's history department was named for Mr. Carson in 2002. An Apollo spokesman declined to comment. Neither Mr. Carson nor another Welsh, Carson official returned calls.

The anonymous letter noted that Pamela J. Joyner, a Dartmouth trustee from 2001 to 2010, had served as a placement agent for Apollo, receiving commissions for investm ents in its funds. Ms. Joyner, whose San Francisco firm Avid Partners is an alternative investment marketing consultant, declined to comment, referring questions to a Dartmouth spokesman. The college spokesman, Justin Anderson, confirmed her placement work for Apollo, and said she had also “explored” such work for the money management firm Welsh, Carson, but did not benefit from any Dartmouth investments.

The letter, made public in May, prompted a review by the state attorney general's office. In October, officials concluded that an investigation wasn't warranted. The review, in part, found that Dartmouth had complied with state rules. Regulations require that such transactions be approved by a two-thirds vote of the board, without any participation by the trustee involved with the investment.

Since the issue arose, Dartmouth has bolstered its controls over such investments. In addition to the existing requirements, the audit committee now votes on such inves tments to ensure they don't pose “an unreasonable risk of appearance of conflict of interest.”

“We could have had a blanket prohibition, and if we did, we would never be second-guessed,” said Mr. Haldeman, the former Dartmouth trustee. “But returns on our endowment would have been substantially lower,” he added, “and the institution would not be as strong as it is today.”