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The most cutting jokes are the ones with a bit of truth behind them. While the increasingly popular quip that "colleges are just real-estate hedge funds with classes attached" may inspire eye rolls, recent moves are making the joke cut deeper.
In January, the University of California system — one of the largest public-university systems in the world and where I teach — made a $4 billion investment in the Blackstone Real Estate Income Trust fund, one of the world's largest real-estate funds. The massive investment came just weeks after the fund, known as BREIT, came under fire for limiting how much investors could pull out of it. But these liquidity concerns didn't scare off UC, which committed to keep its investment with BREIT for at least six years.
And the University of California system isn't alone in its ambitions — universities across the country have invested in or bought up real estate. And some large public universities such as Georgia Tech, the University of Washington, and the University of Texas at Austin have even teamed up with private developers to build "innovation districts," hubs of office buildings and retail shops that are leased to private companies instead of being used for classes or student housing, on university property.
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While the money flowing from higher education to real estate has intensified in recent years, universities have been looking to private equity and real-estate investments since the 1980s to fund their operations. And increasingly, this financialization of higher education has warped the purpose and mission of universities. Billionaire donors and money managers have shifted the focus of these institutions from providing students an effective education to sustaining a profit-generating, investor-enriching machine.
How private equity ended up in universities
In addition to tuition and money from the government, universities are funded by endowments — tax-free donations typically from alumni that are invested in order to grow over time. Instead of using an endowed gift immediately, the school will invest the funds in a variety of assets — stocks, bonds, etc. — and then use the gains made on those investments as a source of revenue. In theory, endowments help provide a continuous stream of funds to pay a university's ongoing costs that isn't dependent on political decisions or students' ability to pay. Endowments can also be earmarked by the gift giver for a particular purpose, such as to fund a professor's salary or a specific research program.
Until the late 1980s, endowments were mostly invested in low-risk assets, like US government bonds. But as Charlie Eaton, a sociology professor at the University of California-Merced, documented in his book "Bankers in the Ivory Tower: The Troubling Rise of Financiers in US Higher Education," that all changed at the 1988 Harvard-Yale football game. Tom Steyer, a hedge-fund manager who would eventually run for president in 2020, got a tip at the game that David Swensen, the newly appointed endowment manager for Yale, was looking to put some of the school's money into funds that could offer higher returns. Steyer convinced Swensen to invest $300 million worth of Yale's endowment into his newly established fund, Farallon Capital, which represented a third of the hedge fund's capital at the time. The new strategy worked for both sides. Swensen grew Yale's endowment from $1.3 billion in 1985 to $31.2 billion in 2020. And Yale's investment was critical to the success of Steyer's fund, eventually making him a billionaire.
The move also marked the beginning of a new way to manage endowment funds. Instead of low-risk, low-return investments, Swensen inspired other schools to follow the "Yale model" and pour more money into riskier private-equity and real-estate hedge funds. Endowment managers were eager for the higher returns that the larger funds brought, sparking a race among top universities to grow their endowments: One analysis found that from 1990 to 2021, the value of the average endowment grew by 423%. And thanks to a booming stock market during the pandemic, the average endowment size increased by 35% during the 2021 fiscal year. Today, US universities have more than $130 billion invested in hedge funds. The arrangement has been a boon for the hedge-fund managers who received university endowment cash, but the benefits for the schools are trickier to parse.
What are endowments good for?
In the three decades since that fateful Harvard-Yale game, colleges have been starved of funding. State funding for public higher education has seen steady declines and federal funding became concentrated in Pell Grants and subsidized student-loan programs. Instead of trying to support all types of disciplines, schools focused on fields like business and technology that generated high returns in the form of wealthy alumni donations or partnerships with private firms. Less profitable fields like the humanities were neglected. As Eaton put it in his book, universities directed funds to "wherever those allocations would generate the largest further investment returns."
And beginning in the 1990s, suspicion across the political spectrum about big government led to a decline in state support for public universities: States as diverse as Kansas, Michigan, Wisconsin, and California lost precious funding. According to a University of California budget study, state contributions per student to the UC budget saw a precipitous decline in the early 2000s, from a peak of $25,000 per student in late 1980s to $15,000 per student by 2005 to today's anemic $11,000 per student.
The decline of public funding paralleled the growth of endowments, but confoundingly, the profits made from these investments weren't used to bridge the gap and keep soaring tuition costs down. In a 2022 working paper for the National Bureau of Economic Research, the economist George Bulman found that for a large sample of private colleges and universities, endowment income is not used to expand enrollment or significantly increase aid to students in financial need. In fact, Bulman found that endowment gains were mostly spent on operating expenditures that increased the selectivity and national ranking of the school. Despite claims from some endowment managers that endowments help fund financial aid, Bulman found that spending on student aid was "statistically insignificant."
And given that endowment gifts siphon off taxable income, the sudden growth of these funds has diverted money the government could use to support schools. Contributions to endowments are tax write-offs, and capital gains on these piles of money are also free from taxation since the universities attached to them are not for profit. Eaton estimated in 2017 that tax breaks for university endowments cost federal coffers up to $19 billion a year. On top of that, in 2017 the New York Times reported that a number of schools were using overseas tax shelters to avoid taxation on income streams unrelated to their academic missions. Under Trump, Congress passed a 1.4% tax on the largest university endowments as part of the Tax Cuts and Jobs Act, but revenue from this tax is a drop in the Federal budget — just $200 million a year — and it is not earmarked to fund education.
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The impact of financialization
Rather than help ease student's cost burdens, the growing hedge-fund-like nature of endowments has actually made affordability worse. According to a 2018 case study on the financialization of higher education from the Roosevelt Institute, a progressive think tank, complex financial investments called interest-rate swaps had cost a sample of 19 schools $2.7 billion — enough to cover the total cost of college for 108,000 students. "The money Wall Street extracts from college budgets and endowments is a transfer of wealth from students to banks and investors, and interferes with the ability of schools to complete their core functions: educating students and preparing them for a life of learning," the report said.
Here again, the University of California provides a useful example. Starting in 2003, university leaders began consulting with Wall Street bankers, including some from Lehman Brothers — the infamous Wall Street investment firm that would eventually fold in 2008 because of its involvement in the subprime mortgage crisis and collapse of the housing market. At the advice of the bankers and advisors like Richard Blum, a hedge-fund manager and the late husband of Senator Dianne Feinstein, UC leaders decided to take on a huge amount of new debt to fund new expansions, mostly of nonacademic projects like medical centers and sports facilities. In order to issue the $11 billion of debt, UC started to use more exotic investment strategies like using tuition fees as collateral for loans and the aforementioned interest-rate swaps. But instead of helping fund a bright new future for the system, these financial sleights of hand ended up costing UC massive amounts of money: Even though administrators defended the moves, reports found that the system stood to lose hundreds of millions of dollars from the swaps. And in order to offset the increasing debt load, UC raised tuition prices and began admitting more out-of-state and international students who had to pay higher fees. As a result, Californians had a harder time gaining admission. As evidence that the equation wasn't working, California mandated last year that top campuses had to put a cap on out-of-state students, promising to increase state allocations to supplement the more than $1.3 billion in tuition revenue that would be lost by the caps.
And this focus on profit-making over strengthening its core mission continues today. Just a few months before UC made its $4 billion investment in BREIT, 48,000 UC graduate assistants, postdoctoral fellows, and researchers went on strike over wages that barely cover rent and food in one of the most expensive parts of the country. The union that represents these workers found that 40% of its members were severely rent burdened — meaning they were spending more than half their income on rent. The financialization of the system has corroded its commitment to its ultimate mission: providing effective higher education for California's students.
Endowments are just the start of universities' warped priorities
Beyond saddling universities with higher costs and failing to deliver on their promises, the growth of endowments as the financial engine for most higher-education institutions has also helped warp the culture of these schools.
Donations from alumni can be important for building community involvement in campus life or alumni loyalty to the alma mater, but increasingly smaller donors are being eclipsed by high-net-worth individuals seeking their names on buildings and larger tax write-offs. This class of high earners are increasingly able to dictate the future of higher education. Their gifts almost always include support for research that can be translated into intellectual property from which they can profit, or chairs in areas of study that reflect well on their identity. Through these kinds of targeted endowments, big-time donors have quietly taken over the research university's priorities. And it has trickled down into how schools themselves are run.
University administrators are guided by the same playbook: First, invest in fundraising and development that would be attractive to billionaires looking for philanthropic opportunities to avoid taxes. Second, leverage your assets by taking on bond-funded debt for new buildings. Third, shrink your workforce down to the bone by reducing the number of tenured faculty positions, outsourcing food and cleaning services, and paying graduate student workers as little as possible. Then, get rid of unprofitable departments in the name of productivity. Finally, establish and copiously reward administrators who will execute those policies with alacrity.
As the influence of billionaires and hedge-fund managers has grown, universities have moved further away from their ultimate goal: educating people. The university can be a place where we learn to feel solidarity with those who came before us so that we can protect the dignity of all those who will come after us. But as schools are forced to lean more and more on their endowments, these ideals are being abandoned in favor of ruthless dollars-and-cents efficiency. And other than the billionaire donors and money managers, this new paradigm is failing everyone: students, professors, and future generations.
Catherine Liu is a professor of Film and Media Studies at the University of California Irvine and the author of "Virtue Hoarders: the Case Against the Professional Managerial Class."
