February 08, 2002
Private Equity Investment Puts Yale in Deep Water
by William Baue
Yale University's investment in a private water company highlights the difficulty institutional
investors have in managing private equity investments that may have little or no transparency.
Yale University recently faced the wrath of environmental groups, a rural Colorado community, and a
U.S. Senator because of the Ivy League school's involvement in a scheme to develop water rights on
environmentally sensitive land. To end the negative publicity, Yale will donate its $4 million
profit from the sale of the land to the Nature Conservancy.
Yale invested in a
series of partnerships that had planned to pump water from an aquifer in the San Luis Valley and
pipe it over the mountains to Denver. The problem was that the San Luis Valley encompasses the
Great Dunes National Monument, home to the tallest sand dunes in North America. Depleting the
aquifer would have threatened the region's unique ecology and potentially could have destabilized
the sand dunes. The land from the deal has been purchased by the Nature Conservancy, and the Nature
Conservancy is now helping to turn most of San Luis Valley into a national park.
machinations behind the university's investment may confuse even Yale MBAs. About fifteen years
ago, American Water Development Inc. (AWDI) filed for rights to sell water from the aquifer beneath
100,000-acres of land in the San Luis Valley known as Baca Ranch. This set off a protracted court
battle to prevent the exploitation of the underground water resources, which environmentalists
deemed critical to the health of area's ecosystem.
At about the same time, Yale started
shifting investments of its $10.8 billion endowment away from a predominance of publicly traded
companies to "nontraditional asset classes" such as real estate. These investments are chosen and
managed by about a hundred different investment firms. Yale may not have the same degree of
transparency on such holdings as compared with its interests in publicly traded companies. The
enormity of Yale's endowment requires a hands-off approach to these investments, according to
Farallon Capital Management, a San Francisco-based investment
firm, manages about $500 million of Yale's endowment. In 1995, Farallon set up Vaca Partners to
buy the Baca Ranch for an estimated $15 million, with Yale holding a 50 percent share in the
limited partnership. If successful in developing the water rights, the investment promised to make
huge profits. The effort to sell the water beneath the ranch passed Farallon's independent
However, when Yale's role in the controversial water
development plans was revealed last month by Yaleinsider.org, a website operated by Yale's
Federation of Hospital and University Employees, the university came under strong criticism.
Residents of San Luis Valley who had been fighting to retain their water likened Yale's action to a
"rape" of the community. Yale President Richard C. Levin maintains that the university was not
aware of any impropriety in the water deal.
"We had no intention of causing harm to the
citizens of Colorado, and our general partner, Farallon Capital, believes that its proposal would
not have done so," said Mr. Levin. "Because Yale has a long-standing commitment to the highest
ethical standards in all its activities, we are taking this direct action to eliminate any
Colorado Senator Wayne Allard, who convinced Mr. Levin to expedite the Nature
Conservancy's purchase of Baca Ranch, believes that Farallon represented the water deal to Yale as
"[Levin] was misled, and I think that the school was misled by
Farallon," said Sen. Allard, according to the Yale Herald, the university's undergraduate
This revelation raises questions about how Yale evaluates the social and
environmental criteria related to its private equity investments.
"It's not clear what
kind of oversight there is of the endowment," said Rose Murphy, the researcher who wrote the
Yaleinsider.org article exposing the scandal.
The Yale Investment Office controls the
university's endowment. The eight-member Advisory Committee on Investor Responsibility (ACIR),
which includes one undergraduate and one graduate member, reviews the social responsibility of
Yale's investment decisions. In practice, however, the committee generally oversees investments in
publicly traded companies, but remains in the dark about "nontraditional" investments, which
comprise up to 60 percent of Yale's endowment portfolio.
ACIR student member David
Corson-Knowles admits that it would be prohibitively onerous for Yale to track all of its
investments. However, the Baca Ranch debacle reveals the risks of unmonitored investing.
"[The] university stands to lose not just the valor of its name, but also the profits from its
ventures, as in this botched water stealing plan," said Mr. Corson-Knowles.