New Report: HEI Hotels a Bad Investment for University Endowments

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A new report released by United Students Against Sweatshops (USAS) and endowment activists from campuses across the country sheds new light on how university endowments have gotten into so much trouble in recent months. The report—a case study on HEI Hotels and Resorts, a company largely funded by university endowments—sheds light on how risky private equity firms have a hold on millions of dollars of endowment funds at a time when universities are cutting academic budgets, student services and financial aid because they lack accessible cash.

Between 2004 and 2008, HEI raised over one billion dollars from approximately two dozen schools, including some of the nation’s largest university endowments like Yale, Harvard and Princeton. While HEI promised universities that they had created “an efficient, risk-adverse business model designed to grow at an unprecedented, disciplined rate,” this report shows two HEI funds made most of their hotel purchases at or near the peak of the market. For example, HEI purchased the Le Meridièn hotel in San Francisco near the peak of the real estate bubble in May 2006, paying $129 million for the hotel and saddling the property with $99 million in debt. By September 2009, HEI reported that the assessed value of the property was a mere $43 million.

The report goes on to show how HEI has “locked in” endowment investment, as property values fluctuate, leaving universities to absorb the risk and bear the brunt of the current recession. Millions of dollars that HEI collected from their most recent call for funds from university investors sit unused, even as universities make drastic cuts to financial aid and campus services because they do not have enough cash on hand. Now, university endowment managers are under fire for tying up endowment capital in long-term, illiquid private equity holdings.

The report also shows how HEI employees have been affected by the company’s business model, which has led to drastic cuts in staffing at some hotels. Working conditions have prompted HEI hotel workers to organize in California and northern Virginia. The Office of the General Counsel of the National Labor Relations Board (NLRB) has issued complaints against HEI alleging, among other things, that a union leader at the Sheraton Crystal City hotel was fired because of his role in the union. HEI denies these allegations and will face an NLRB hearing in early June.

Campus controversy around HEI has hit a boiling point in recent months at universities across the nation. Since February 2010, officials at Yale and Brown, including Brown President Ruth Simmons, have publicly expressed concern about the company’s labor record. On April 20, 2010, students at Notre Dame launched a five-day hunger strike, calling on the university to divest from HEI for unethical labor practices. Students at University of Pennsylvania, the University of Chicago, Yale, Princeton, and Brown have solidarity actions planned this week.

“Notre Dame says to the world that it’s an upstanding Catholic institution that upholds Catholic values and Catholic social teaching on campus, as well as an ethical investment policy,” said Note Dame undergraduate and hunger striker Liz Furman. “I’m a Christian and I really believe that all people have the right to dignity and respect. I think HEI isn’t doing that and our University isn’t doing that.”