Liquidity is Hard
It made the news the other day when Harvard University announced that it would be taking on $750M of debt in order to fund operations amid “ongoing contingency planning for a range of financial circumstances.” Because that seems like an odd thing for an organization with a $50-plus billion endowment to have to do. But with the background that only $1.5 billion of that $50-plus billion is in cash and some $40 billion is in stuff like hedge funds and private equity that would be considered illiquid, the move makes more sense.
But what’s the point of having resources on your balance sheet if it doesn’t allow you to operate on your own terms and control your own destiny?
See, at Permanent Equity we believe there is no medium risk and we keep about 18 months worth of operating expenses in cash on our balance sheet. While that might sound like an extraordinarily conservative policy, we do this so that we maintain the flexibility to operate in normal and ordinary course for more than a year without needing to take distributions out of our operating companies. This is what can and will enable us to make sensible long-term capital allocation decisions together with our operators without concern for what that means for the finances of the mothership (such as foregoing all distributions during the height of the pandemic).
Our CEO Brent and I revisited the merits of this policy when we were talking about the recent market volatility caused by tariff uncertainty. Finishing up that conversation, I said, “I’m so glad our cash is in cash.” And Brent said, “Thank you for being you.”
After all, it can be difficult – nauseating, even – to look so stupid keeping your cash in cash when other vehicles in which you might put cash such as hedge funds and private equity seem to be appreciating so much in value. That’s FOMO (or fear of missing out). But as I’ve said before, here we try to practice FOMOBOMO (fear of missing out but okay missing out). Because while one point of money might be trying to make more money, what’s the point if you can’t be sure you can always do it on your terms?
Liquidity is hard.
– Tim
