(Bloomberg) -- Ohio State University's endowment will jump 25 percent in size with a $1 billion payment from two companies that will lease the school's energy assets for 50 years.
The school's board of trustees on Friday approved a public-private partnership with French company Engie SA and Montreal-based Axium Infrastructure Inc. to run and manage its energy and electricity systems in exchange for annual payments expected to exceed $54 million.
Research universities like Ohio State are akin to small towns, with large holdings of buildings to maintain for decades. Colleges are grappling with how to become more energy efficient at a time of budget cutbacks and lagging endowment performance. Ohio State, which has struggled with long-term performance in its fund, said the deal will lower energy costs and the payment will help bolster academic programs.
Upfront payments are common in public-private partnerships that involve existing assets, said Rick Geddes, director of Cornell University's program in infrastructure policy.
“It's inherently less risky, because you kind of know the revenues of the assets already,” Geddes said. “It's how you use the payment -- that's the risk.”
Columbus-based Ohio State in 2012 also entered into a 50-year lease to manage its parking operations in an almost $500 million deal with an upfront payment that went into its endowment.
Such deals have sometimes attracted opposition, in part because they tend to be complicated, and because not all deals have been financially beneficial. With a parking meter deal in Chicago, for instance, its inspector general determined that the city, in its rush to fill a short-term budget gap, undersold the rights.
Ohio State's parking deal helped the school distribute about $100 million to endeavors including scholarships, sustainable transportation options and faculty positions, according to the school.
Fee Structure
The deal with Engie and Axium has multiple parts. The school will pay the companies an annual fee that starts at $45 million and increases 1.5 percent per year; an operating fee that starts at $9.2 million annually and can be adjusted based on costs; and a financial return on any capital investments it funds for the university.
The university will pay Engie and Axium more than $2.7 billion over the life of the contract, which officials contend wouldn't exceed what it would otherwise pay.
“Like many universities, we have an interest in sustaining and using our energy resources in an efficient and also responsible way,” Michael Drake, the school's president, said in an interview.
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The companies will install energy conservation measures after evaluating some 450 buildings and 22 million-square-feet of energy-related infrastructure on campus. Some of the improvements include heat recovery and demand-controlled ventilation.
About 20 percent of the campus is powered by wind, which potentially could increase. The university will save on capital improvements costs, estimated to be less than if the school tackled the projects on its own, said Geoffrey Chatas, OSU's chief financial officer.
The payment to Ohio State will push its endowment up one spot to the sixth richest public school through June 30, surpassing Pennsylvania State University, according to data compiled by Bloomberg. It was the 25th-largest U.S. endowment as of that period with $3.6 billion.
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The fund is up 5.3 percent for the first six months of fiscal 2017 to $3.9 billion, buoyed by its 43 percent in public equities.
For the long-term, its performance is among the worst of the largest 100 college funds, according to data compiled by Bloomberg.
Its 3.7 percent annualized 10-year return lags the 5 percent average gain for about 800 funds of all sizes, according to a survey by the National Association of College and University Business Officers and money manager CommonFund. Ohio State's 5-year return is 5 percent, below Nacubo's 5.4 percent average.
“We're not where we want to be,” Chatas said.
The school sought better returns by hiring its first chief investment officer in 2008. The investment office was staffed by fiscal 2010, and the fund's annualized return since then was 8.1 percent through June 30. John Lane, the second CIO, joined in 2014.
Chatas said the school estimates an annualized 8 percent return over the next decade in the endowment. The $1 billion payment will be invested in the fund's long-term strategy, which includes an increase to its current allocation of 16.5 percent to private equity, where the endowment has been recruiting staff, he said.
Tim Keating, president of Keating Wealth Management, an investment adviser based in Greenwood Village, Colorado, said achieving high returns in a low-return environment will be challenging.
“The default assumption should be their historical return, not their projected return,” Keating said.
To contact the reporters on this story: Janet Lorin in New York at jlorin@bloomberg.net, Brian Eckhouse in New York at beckhouse@bloomberg.net.
To contact the editors responsible for this story: Mary Romano at mromano6@bloomberg.net, Reed Landberg at landberg@bloomberg.net, Will Wade
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