Aeneas Portfolio Attracts Scrutiny

Deciding how to invest a billion dollars can be tough. For Harvard Management Company's (HMC) Scott Sperling and Mike Eisenson, it can be very rewarding as well.

Sperling and Eisenson are the youthful managing partners of the Aeneas Group Incorporated, the high-risk, private placement arm of HMC. As such, they control approximately 20 percent of Harvard's $5 billion plus endowment--the 20 percent that is invested in real estate commodities and venture capital.

And as such, they have earned steep salaries and lucrative bonuses-- bonuses that in 1989 placed their earnings at over $1 million dollars each, far higher than any other Harvard official at the time.

But, as Sperling and Eisenson know all too well, managing high-risk investment can be a risky business. During the last fiscal year, their portfolio was devalued by $200 million, nearly 20 percent of its total worth. Severalmulti-million dollar assets were marked down tozero.

HMC President Jack R. Meyer has told theCrimson that is "pleased" with Aeneas' performanceand with that of its managing partners. And whileestimated that Aeneas has averaged a rate ofreturn of approximately 12.5 percent on itsinvestment over the last decade as opposed toHMC's overall average of approximately 13.5percent, he attributed the lower profits to "toughtimes" for private placements. Sperling andEisenson estimated Aeneas' average returns asabout 14 to 15 percent.

But internal HMC documents obtained by TheCrimson suggest that during the five year periodbetween 1986 and 1991, Aeneas' compound annualreturn averaged only 5.4 percent. That would putthe high risk division's returns not only belowHMC's internal benchmark of 11.1 percent for thatperiod, but below the 6.9 percent for that period,but below the 6.9 percent a very safe and highlyconservative investment in 10-year U.S. TreasuryNotes would have brought.

And while a return rate of 5.4 percent wouldnot necessarily invalidate the estimates made byMeyer, Sperling and Eisenson, it would suggestthat Aeneas was most profitable before 1986, theyear Eisenson arrived and just two years afterSperling took over as a full-time managingpartner.

In fact, several Aeneas investments have comeunder recent scrutiny for their financial merit.

Take Avenue Entertainment, for example. Harvardinvested more than $5 million in the Los Angelesfilm production and distribution company in 1987,when it was just being started up Hollywoodproducer and former island Pictures President CaryBrokaw.

Sperling and Eisenson have said that, at thetime, they were interested in investing in therapidly expanding and potentially highlyprofitable movie business. the Avenue deal was oneof a pair of investments that also included amajor stake in Tristar Pictures.

Tristar was highly successful. When Aeneas soldits stake in the company to ColumbiaPictures--later acquired by the SonyCooperation--Several years later, it did so at asubstantial profit.

But the Avenue deal was not as fortunate. Overthe next three years, sources have told TheCrimson, Avenue lost significant amounts of moneyby acquiring the distribution rights to a seriesof low quality, ill-fated films, including one,Cold Feet that sources said grossed a totalof $250,000 nationwide less than the cost ofproducing the film's preview.

Despite the losses, however, the sources saidHarvard neglected to devalue the Avenue investmentsignificantly until fiscal 1991, when it waswritten down to zero. Holding it at an inflatedvalue, they said, could have contributed to largebonuses like those earned by Sperling and Eisensonin 1989.

"Clearly the company was failing when they tooktheir bonuses and was probably worth zero," onesource alleged. "it was held at artificialvaluation for some length of time and then all ofa sudden written down to zero a short time afterthey got their bonuses..... That seemsoutrageous."

Furthermore, the source charged, Aeneas'dealings with Avenue may be indicative of itsoverall management style.

"If they take one company, hold it at whatappears to be an artificial book value for asubstantial period of time, and then, shortlythereafter write it down to zero, what does thatsuggest about the integrity of the generalvaluation method," the source asked. "Certainlyyou have to wonder when you see something likethat."

And, sources charged, despite Brokaw'sdemonstrated inability to run the firm profitablyand his failure to control rising costs, Aeneasofficials failed to respond adequately. Thesituation at Avenue was spinning out of control,the source said, and neither Sperling nor Eisensonstepped in to do anything about it.

"There were actions taken by Mr. Brokawsubsequent to the investment that should have beenquestioned and more tightly managed," one sourcesaid. "He had virtual free reign over almosteverything with no oversight."

"Sperling's apparent unwillingness to bringoutside expertise onto Avenue's board limited theboard's ability to properly oversee Brokaw'sactivities," another source charged.

Reached at Avenue's office in Los Angeles,Brokaw denied that the company was not surprisedclosely enough by its investors at Aeneas.Sperling and Aeneas partner Tim Palmer are activemembers of Avenue's four-person board ofdirectors, he said.

The Aeneas team's management style is'responsible but hands off," Brokaw said. "They donot exert significant day to day control in anyway," he added.

Sperling said that his job is not to runAeneas' investments on a day to day basis.

"There are very few business--whether it's anentertainment business, or a semiconductorcompany, or a software company, or a bank--wherethe nature of our role is to tell the manager howto run the business on a day to day basis,because that's not our expertise," Sperling said."If we tried to do that, we'd only handicap thecompany."

Sperling also denied that Avenue is a failedinvestment, even though source have told TheCrimson that Aeneas has marked the movie company'svaluation down to zero.

In addition, the sources said and Brokawconfirmed that Avenue is liquidating many of itsassts. The Company is down to eight employees froma one time high of 27 and is no longer in thedistribution business, part of a settlement to alawsuit filed against the company and PhemusCorporation, an Aeneas subsidiary, by theproducers of the film Mr. Johnson.

In that suit, the plaintiffs--who asked inexcess of $20 million in damage--charged Avenuewith fraud and breach of contract for failing tocarry out its obligations as the movie'sdistributor, resulting in the film's poor boxoffice returns.

Mr. Johnson cost nearly $7 million to producebut has grossed only $1.5 million, according toVariety magazine, even though, according todirector Bruce Beresford--who directed DrivingMiss Daisy---the film received "good reviewsevery where it was shown."

Sources have told The Crimson that the suit wassettled out of court for approximately $100,000,with about $40,000 coming from Harvard.

Brokaw said that Aeneas' investment in Avenue"hasn't been a success," though he would notcomment on whether the investment was a wise onefor Harvard.

And Sperling said, "The jury's still out. wedon't know how it will do."

But a number of sources called the investment adefinite failure.

"The company has been written down to zero,there's creditors' committee, they're no longer indistribution, and yet these people say it's soonto call the company a failure," said one source."That's like people at a funeral not acknowledgingthat the corpse is dead."

Sperling said Avenue's success or failuredepends on two more films it is producing. One isthe newly released and critically acclaimed ThePlayer, which Sperling said stands to generatesubstantial profit for the company.

Still, Sperling admitted, "I would say Avenuehas not executed as well as we hoped it wouldexecute. At this point, I don't know if we'll makeour five million back."

But sources have told The Crimson that Aeneasis considering a further major investment in anAvenue reorganized under Brokaw. The investmentmay be part of a deal between Avenue and 20thCentury Fox, the source said.

Sperling and Eisenson declined to comment onrumors of the deal, though they refused to ruleout the possibility. Fox Chief Operating OfficerStrauss Zelnick said there is no deal currently inthe works with Brokaw, though he said he said hemight be interested in such a deal in the future.Brokaw said he thinks a deal is unlikely, thoughhe said it is possible that Harvard may continueto invest in Avenue .

"There's no decision at this point about anyfurther investment in Avenue by Harvard," Brokawsaid.

But source close to HMC said that any furtherinvestment in Avenue would be a mistake.

"With the benefit of a full perspective of[Brokaw's] production activities, how they cancontemplate investing more money is befuddling, atbest," one source said.

While some companies, like Avenue, had theirvaluations completely wiped out in the 1991markdowns, others, like Texas-based Harken EnergyCorporation, are still valued significantly byAeneas, Harken, for one, has also been linked toallegedly shady business practices.

The Wall Street Journal reported that Aeneas'nearly $52 million investment in the oil and gasexploration firm was written down to just over $28million in 1991. Eisenson said that Aeneas hassold some of its stake in Harken, adding that themarket value of Harvard's current shares exceedstheir original cost. Still he noted, if Harkenstock drops in price, Aeneas could stand to losemoney on its investment.

Today, according o Harken President and ChiefExecutive Officer Mikel D. Faulkner, Harvard ownsapproximately 22 percent of the company's commonstock. Faulkner said that, while Aeneas does notcontrol Harken, Eisenson is extremely active onthe company's board, staying in almost dailycontract with Harken officials.

Eisenson acknowledged that Harken is aninvestment with make or break prospects in thenear future. The outcome, he said, depends largelyon exploratory drilling currently underway in thePersian Gulf, off the coast of Bahrain.

If Harken finds oil there, the money managersaid, the investment will have been a success. Ifit fails, he added, the investment will likely bedevalued.

According to Faulkner, the one well Harken hascompleted in the Gulf so far has come up dry.

In addition, according to US News & WorldReport, "Harken has been characterized by apattern of financial deal-making so burdened withdebt and tangled stock swaps that its largestcreditors threatened to shut the company down."

The magazine also alleged unusually highsalaries and generous stock options for Harkendirectors in year when the company performedpoorly.

Eisenson, who is on the company's compensationcommittee, denied the charges.

"Their cash compensation is actually quite low,relative to the industry," Eisenson said, addingthat the earrings of Harken's executives arelargely determined on an incentive basis and thatexecutives are not allowed any unusually liberalstock options.

Harken has also come under scrutiny for itsalleged indirect ties to the Bank of Credit andCommerce International (BCCI), formerly one of theworld's largest banks. BCCI is currently involvedin growing scandal that includes allegations oflaundering drug money.

According to the Wall Street Journal Harken"has dealt with a number of individuals who, inturn, have had dealing of their own withprincipals of BCCI."

Faulkner denied any link.

"It's absolutely untrue and totally withoutfoundation," the Harken CEO said.

Harvard Management Company President Jack R.Meyer--while denying any truth to the allegationof Harken's connection to BCCI--said such a link,even if verified, would not necessarily mean thatAeneas would immediately divest itself of itsholdings in the company .

"Surely if we found out that there was aconnection and if we found out that there was aconnection and if we found out that things weredone that should not have [been], of course itwould have [an] enormous influence on us," Meyersaid.

"But you have to understand that in a privateplacement market, or in a stock that has liquidityas limited as this, even if all those things weretrue, we could not tomorrow sell our position. Itwould take a while," he said.

While Avenue and Harken are two investmentsthat have not to date performed well for Aeneas,Meyer, Sperling and Eisenson point to aninvestment in Texas-based Team Bank as a model ofsuccess for the Aeneas Group.

Aeneas purchased a large chunk of TeamBank--then called Texas AmericanBankshares--between 1988 and 1922 for $27 million,after the company had filed for protection withthe Federal Deposit Insurance Corporation.

Now, four year later, Aeneas has madearrangements to sell its investment to Ohio-basedBanc One Corporation in a deal worth nearly threetimes the initial purchase price. Aeneas will netan estimated $46 million in the deal.

"It's very satisfying rate of return,obviously, and it's not unique in being aninvestment that's come to a successful maturitythis year," Eisenson said. "It is the kind ofinvestment we like to make ."

Eisenson added that four or five other Aeneasinvestments this year have netted the companyreturns in the area of two to 10 times theirinitial cost.

Still, charges of financial mismanagement andeven misconduct continue to plague Aeneas' two topmoney managers.

Sperling and Eisenson, for their part blamedmany of the charges on individuals who may bedisgruntled former employees or otherwise have anaxe to grind with HMC.

"We have fired people, we have been inorganization where we have been on boards ofcompanies that people have been fired [from], andthere are a lot o people out there who don't likethat," Sperling said. "there is always going to bepercentage [of people] who...may take some shots."

But one source close to the management companysaid that the criticisms of Sperling's andEisenson's management should be taken seriously.

"As people entrusted with the management of auniversity's endowment, their jobs is doublyimportant," the sources said. "To sustain aHarvard or any university is a specialundertaking, and it's disturbing to see peoplemisusing their authority in that system."Crimson File PhotoHarvard Management Company President JACK R.MEYER

HMC President Jack R. Meyer has told theCrimson that is "pleased" with Aeneas' performanceand with that of its managing partners. And whileestimated that Aeneas has averaged a rate ofreturn of approximately 12.5 percent on itsinvestment over the last decade as opposed toHMC's overall average of approximately 13.5percent, he attributed the lower profits to "toughtimes" for private placements. Sperling andEisenson estimated Aeneas' average returns asabout 14 to 15 percent.

But internal HMC documents obtained by TheCrimson suggest that during the five year periodbetween 1986 and 1991, Aeneas' compound annualreturn averaged only 5.4 percent. That would putthe high risk division's returns not only belowHMC's internal benchmark of 11.1 percent for thatperiod, but below the 6.9 percent for that period,but below the 6.9 percent a very safe and highlyconservative investment in 10-year U.S. TreasuryNotes would have brought.

And while a return rate of 5.4 percent wouldnot necessarily invalidate the estimates made byMeyer, Sperling and Eisenson, it would suggestthat Aeneas was most profitable before 1986, theyear Eisenson arrived and just two years afterSperling took over as a full-time managingpartner.

In fact, several Aeneas investments have comeunder recent scrutiny for their financial merit.

Take Avenue Entertainment, for example. Harvardinvested more than $5 million in the Los Angelesfilm production and distribution company in 1987,when it was just being started up Hollywoodproducer and former island Pictures President CaryBrokaw.

Sperling and Eisenson have said that, at thetime, they were interested in investing in therapidly expanding and potentially highlyprofitable movie business. the Avenue deal was oneof a pair of investments that also included amajor stake in Tristar Pictures.

Tristar was highly successful. When Aeneas soldits stake in the company to ColumbiaPictures--later acquired by the SonyCooperation--Several years later, it did so at asubstantial profit.

But the Avenue deal was not as fortunate. Overthe next three years, sources have told TheCrimson, Avenue lost significant amounts of moneyby acquiring the distribution rights to a seriesof low quality, ill-fated films, including one,Cold Feet that sources said grossed a totalof $250,000 nationwide less than the cost ofproducing the film's preview.

Despite the losses, however, the sources saidHarvard neglected to devalue the Avenue investmentsignificantly until fiscal 1991, when it waswritten down to zero. Holding it at an inflatedvalue, they said, could have contributed to largebonuses like those earned by Sperling and Eisensonin 1989.

"Clearly the company was failing when they tooktheir bonuses and was probably worth zero," onesource alleged. "it was held at artificialvaluation for some length of time and then all ofa sudden written down to zero a short time afterthey got their bonuses..... That seemsoutrageous."

Furthermore, the source charged, Aeneas'dealings with Avenue may be indicative of itsoverall management style.

"If they take one company, hold it at whatappears to be an artificial book value for asubstantial period of time, and then, shortlythereafter write it down to zero, what does thatsuggest about the integrity of the generalvaluation method," the source asked. "Certainlyyou have to wonder when you see something likethat."

And, sources charged, despite Brokaw'sdemonstrated inability to run the firm profitablyand his failure to control rising costs, Aeneasofficials failed to respond adequately. Thesituation at Avenue was spinning out of control,the source said, and neither Sperling nor Eisensonstepped in to do anything about it.

"There were actions taken by Mr. Brokawsubsequent to the investment that should have beenquestioned and more tightly managed," one sourcesaid. "He had virtual free reign over almosteverything with no oversight."

"Sperling's apparent unwillingness to bringoutside expertise onto Avenue's board limited theboard's ability to properly oversee Brokaw'sactivities," another source charged.

Reached at Avenue's office in Los Angeles,Brokaw denied that the company was not surprisedclosely enough by its investors at Aeneas.Sperling and Aeneas partner Tim Palmer are activemembers of Avenue's four-person board ofdirectors, he said.

The Aeneas team's management style is'responsible but hands off," Brokaw said. "They donot exert significant day to day control in anyway," he added.

Sperling said that his job is not to runAeneas' investments on a day to day basis.

"There are very few business--whether it's anentertainment business, or a semiconductorcompany, or a software company, or a bank--wherethe nature of our role is to tell the manager howto run the business on a day to day basis,because that's not our expertise," Sperling said."If we tried to do that, we'd only handicap thecompany."

Sperling also denied that Avenue is a failedinvestment, even though source have told TheCrimson that Aeneas has marked the movie company'svaluation down to zero.

In addition, the sources said and Brokawconfirmed that Avenue is liquidating many of itsassts. The Company is down to eight employees froma one time high of 27 and is no longer in thedistribution business, part of a settlement to alawsuit filed against the company and PhemusCorporation, an Aeneas subsidiary, by theproducers of the film Mr. Johnson.

In that suit, the plaintiffs--who asked inexcess of $20 million in damage--charged Avenuewith fraud and breach of contract for failing tocarry out its obligations as the movie'sdistributor, resulting in the film's poor boxoffice returns.

Mr. Johnson cost nearly $7 million to producebut has grossed only $1.5 million, according toVariety magazine, even though, according todirector Bruce Beresford--who directed DrivingMiss Daisy---the film received "good reviewsevery where it was shown."

Sources have told The Crimson that the suit wassettled out of court for approximately $100,000,with about $40,000 coming from Harvard.

Brokaw said that Aeneas' investment in Avenue"hasn't been a success," though he would notcomment on whether the investment was a wise onefor Harvard.

And Sperling said, "The jury's still out. wedon't know how it will do."

But a number of sources called the investment adefinite failure.

"The company has been written down to zero,there's creditors' committee, they're no longer indistribution, and yet these people say it's soonto call the company a failure," said one source."That's like people at a funeral not acknowledgingthat the corpse is dead."

Sperling said Avenue's success or failuredepends on two more films it is producing. One isthe newly released and critically acclaimed ThePlayer, which Sperling said stands to generatesubstantial profit for the company.

Still, Sperling admitted, "I would say Avenuehas not executed as well as we hoped it wouldexecute. At this point, I don't know if we'll makeour five million back."

But sources have told The Crimson that Aeneasis considering a further major investment in anAvenue reorganized under Brokaw. The investmentmay be part of a deal between Avenue and 20thCentury Fox, the source said.

Sperling and Eisenson declined to comment onrumors of the deal, though they refused to ruleout the possibility. Fox Chief Operating OfficerStrauss Zelnick said there is no deal currently inthe works with Brokaw, though he said he said hemight be interested in such a deal in the future.Brokaw said he thinks a deal is unlikely, thoughhe said it is possible that Harvard may continueto invest in Avenue .

"There's no decision at this point about anyfurther investment in Avenue by Harvard," Brokawsaid.

But source close to HMC said that any furtherinvestment in Avenue would be a mistake.

"With the benefit of a full perspective of[Brokaw's] production activities, how they cancontemplate investing more money is befuddling, atbest," one source said.

While some companies, like Avenue, had theirvaluations completely wiped out in the 1991markdowns, others, like Texas-based Harken EnergyCorporation, are still valued significantly byAeneas, Harken, for one, has also been linked toallegedly shady business practices.

The Wall Street Journal reported that Aeneas'nearly $52 million investment in the oil and gasexploration firm was written down to just over $28million in 1991. Eisenson said that Aeneas hassold some of its stake in Harken, adding that themarket value of Harvard's current shares exceedstheir original cost. Still he noted, if Harkenstock drops in price, Aeneas could stand to losemoney on its investment.

Today, according o Harken President and ChiefExecutive Officer Mikel D. Faulkner, Harvard ownsapproximately 22 percent of the company's commonstock. Faulkner said that, while Aeneas does notcontrol Harken, Eisenson is extremely active onthe company's board, staying in almost dailycontract with Harken officials.

Eisenson acknowledged that Harken is aninvestment with make or break prospects in thenear future. The outcome, he said, depends largelyon exploratory drilling currently underway in thePersian Gulf, off the coast of Bahrain.

If Harken finds oil there, the money managersaid, the investment will have been a success. Ifit fails, he added, the investment will likely bedevalued.

According to Faulkner, the one well Harken hascompleted in the Gulf so far has come up dry.

In addition, according to US News & WorldReport, "Harken has been characterized by apattern of financial deal-making so burdened withdebt and tangled stock swaps that its largestcreditors threatened to shut the company down."

The magazine also alleged unusually highsalaries and generous stock options for Harkendirectors in year when the company performedpoorly.

Eisenson, who is on the company's compensationcommittee, denied the charges.

"Their cash compensation is actually quite low,relative to the industry," Eisenson said, addingthat the earrings of Harken's executives arelargely determined on an incentive basis and thatexecutives are not allowed any unusually liberalstock options.

Harken has also come under scrutiny for itsalleged indirect ties to the Bank of Credit andCommerce International (BCCI), formerly one of theworld's largest banks. BCCI is currently involvedin growing scandal that includes allegations oflaundering drug money.

According to the Wall Street Journal Harken"has dealt with a number of individuals who, inturn, have had dealing of their own withprincipals of BCCI."

Faulkner denied any link.

"It's absolutely untrue and totally withoutfoundation," the Harken CEO said.

Harvard Management Company President Jack R.Meyer--while denying any truth to the allegationof Harken's connection to BCCI--said such a link,even if verified, would not necessarily mean thatAeneas would immediately divest itself of itsholdings in the company .

"Surely if we found out that there was aconnection and if we found out that there was aconnection and if we found out that things weredone that should not have [been], of course itwould have [an] enormous influence on us," Meyersaid.

"But you have to understand that in a privateplacement market, or in a stock that has liquidityas limited as this, even if all those things weretrue, we could not tomorrow sell our position. Itwould take a while," he said.

While Avenue and Harken are two investmentsthat have not to date performed well for Aeneas,Meyer, Sperling and Eisenson point to aninvestment in Texas-based Team Bank as a model ofsuccess for the Aeneas Group.

Aeneas purchased a large chunk of TeamBank--then called Texas AmericanBankshares--between 1988 and 1922 for $27 million,after the company had filed for protection withthe Federal Deposit Insurance Corporation.

Now, four year later, Aeneas has madearrangements to sell its investment to Ohio-basedBanc One Corporation in a deal worth nearly threetimes the initial purchase price. Aeneas will netan estimated $46 million in the deal.

"It's very satisfying rate of return,obviously, and it's not unique in being aninvestment that's come to a successful maturitythis year," Eisenson said. "It is the kind ofinvestment we like to make ."

Eisenson added that four or five other Aeneasinvestments this year have netted the companyreturns in the area of two to 10 times theirinitial cost.

Still, charges of financial mismanagement andeven misconduct continue to plague Aeneas' two topmoney managers.

Sperling and Eisenson, for their part blamedmany of the charges on individuals who may bedisgruntled former employees or otherwise have anaxe to grind with HMC.

"We have fired people, we have been inorganization where we have been on boards ofcompanies that people have been fired [from], andthere are a lot o people out there who don't likethat," Sperling said. "there is always going to bepercentage [of people] who...may take some shots."

But one source close to the management companysaid that the criticisms of Sperling's andEisenson's management should be taken seriously.

"As people entrusted with the management of auniversity's endowment, their jobs is doublyimportant," the sources said. "To sustain aHarvard or any university is a specialundertaking, and it's disturbing to see peoplemisusing their authority in that system."Crimson File PhotoHarvard Management Company President JACK R.MEYER