Michigan football saw Paris. The donor's family scored millions University of Michigan alumnus Donald C. Graham helped pay for the university's football team trip to France. His contribution came after U-M invested $102 million in his son's private equity funds.

Matthew Dolan , David Jesse | Detroit Free Press

Show Caption Hide Caption Jim Harbaugh reveals donors who funded U-M trips Jim Harbaugh reveals donors who funded U-M trips.

The wealthy family who helped bankroll the University of Michigan football team's recent overseas trip has received more than $100 million in investments from the university, according to a review of hundreds of U-M records.

U-M's endowment has invested a total of $102 million in four private equity funds run by the son of U-M alumnus and mega-donor Donald Graham. Graham and his family foundation have donated more than $60 million to Michigan, including paying for half of the estimated $800,000 cost of the Wolverines' trip to France last spring, organized by coach Jim Harbaugh.

It is the kind of financial back-and-forth that has troubled critics worried about how large donations to U-M and other elite universities could influence investment decisions worth billions of dollars.

"This case raises questions about a conflict of interest. Is Michigan acting in the best interest of the university or in the interest of a donor?" said Charlie Eaton, assistant professor of sociology at University of California, Merced, who is writing a book about Wall Street's relationship with higher education. "My research suggests that this is not just a coincidence that Michigan is invested in its biggest donors."

Melanie Leslie, the dean of the Benjamin N. Cardozo School of Law at Yeshiva University in New York, who has studied governance issues at nonprofits, said in an interview that "it’s all about process and transparency. ... I don’t think a blanket rule prohibiting the investments with donors is necessarily the way to go."

Leslie added that the process must be clear enough to avoid a "lack of accountability and people benefiting their friends."

At U-M, thousands of donors — many of them alumni — count on university investment officials to safeguard and grow hundreds of millions of dollars donors put into more than 10,000 individual endowments. Those long-term funds, now worth more than $11 billion collectively, are the country's third-largest endowment for a public university.

Internal auditors at the University of Michigan, as far back as 2014, cited problems with the university’s management of its endowment, including a lack of proper oversight and staff members who accepted luxury gifts and high-end travel. But the auditors never finished the job.

In a March interview this year, after the Free Press asked about the unfinished audit, President Mark Schlissel said he had "dropped the ball." Schlissel then commissioned PricewaterhouseCoopers to complete a comprehensive financial review, which was released Thursday.

External auditors concluded that they generally found sound financial controls, though they recommended implementing stronger policies to avoid some potential conflicts of interest as well as stricter oversight of employee travel and gift from investment fund managers. The audit only examined investment operations from July 1, 2017 through March 31 of this year.

The PwC audit and the university's written response did not specifically impose greater controls over possible conflicts arising from investing with some of the university's wealthiest donors.

Instead, university officials appeared to be moving toward curtailing direct oversight over individual investment decisions by elected leaders.

Today, the regents approve all new investments and reports those investment decisions at their monthly meetings where the public may comment. But U-M said Thursday it may curtail that power and public participation. U-M did say it would still report the investments to the board in a public setting.

Under the proposal announced Thursday, the regents would only weigh in on the kinds of investments U-M should make and how to divvy up those investment dollars broadly by category. The actual decision to place money with individual investment funds, however, would rest with U-M's chief investment officer and its chief financial officer.

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David Callahan, author of the 2017 book, "The Givers," said in an interview that private donors across the country have increasing influence at public universities where government support has dwindled.

Contributors who step into the funding breach say they are deeply thankful when they give back to their alma maters, according to Callahan. But getting into business with those same donors can be problematic for school officials, he said.

"How do you pull the plug on investing in a fund with a donor when they could be giving a lot more in the future?" said Callahan, who is also the founder and editor of the news website Inside Philanthropy,. "Even if it's underperforming, you have to weigh that against ticking that person off. It all sounds like a very bad idea."

Aaron Dorfman agreed. He's president and CEO of the National Committee for Responsive Philanthropy, a Washington-based research and watchdog organization tracking the operations and performance of nonprofits and their contributors.

"If I were a regent, I would support not investing with donors. There are too many other options," Dorfman said in an interview.

A Free Press investigation published in February found that executives at some of the nation's top investment firms donated hundreds of millions of dollars to the University of Michigan while the university invested as much as $4 billion in those companies' funds. Among them are firms run by billionaire Miami Dolphins football team owner Stephen Ross and Chicago real estate magnate Sam Zell. The Free Press reporting was based on hundreds of publicly reported investment transactions and donor records.

At the time of that analysis, Don Graham's role was little known.

His donation to Michigan football for the Paris trip had been anonymous. U-M documents for 2004, 2006, 2008 and 2015 did not reveal Graham's connection to the investment firm known as Graham Partners, which received more than $100 million in total from the endowment. The university also left Graham's name off a 2016 list of top contributors requested by the Free Press.

Graham's ties to Michigan run deep.

An Ann Arbor native and son of a U-M professor, Graham, 85, earned his bachelor's and master’s degrees, as well as an honorary doctorate, all in engineering from the university. He and his wife, Ingrid, have served as deputy campaign chairs for the Victors for Michigan, a premier university fundraising effort.

He also founded U-M's multidisciplinary Graham Sustainability Institute in addition to funding laboratories, scholarships and endowed professorships. In 2005, Graham received the engineering college's alumni medal for extraordinary achievement.

Graham is founder and chairman of the Graham Group, an alliance of industrial businesses and investment-management firms based near his home in York, Pa. According to his company's website, the Graham Group has also spawned five independent investment businesses that today manage several billion dollars in internal capital for Graham and third-party capital for institutional investors such as the University of Michigan.

Growing family business

One of the businesses is Graham Partners, started in 1988 as a way to manage corporate finance activities connected to the Graham Group. Company literature posted online once described Graham Partners as "sponsored by the Graham Group" before becoming independent and affiliated with the family conglomerate.

About a decade later, Graham Partners became a private equity firm to invest in advanced manufacturing and industrial technology businesses using money from outside institutions, including university endowments, charitable foundations and pension funds.

Don Graham's son, Steven, runs the firm after previously working for the investment bank Goldman Sachs. He told a trade magazine in 1999 that the Graham Group wanted to start Graham Partners to diversify his family's investments and attract institutional investors in the private equity arena.

Responding to a request for an interview, Steven Graham wrote in a mid-July email, "This is not something we want any involvement with." His father, Donald Graham, did not return requests for comment.

At the end of 2017, Graham Partners held nearly $1.2 billion assets under management, according to a federal Securities and Exchange Commission filing. The firm based near Philadelphia launched its first fund to outside investors in the late 1990s and SEC records show the firm has had six funds in total.

“While I think some of your work has been very good, there is absolutely no correlation between Don Graham’s support for the football program and the investment in his son’s private equity fund,” U-M Regent Andrea Newman wrote on Twitter late Friday to the Free Press in response to the online posting of this story.

U-M spokesman Rick Fitzgerald earlier said Donald Graham "has no ownership or any economic interest in Graham Partners or the funds it manages. His only role is that of an investor under the same economic terms as many other institutional investors that have made commitments to such funds."

But firm documents describe a close relationship.

Donald Graham is currently listed on Graham Partners' website as "Senior Advisor/Industry Specialist - Packaging, Building Products and Capital Equipment." The Graham Group chaired by Donald Graham pledged $68 million to the firm's first fund, representing 34 percent of the capital targeted, according to an April 1999 Buyouts magazine article (U-M was not an investor in that fund). In turn, Steven Graham continues to serve as "the Graham family trustee for trusts" which have had interests in Graham Group companies, according to the Graham Group website.

Publicly available securities documents do not include how much Don Graham and the Graham Group may have invested in subsequent funds launched by Graham Partners, if any. In four of those funds, U-M approved up to $115 million in investments. A spokesman said the current total is $102 million.

Judging Graham's performance

It's also hard to know whether investing with Graham Partners was a smart bet for Michigan. The university declined to say how its funds with the firm perform.

Unlike publicly traded companies, Steven Graham's private equity funds do not publicly release their financial performance in regulatory filings. U-M refused to release how much the university made or lost with any funds as well as any fees and profit-sharing it paid to Graham Partners to manage its millions. More than a decade ago, the university lobbied to change state law, which now prevents the public from using open-records laws to compel U-M to turn over the relevant information.

Based on an industry standard fee of 2 percent annually, it is likely that U-M paid Graham Partners millions of dollars in fees in addition to 20 percent of the unknown profits the funds earned.

The funds' performance at Graham Partners has been relatively mediocre, according to one closely-watched measure.

Three out of five of its funds have performed worse than half of all of the private equity funds in the U.S, according to the private data market firm Pitchbook. The performance improved somewhat with two other funds, including one that was among the top 25 percent. The Pitchbook data does not include Graham Partners' sixth and latest fund, in which U-M has invested $40 million.

Steven N. Kaplan, a professor of entrepreneurship and finance at the University of Chicago Booth School of Business, said more information needs to be known to evaluate how well a fund actually did.

"You want to know whether the funds best the public markets," including the Standard & Poor's 500 stock market index, Kaplan wrote in a recent email. Graham Partners has not publicly released that information on its website or in regulatory filings.

University officials maintain there is no quid pro quo between Graham's donations and U-M investments in his son's business. They said all investment decisions are fully vetted by a large professional staff and rely on sound financial judgments without regard to donors' gifts.

"The investment of $102 million with Graham Partners has no association with Donald Graham’s philanthropic giving to the university," Fitzgerald, the U-M spokesman, said.

Fitzgerald added that donations are handled by university fundraisers and investments are handled separately. But in an earlier interview, the university's top development officer said he shares potential investment offers from alumni with the office of Chief Investment Officer Erik Lundberg.

Lundberg is ranked in the middle of the pack — 58th out of the 107 largest college endowments — in terms of the performance of chief investment officers, according to the report from Charles Skorina & Co., a Tucson, Arizona-based executive search firm for investment professionals. The report evaluated college endowments and their top investment managers over a five-year period ending in June 2016.

However, Fitzgerald has challenged that characterization, saying U-M’s performance through last June was in the top 25 percent of all college and university endowments for three-, five- and 10-year periods according to Cambridge Associates, a university consultant.

In 2017, Lundberg's compensation was $2.45 million, a 20 percent increase over 2016. Lundberg has been eligible for incentive pay based in part on a three-year average of the endowment’s performance. The return on investment for the university's long-term portfolio, which includes the endowment, was 13.8 percent in the fiscal year that ended June 30, 2017.

To examine business connections between U-M and its top donors, the Free Press earlier asked for a list of the university's top donors. U-M provided the 10 largest total donations as of 2016, ranging from $59 million up to $328 million.

Graham's name was not on the list. That was despite his inclusion in a 2015 published report based on information supplied by U-M that included Graham and his wife as donating $60 million.

Asked recently to explain the discrepancy, Fitzgerald wrote that "regarding your questions about U-M donor Donald C. Graham, we can tell you that the ranking of top donors can, and does, change over time. Now that one of his more recent commitments has been fully determined, we can tell you that he would be the No. 10 donor with donations totaling $62 million."

Revealing donors

For months, the football team's benefactors for the week-long, overseas trips were anonymous.

Then in May, standing outside the Eiffel Tower, Harbaugh revealed Michigan graduates Bobby Kotick and Graham were the donors responsible for the football team's French week-long excursion while Kotick alone funded the team's 2017 trip to Rome. It does not appear that U-M invests in any funds connected to Kotick, according to a Free Press review of university records.

Kotick is the chief executive officer of Activision Blizzard, the company responsible for the popular video game series "Call of Duty." Earlier, Kotick donated $200,000 in January 2008 for the football stadium renovation and a piece of art entitled "Dark Presence III" to the U-M art museum, according to school records. Kotick did not respond to a request for comment.

Both team trips attracted substantial local and national media attention. Next year's trip is slated for South Africa. A spokesman for Harbaugh said this month the coach was unavailable for comment about the trips' donors.

"It's been unanimous, everyone I've talked to on this trip has really enjoyed it," Harbaugh said during the Paris trip in May. "Thank Bobby Kotick for having the vision to endow this. Don Graham helped out this year. Two great guys."

Matthew Dolan is an investigative reporter specializing in business and financial issues for the Free Press. Contact him at 313-223-4743, msdolan@freepress.com or on Twitter at @matthewsdolan.

David Jesse is a higher education reporter at the Free Press. Contact him at 313-222-8851, djesse@freepress.com or on Twitter: @reporterdavidj.