ALTERNATIVE INVESTMENT PORTFOLIO

REVIEW AND RECOMMENDATIONS

At the last Investment Committee meeting a number of questions arose regarding the approach for monitoring the level of the investment commitment to the Foundation's alternative investment portfolio and the performance measurement and monitoring procedures. This memo summarizes the research of the Foundation's financial staff in response to the questions raised and their recommendations. Dusty Rhodes and Reed Coleman provided valuable insight and advice regarding certain sections of the analysis.

The memo discusses the following three items:

1.	Alternative Investments Capacity Calculation

2.	Changes to Internal Reporting and Performance Measurement and Monitoring

3.	Independent Review of Alternative Investment Strategy

ALTERNATIVE INVESTMENTS CAPACITY CALCULATION

Monitoring of the level of alternative investments can be classified into three key measurements or questions:

1.	What is the target asset allocation and how is it calculated?

2.	What is the appropriate level of commitments to achieve the desired target asset allocation?

3.	What is the asset allocation exposure if all capital commitments are funded immediately?

Actual Asset Allocation Percent

The Foundation's current asset allocation strategy includes a 10% allocation for the alternative investment portfolio. The 10% allocation calculation is directly affected by the criteria used to establish the Foundation's net carrying amount reported in the Flashreport.

Exhibit A presents an analysis to demonstrate the components of a typical alternative investment. Under the new accounting method (lower of cost or fair value) for alternative investments, the net carrying value of this hypothetical investment would be stated at $8,000,000 in the Foundation's alternative investment portfolio. Such amount would be reduced if the combined net amount of undistributed realized and unrealized gains or losses was negative. This approach focuses on the capital flows of the alternative investment portfolio and effectively adjusts the

available investment capacity for net losses reported by the partnerships. Funds flow from investment income are normally included in the general funds of the Foundation to fund grants and expenditures and, accordingly, are not being considered when calculating the alternative investment capacity level or funds available for reinvestment.

The new lower of cost or fair value accounting method will result in a conservative carrying amount and, accordingly, a lower actual asset allocation percent. This benchmark will tend to keep a greater amount of capital employed in the alternative investment portfolio. The basic premise is that the Foundation recognizes and absorbs any losses and does not want the losses to have a "drag" on investing in new partnerships. For example, the Financial Summary in Exhibit B includes the net carrying amounts reported by the various partnerships and the Foundation's net carrying amount under the new accounting method. The actual asset allocation percent based on the Foundation's net carrying amount is 8.00% compared to the 9.84% based on the partnerships' reported net carrying amount.

Commitment Capacity Level

Alternative investments typically have investment periods of 3-5 years. At the same time certain of the more mature investments are making capital distributions. Accordingly, in order to reach the 10% target allocation, investment commitments should exceed the target allocation. The Foundation established a 140% benchmark as the upper threshold of net commitments as a percent of the 10% target allocation. At June 30, 2000, the Foundation's net commitments as a percent of the target allocation was 139%. See calculation on Exhibit B.

It should be noted that the total actual investment portfolio amount fluctuates and can change the actual commitment capacity percent calculation from month to month. In order to mitigate the effect of changes in the monthly portfolio amount, the net commitments as a percent of the 10% target allocation is also presented using a year-to-date moving average of the total investment portfolio amount. Using this methodology, the percent is 141%. See calculation on Exhibit B.

In retrospect, the Foundation's 140% benchmark may be high since the pace of the investments has been higher than anticipated and the capital distributions have been slower than anticipated. See Exhibit B for this calculation.

Asset Allocation Exposure

This is a newly adopted benchmark which calculates the proforma asset allocation percent if all of the unpaid capital commitments were required to be made immediately. It should be noted that the Foundation's net carrying amount under the new accounting method is the base number in this calculation. As indicated in Exhibit B, the asset allocation exposure percent is 12.8% at June 30, 2000. Again, this benchmark would normally be lower and tend to keep a greater amount of capital employed in the alternative investment portfolio.

No matter how the benchmarks are calculated, they are only guides and will not totally control the capital employed in the alternative investment portfolio. Each alternative investment has a life of its own and accurately predicting capital flows and investment income flows tend to be a "guesstimate." However, once the benchmarks are established, consistent application of the benchmarks should provide reasonable control of the capital commitments over the long term.

CHANGES TO INTERNAL REPORTING AND

PERFORMANCE MEASUREMENT AND MONITORING

Various alternatives were evaluated to improve the performance measurement and monitoring of the alternative investment portfolio. Two possible choices were identified:

1.	Retain an organization like Cambridge Associates to implement a performance measurement and monitoring system.

2.	Purchase available systems or products and internally implement an acceptable performance measurement and monitoring system.

Cambridge Associates

Cambridge Associates is a very experienced consulting firm that has an extensive list of foundation clients. For monitoring and performance reporting of an existing portfolio they charge 25 basis points annually for all existing investments commitments. This fee would be approximately $275,000 annually for the Foundation's current alternative investment portfolio.

There is little doubt that Cambridge would provide an excellent service. However, the cost/benefit of the service provided is difficult to justify.

Internal Implementation of Performance

Measurement and Monitoring System

The Foundation finance staff identified two systems for the purpose of enhancing alternative investments tracking and performance reporting. The objective was to find a system that is accepted within the industry, that would track investments and ideally would provide benchmarking capabilities. We did not find one system that met all requirements. Two systems were found that when used together met all requirements. The two systems are Private i, a Burgiss Group product and VentureXpert, an internet service of Thomson Financial Securities Data. Private i tracks and manages partnership interests, and calculates IRR by partnership. It does not have an external benchmarking feature. Therefore, we looked at VentureXpert, a research data base offering benchmarks for private equity investments which complements Private i.

The Bradley Foundation financial staff recommends the licensing of both products based on the research and review conducted. We concluded that both products are significant enhancements over the present system of worksheets currently in place. With both systems, we will be able to report IRR by partnership and compare them to a comparable benchmark. In addition, the software provides the ability to prepare a variety of reports summarizing the activity of the total alternative investment portfolio. The annual licensing fee for the two systems is $30,000.

Private i

The key features of Private i are that it:

•	maintains records of each financial event: capital calls, distributions, valuations, write-offs

•	tracks realized and unrealized gains

•	calculates IRR

•	includes a variety of standard reports and capabilities to customize reports

IRR from inception to date is calculated for each partnership monthly. IRR can be calculated on demand at other points in time. For example, IRR may be run from January through April of 2000.

Our methodology for testing Private i consisted of hands on use of the system, interviews with three current users and consulting with a customer service manager at Northern Trust Company (NTC). The feedback we received from the users and NTC was generally favorable. The highlights of the user interviews are that the system has been reliable, it is fairly easy to use the basic features, it takes several months to fully utilize the system and it is modestly priced compared to the few competing systems.

Private i is licensed for 5 years with an annual fee of $12,000 for an unlimited numer of Bradley Foundation users. The fee includes maintenance and support.

VentureXpert

Venture Economics, a division of Thomson Financial Securities Data, collects partnership information on a daily basis from various sources. One source is their partnership with National Venture Capital Association (NVCA). NVCA members contribute information on their portfolio companies and investment activities. Members contribute transactions daily and financial statements quarterly. VentureXpert is updated the day after the information is received. Venture Economics also has a staff of 25 research analysts who actively collect data from various sources such as news wires, press releases and surveys.

The key features of VentureXpert is performance reporting by fund type and vintage year, cumulative benchmark, and time weighted returns.

We obtained temporary passwords to test the website version of VentureXpert. We found that all of the Bradley Foundation alternative investment partnerships were included in the database. The database appears to have all of the benchmarks the Bradley Foundation needs for reporting. The timeliness of the information in VentureXpert is predicated on receipt of information from the reporting partnership. Unfortunately, valuation and accounting for private equity partnerships is cumbersome and reporting can be delayed up to several months after the period closes. While the benchmark data may not be available immediately after month end, over time the benchmark data will permit quarterly "look back" comparisons to the investment performance of the Bradley Foundation's partnership investments.

The licensing agreement for VentureXpert is $18,000 annually for unlimited number of Bradley Foundation users.

INDEPENDENT REVIEW OF ALTERNATIVE INVESTMENT STRATEGY

The Foundation has substantially reached the upper threshold of the investment capacity for alternative investments. One could say the first round of investing is complete. It would now be beneficial to complete an "independent reality check" of the portfolio composition and diversification resulting from round one before commencing round two of the investment program. In this connection, two options related to independent consulting services were evaluated:

1.	Cambridge Associates, Inc.

2.	Callan Associates

Cambridge Associates, Inc.

As mentioned previously, Cambridge is a national consulting firm with extensive experience with private equity investments. They do not normally provide special project consulting services but prefer to be hired on a retainer basis as the investment manager of an alternative investment portfolio.

They provide a comprehensive array of services including selection of investments, oversight of partnership transactions, performance reporting and comparative benchmark analysis. For the complete package of services they charge 50 basis points for the first $100 million of commitments. This fee would be approximately $550,000 annually for the Foundation's current alternative investment portfolio.

Callan Associates

Callan Associates is a national investment consulting firm that also provides advice as to alternative investment portfolios. They are not as large as Cambridge but they do provide private equity consulting services to a large number of pension plans (i.e. State of Utah and Hawaii) and the Robert Woods Johnson Foundation. They are willing to complete special project work including a "reality check" or report card on the Bradley Foundation's existing alternative investment portfolio. The fee for this special project is $30,000.

We recommend the Foundation appoint Callan Associates to complete a special project that would include a "reality check" or report card on the Bradley Foundation's existing portfolio for the following reasons:

1.	Callan has individuals with extensive experience with alternative investments.

2.	Bob Day from the Robert Woods Johnson Foundation was contacted and gave a very favorable evaluation of Callan's private equity consulting services.

3.	The fee is very realistic for the services provided. It should be noted the Foundation could use a portion of the $49,000 of available purchasing credit accumulated form the Merrill Lynch Commission Recapture program to pay for this special project.

4.	The financial staff and Investment Committee have a significant fiduciary responsibility regarding oversight of the investment portfolio. Alternative investments present a larger challenge because they lack liquidity and ascertainable market values. A periodic independent "reality check" or audit or the alternative investment portfolio would enhance the required fiduciary responsibility of all concerned parties.

ALTERNATIVE INVESTMENTS

SELECTED FUND MEMOS/REPORTS