UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-21730
THE ENDOWMENT TEI FUND, L.P.
(Exact name of registrant as specified in charter)
4265 SAN FELIPE, SUITE 900, HOUSTON, TX 77027
(Address of principal executive offices) (Zip code)
A. HAAG SHERMAN
THE ENDOWMENT TEI FUND, L.P.
4265 SAN FELIPE, SUITE 900, HOUSTON, TX 77027
(Name and address of agent for service)
Registrant's telephone number, including area code: 800-725-9456
Date of fiscal year end: 12/31/06
Date of reporting period: 12/31/06
Form N-CSR is to be used by management investment companies to file reports
with the Commission not later than 10 days after the transmission to
stockholders of any report that is required to be transmitted to stockholders
under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1).
The Commission may use the information provided on Form N-CSR in its regulatory,
disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form
N-CSR, and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. Section 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
(THE ENDOWMENT FUND LOGO)
THE ENDOWMENT TEI FUND, L.P.
SHAREHOLDERS' REPORT
December 31, 2006
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Partners
The Endowment TEI Fund, L.P.:
We have audited the accompanying statement of assets, liabilities, and
partners' capital of The Endowment TEI Fund, L.P. (the Fund) as of December 31,
2006, and the related statement of operations for the year then ended, the
statement of changes in partners' capital for the year then ended and for the
period March 17, 2005 (inception) through December 31, 2005, the statement of
cash flows for the year then ended, and the financial highlights for the year
then ended and for the period March 17, 2005 (inception) through December 31,
2005. These financial statements and financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of The
Endowment TEI Fund, L.P. as of December 31, 2006, the results of its operations
for the year then ended, the changes in partners' capital for the year then
ended and for the period March 17, 2005 (inception) through December 31, 2005,
the cash flows for the year then ended, and the financial highlights for the
year then ended and for the period March 17, 2005 (inception) through December
31, 2005 in conformity with U.S. generally accepted accounting principles.
/s/ KPMG
Houston, Texas
February 26, 2007
THE ENDOWMENT TEI FUND, L.P.
(A LIMITED PARTNERSHIP)
STATEMENT OF ASSETS, LIABILITIES, AND PARTNERS' CAPITAL
DECEMBER 31, 2006
<Table>
ASSETS
Investment in the Offshore Fund, at estimated fair value.......... $232,077,043
Receivable from the Offshore Fund................................. 232,189
Prepaid contributions to the Offshore Fund........................ 30,275,836
Prepaids and other assets......................................... 202,113
------------
Total assets.................................................... 262,787,181
============
LIABILITIES AND PARTNERS' CAPITAL
Subscriptions received in advance................................. 30,275,836
Redemptions payable............................................... 232,189
Service fee payable............................................... 447,606
Accounts payable and accrued expenses............................. 40,004
------------
Total liabilities............................................... 30,995,635
------------
Partners' capital................................................. 231,791,546
------------
Total liabilities and partners' capital......................... $262,787,181
============
</Table>
See accompanying notes to financial statements.
1
THE ENDOWMENT TEI FUND, L.P.
(A LIMITED PARTNERSHIP)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2006
<Table>
Net investment loss allocated from the Offshore Fund:
Interest and dividend income..................................... $ 391,657
Expenses......................................................... 801,631
-----------
Net investment loss allocated from the Offshore Fund.......... (409,974)
-----------
Income of the Fund:
Early repurchase income.......................................... 2,675
-----------
Total income of the Fund...................................... 2,675
Expenses of the Fund:
Insurance expense................................................ 11,528
Directors fees................................................... 15,288
Servicing fees................................................... 680,596
Amortization of offering costs................................... 95,453
Other expenses................................................... 78,132
-----------
Total expenses of the Fund, before waiver..................... 880,997
Servicing fees waived......................................... 165,781
-----------
Total expenses of the Fund, net............................... 715,216
-----------
Net investment loss of the Fund.................................. (712,541)
-----------
Net investment loss................................................ (1,122,515)
-----------
Net realized and unrealized gain from investment transactions
allocated from the Offshore Fund:
Net realized gain from investments............................... 2,348,921
Net unrealized gain from investments............................. 10,194,327
-----------
Net realized and unrealized gain from investment transactions
allocated from the Offshore Fund............................ 12,543,248
-----------
Net increase in partners' capital resulting from operations... $11,420,733
===========
</Table>
See accompanying notes to financial statements.
2
THE ENDOWMENT TEI FUND, L.P.
(A LIMITED PARTNERSHIP)
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
YEAR ENDED DECEMBER 31, 2006 AND
PERIOD MARCH 17, 2005 (INCEPTION) THROUGH DECEMBER 31, 2005
<Table>
Contributions..................................................... $ 11,298,189
Net increase in partners' capital resulting from operations:
Net investment loss............................................. (251,327)
Net realized gain from investments.............................. 101,895
Net unrealized gain from investments............................ 955,218
------------
Net increase in partners' capital resulting from operations.. 805,786
------------
Partners' capital at December 31, 2005............................ $ 12,103,975
------------
Contributions..................................................... $208,734,792
Distributions..................................................... (467,954)
Net increase in partners' capital resulting from operations:
Net investment loss............................................. (1,122,515)
Net realized gain from investments.............................. 2,348,921
Net unrealized gain from investments............................ 10,194,327
------------
Net increase in partners' capital resulting from operations.. 11,420,733
------------
Partners' capital at December 31, 2006............................ $231,791,546
============
</Table>
See accompanying notes to financial statements.
3
THE ENDOWMENT TEI FUND, L.P.
(A LIMITED PARTNERSHIP)
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2006
<Table>
<Caption>
2006
-------------
Cash flow from operating activities:
Net increase in partners' capital resulting from operations.... $ 11,420,733
Adjustments to reconcile net increase in partners' capital
resulting from operations to net cash used in operating
activities:
Net realized and unrealized gain from investment
transactions allocated from the Offshore Fund............. (12,543,248)
Net investment loss allocated from the Offshore Fund........ 409,974
Contributions to Offshore Fund.............................. (208,737,468)
Distributions from Offshore Fund............................ 1,075,579
Increase in receivable from the Offshore Fund............... (232,189)
Increase in prepaid contributions to the Offshore Fund...... (30,275,836)
Increase in prepaids and other assets....................... (200,313)
Decrease in payable to Adviser.............................. (157,185)
Increase in service fee payable............................. 447,606
Increase in accounts payable and accrued expenses........... 17,484
-------------
Net cash used in operating activities..................... (238,774,863)
-------------
Cash flow from financing activities:
Contributions from partners.................................... 208,734,792
Distributions to partners...................................... (467,954)
Increase in subscriptions received in advance.................. 29,705,836
Increase in redemptions payable................................ 232,189
-------------
Net cash provided by financing activities................. 238,204,863
-------------
Net decrease in cash and cash equivalents........................ (570,000)
Cash and cash equivalents at beginning of year................... 570,000
-------------
Cash and cash equivalents at end of year......................... $ --
=============
</Table>
See accompanying notes to financial statements.
4
THE ENDOWMENT TEI FUND, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006
(1) ORGANIZATION
The Endowment TEI Fund, L.P. (the "Fund"), is a limited partnership
organized under the laws of the state of Delaware. The Fund was registered and
began operations on March 17, 2005 ("Inception") as a nondiversified, closed-end
management investment company under the Investment Company Act of 1940 (the
"1940 Act"). The Fund was created to serve as a feeder fund for The Endowment
(Offshore TEI) Fund, Ltd. (the "Offshore Fund"), which in turn is a feeder fund
for The Endowment Master Fund, L.P. (the "Master Fund"). For convenience,
reference to the Fund may include the Master Fund, as the context requires.
The Fund's investment objective is to preserve capital and to generate
consistent long-term appreciation and returns across all market cycles. The Fund
pursues its investment objective by investing substantially all of its assets in
the Offshore Fund, which will in turn invest all of its assets in the Master
Fund, which has the same investment objectives as the Offshore Fund and the
Fund. The Master Fund invests its assets in a variety of investment vehicles
including but not limited to limited partnerships, limited liability companies,
offshore corporations (collectively, the "Investment Funds"), registered
investment companies and direct investments in marketable securities and
derivative instruments. The Master Fund is primarily a "fund of funds" and is
intended to afford investors the ability to invest in a multi-manager portfolio,
exhibiting a variety of investment styles and philosophies, in an attempt to
achieve positive risk-adjusted returns over an extended period of time. The
Fund's investments are managed by a select group of investment managers
identified by the Adviser, as hereinafter defined, to have investments that when
grouped with other investments of the Fund result in a portfolio that is
allocated more broadly across markets, asset classes, and risk profiles. The
Master Fund's financial statements, footnotes and schedule of investments,
included elsewhere in this report, are an integral part of the Fund's financial
statements that should be read in conjunction with this report. The percentage
of the Master Fund's partnership interests indirectly owned by the Fund on
December 31, 2006 was 22.95%.
The Endowment Fund GP, L.P., a Delaware limited partnership, serves as the
general partner of the Fund (the "General Partner"). To the fullest extent
permitted by applicable law, the General Partner has irrevocably delegated to a
board of directors (the "Board" and each member a "Director") its rights and
powers to monitor and oversee the business affairs of the Fund, including the
complete and exclusive authority to oversee and establish policies regarding the
management, conduct and operation of the Fund's business. A majority of the
members of the Board are independent of the General Partner and its management.
To the extent permitted by applicable law, the Board may delegate any of its
rights, powers and authority to, among others, the officers of the Fund, the
Adviser, or any committee of the Board.
The Board is authorized to engage an investment adviser and it has selected
Endowment Advisers, L.P. (the "Adviser"), to manage the Fund's portfolio and
operations, pursuant to an investment management agreement (the "Investment
Management Agreement"). The Adviser is a Delaware limited partnership that is
registered as an investment adviser under the Investment Advisers Act of 1940
(the "Advisers Act"). Under the Investment Management Agreement, the Adviser is
responsible for the establishment of an investment committee (the "Investment
Committee"), which is responsible for developing, implementing, and supervising
the Fund's investment program subject to the ultimate supervision of the Board.
In addition to investment advisory services, the Adviser also functions as the
servicing agent of the Fund (the "Servicing Agent") and as such provides or
procures investor services and administrative assistance for the Fund. The
Adviser can delegate all or a portion of its duties as Servicing Agent to other
parties, who would in turn act as sub-servicing agents.
5
THE ENDOWMENT TEI FUND, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(a) BASIS OF ACCOUNTING
The accompanying financial statements have been presented on the accrual
basis of accounting in conformity with U.S. generally accepted accounting
principles ("GAAP").
(b) CASH EQUIVALENTS
The Fund considers all unpledged temporary cash investments with a maturity
date at the time of purchase of three months or less to be cash equivalents.
(c) INVESTMENT SECURITIES TRANSACTIONS
The Fund records security transactions on a trade-date basis.
Securities that are held by the Fund, including those that have been sold
but not yet purchased, are marked to estimated fair value at the date of the
financial statements, and the corresponding unrealized gain or loss is included
in the statement of operations.
Realized gains or losses on the disposition of investments are accounted
for based on the first in first out ("FIFO") method.
(d) VALUATION OF INVESTMENTS
The valuation of the Fund's investments will be determined as of the close
of business at the end of any fiscal period, generally monthly. The valuation of
the Fund's investments is calculated by BISYS Fund Services Ohio, Inc.
("BISYS"), the Fund's independent administrator (the "Independent
Administrator") in consultation with the Adviser. The valuation procedures of
the Fund's underlying investments are reviewed by a committee approved by the
Board that was established to oversee the valuation of the Fund's investments
(the "Valuation Committee"), in consultation with the Adviser and the
Independent Administrator. The net assets of the Fund will equal the value of
the total assets of the Fund, less all of its liabilities, including accrued
fees and expenses.
The Fund invests substantially all of its assets in the Offshore Fund,
which in turn invests in the Master Fund. Investments in the Master Fund are
accounted for using the equity method, which approximates fair value. Valuation
of the investments held by the Master Fund is discussed in the notes to the
Master Fund financial statements included elsewhere in this report.
(e) INVESTMENT INCOME
Distributions received from investments, whether in the form of cash or
securities, are applied as a reduction of the cost of the investments and to the
extent distributions exceed the cost of the investment, a realized gain is
recognized.
For investments in securities, dividend income is recorded on the ex-
dividend date. Interest income is recorded as earned on the accrual basis and
includes amortization or accretion of premiums or discounts.
(f) FUND EXPENSES
Unless otherwise voluntarily or contractually assumed by the Adviser or
another party, the Fund bears all expenses incurred in its business, directly or
indirectly through its investment in the Master Fund, including but not limited
to, the following: all costs and expenses related to investment transactions and
positions for the Fund's account; legal fees; accounting, auditing and tax
preparation fees; recordkeeping and custodial fees; costs of
6
THE ENDOWMENT TEI FUND, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 -- (CONTINUED)
computing the Fund's net asset value; fees for data and software providers;
research expenses; costs of insurance; registration expenses; certain offering
costs; expenses of meetings of the partners; directors fees; all costs with
respect to communications to partners; and other types of expenses as may be
approved from time to time by the Board. Offering costs are amortized over a
twelve-month period or less from the date they are incurred.
(g) INCOME TAXES
The Fund itself is not subject to income taxes because such taxes are the
responsibility of the individual partners in the Fund. Accordingly, no provision
for income taxes has been made in the Fund's financial statements.
(h) USE OF ESTIMATES
The preparation of the financial statements in accordance with GAAP
requires management to make estimates and assumptions relating to the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
(i) ORGANIZATIONAL EXPENSES
The Fund's organizational expenses (the "Organizational Expenses") were
initially borne by the Adviser or an affiliate thereof and for capital account
allocation purposes assumed to be reimbursed, over not more than a 60 month
period of time, notwithstanding that such Organizational Expenses were expensed
in accordance with GAAP for Fund reporting purposes upon commencement of
operations.
(j) NEW ACCOUNTING PRONOUNCEMENTS
During July 2006, the Financial Accounting Standards Board ("FASB")
released FASB Interpretation No. 48, "Accounting for Uncertainty in Income
Taxes" ("FIN 48"). FIN 48 provides guidance for how uncertain tax positions
should be recognized, measured, presented and disclosed in financial statements.
FIN 48 requires the evaluation of tax positions taken or expected to be taken in
the course of preparing the Fund's tax returns to determine whether the tax
positions will "more-likely-than-not" be sustained by the applicable tax
authority. Tax positions not deemed to meet the more-likely-than-not threshold
would be recorded as a tax benefit or expense in the current year. Adoption of
FIN 48 is required for fiscal years beginning after December 15, 2006 and is to
be applied to all open tax years as of the effective date. Management does not
believe that the adoption of FIN 48 will materially impact the Fund's financial
statements.
During September 2006, the FASB issued Statement on Financial Accounting
Standards ("SFAS") No. 157, "Fair Value Measurements." This standard establishes
a single authoritative definition of fair value, sets out a framework for
measuring fair value and requires additional disclosures about fair value
measurements. SFAS No. 157 applies to fair value measurements already required
or permitted by existing standards. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. The changes to current GAAP from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. Management does not believe that the adoption of SFAS No.
157 will impact the Fund's financial statements. However, additional disclosures
may be required about the inputs used to develop the measurements and the effect
of certain measurements on changes in net assets for the period.
7
THE ENDOWMENT TEI FUND, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 -- (CONTINUED)
(3) PARTNERS' CAPITAL ACCOUNTS
(a) ISSUANCE OF INTERESTS
Upon receipt from an eligible investor of an initial or additional
application for interests (the "Interests"), which will generally be accepted as
of the first day of each month, the Fund will issue new Interests. The Interests
have not been registered under the Securities Act of 1933, as amended (the
"Securities Act"), or the securities laws of any state. The Fund issues
Interests only in private placement transactions in accordance with Regulation D
or other applicable exemptions under the Securities Act. No public market exists
for the Interests, and none is expected to develop. The Fund is not required,
and does not intend, to hold annual meetings of its partners. The Interests are
subject to substantial restrictions on transferability and resale and may not be
transferred or resold except as permitted under the Fund's limited partnership
agreement (the "LP Agreement").
The Fund reserves the right to reject any applications for Interests. The
$30,275,836 in subscriptions received in advance as of December 31, 2006
represents subscriptions for Fund Interests received prior to the January 2007
closing.
(b) ALLOCATION OF PROFITS AND LOSSES
For each fiscal period, generally monthly, net profits or net losses of the
Fund, including allocations from the Master Fund (through the Offshore Fund),
are allocated among and credited to or debited against the capital accounts of
all partners as of the last day of each fiscal period in accordance with the
partners' respective capital account ownership percentage for the fiscal period.
Net profits or net losses are measured as the net change in the value of the net
assets of the Fund, including any net change in unrealized appreciation or
depreciation of investments and income, net of expenses, and realized gains or
losses during a fiscal period. Net profits or losses are allocated after giving
effect for any initial or additional applications for Interests, which generally
occur at the beginning of the month or any repurchases of Interests.
(c) REPURCHASE OF INTERESTS
A partner will not be eligible to have the Fund repurchase all or any
portion of an Interest at any time prior to the business day immediately
preceding the one-year anniversary of the partner's purchase of such Interest
(or portion thereof) without incurring additional costs including an early
repurchase fee. The Adviser, which also serves as the investment adviser of the
Master Fund and Offshore Fund, expects that it will recommend to the Board that
the Fund offer to repurchase such Interests each calendar quarter, pursuant to
written tenders by partners. However, the Board retains the sole discretion to
accept or reject the recommendation of the Adviser and to determine the amount
of Interests, if any, that will be purchased in any tender offer that it does
approve. Since the Fund's assets are invested in the Master Fund (through the
Offshore Fund), the ability of the Fund to have its Interests in the Master Fund
be repurchased would be subject to the Master Fund and the Offshore Fund's
repurchase policies. In addition, the Fund may determine not to conduct a
repurchase offer each time the Master Fund and Offshore Fund conduct a
repurchase offer. In the event Interests are repurchased, there will be a
substantial period of time between the date as of which partners must tender
their Interests for repurchase and the date they can expect to receive payment
for their Interests from the Fund.
(4) INVESTMENTS IN PORTFOLIO SECURITIES
As of December 31, 2006, all of the investments made by the Fund were in
the Master Fund (through the Offshore Fund).
8
THE ENDOWMENT TEI FUND, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 -- (CONTINUED)
(5) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Investment Funds in which the Fund
may invest either directly or through the Offshore Fund and Master Fund will
trade various derivative securities and other financial instruments, and enter
into various investment activities with off-balance sheet risk both as an
investor and as a principal. The Fund's risk of loss in these Investment Funds
is limited to the Fund's pro rata share of the value of the investment in or
commitment to such Investment Funds as held directly or through the Offshore
Fund and Master Fund. In addition, the Master Fund may from time to time invest
directly in derivative securities or other financial instruments to gain greater
or lesser exposure to a particular asset class.
(6) ADMINISTRATION AGREEMENT
In consideration for administrative, accounting, and recordkeeping
services, the Master Fund will pay the Independent Administrator a monthly
administration fee (the "Administration Fee") based on the month end net assets
of the Master Fund. The Master Fund is charged, on an annual basis, 8 basis
points on Master Fund net assets of up to $100 million, 7 basis points on Master
Fund net assets between the amounts of $100 million and $250 million and 6 basis
points for amounts over $250 million. The asset based fees are assessed based on
month end net assets and are payable monthly in arrears. The Independent
Administrator will also provide the Fund, the Offshore Fund and the Master Fund
with legal, compliance, transfer agency, and other investor related services at
an additional cost.
The fees for Fund administration will be paid out of the Master Fund's
assets, which will decrease the net profits or increase the net losses of the
partners in the Fund.
(7) RELATED PARTY TRANSACTIONS
(a) INVESTMENT MANAGEMENT FEE
In consideration of the advisory and other services provided by the Adviser
to the Master Fund, the Master Fund will pay the Adviser an investment
management fee (the "Investment Management Fee"), equal to 1.00% on an
annualized basis of the Master Fund's net assets, calculated based on the NAV at
the end of each month, payable quarterly in arrears. So long as the Fund invests
all of its investable assets in the Offshore Fund, which in turn invests all of
its investable assets in the Master Fund, the Fund will not pay the Adviser
directly any Investment Management Fee; however, the Fund's Partners bear an
indirect portion of the Investment Management Fee paid by the Master Fund. The
Investment Management Fee will decrease the net profits or increase the net
losses of the Master Fund and indirectly the Fund as the fees reduce the capital
accounts of the Master Fund's limited partners.
(b) SERVICING FEE
In consideration for providing or procuring investor services and
administrative assistance to the Fund, the Adviser will receive a servicing fee
(the "Servicing Fee") equal to 1.00% (on an annualized basis) of each partner's
capital account balance, calculated at the end of each month, payable quarterly
in arrears.
The Adviser voluntarily waived Servicing Fees since Inception until such
time as the collective net asset value of all 1940 Act feeder funds investing in
the Master Fund exceeded $40 million and the initial offering costs of the Fund
were fully amortized, which occurred in August, 2006. As a result, for the year
ended December 31, 2006, the Fund incurred $514,815 in Servicing Fees, which is
net of $165,781 in Servicing Fee waivers provided by the Adviser.
9
THE ENDOWMENT TEI FUND, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 -- (CONTINUED)
(c) PLACEMENT AGENTS
The Fund may engage one or more placement agents (each, a "Placement
Agent") to solicit investments in the Fund. Sanders Morris Harris, Inc. ("SMH"),
an affiliate of the General Partner and the Adviser, has been engaged by the
Fund to serve as a Placement Agent. SMH is a full service investment banking,
broker-dealer, asset management and financial services organization. A Placement
Agent may engage one or more sub-placement agents. The Adviser or its affiliates
may pay a fee out of their own resources to Placement Agents and sub-placement
agents.
(8) INDEBTEDNESS OF THE FUND
Pursuant to the Fund LP Agreement, the Fund may borrow up to, but not more
than, 10% of the net assets of the Fund (at the time such borrowings were made
and after taking into account the investment and/or deployment of such proceeds)
for the purpose of making investments, funding redemptions and for other working
capital and general Fund purposes. For purposes of the Fund's investment
restrictions and certain investment limitations under the 1940 Act, including
for example, the Fund's leverage limitations, the Fund will not "look through"
Investment Funds in which the Fund invests. Investment Funds may also use
leverage, whether through borrowings, futures, or other derivative products and
are not subject to the Fund's investment restrictions. However, such borrowings
by Investment Funds are without recourse to the Fund and the Fund's risk of loss
is limited to the value of its investment in such Investment Funds (held through
its investment in the Offshore Fund and Master Fund), other than for some
Investment Funds in which the Master Fund has made a capital commitment. For
some Investment Funds in which the Master Fund has made a capital commitment
that will be funded over a period of time, such as private equity and real
estate funds, the Master Fund, in certain instances, may commit to fund up to
twice its initial capital commitment. The rights of any lenders to the Fund to
receive payments of interest or repayments of principal will be senior to those
of the partners, and the terms of any borrowings may contain provisions that
limit certain activities of the Fund.
(9) FINANCIAL HIGHLIGHTS
<Table>
<Caption>
PERIOD
MARCH 17, 2005
YEAR ENDED (INCEPTION) TO
DECEMBER 31, 2006 DECEMBER 31, 2005
----------------- -----------------
Net investment loss to average partners'
capital(1,2)................................. (1.65)% (3.97)%
Expenses to average partners' capital(1,2)..... 2.24% 4.62%
Portfolio Turnover(3).......................... 15.31% 12.65%
Total Return(4)................................ 11.54% (3.08)%
Partners' capital, end of period............... $231,791,547 $12,103,975
</Table>
The above calculations for 2006 and 2005 reflect the waiver of the
Servicing Fees since Inception of the Fund through such time as the collective
net asset value of all 1940 Act feeder funds investing in the Master Fund
exceeded $40 million and the initial offering costs of the Fund were fully
amortized, which occurred in August, 2006. An investor's return (and operating
ratios) may vary from those reflected based on the timing of capital
transactions.
- --------
(1) Ratios are calculated by dividing the indicated amount by average
partners' capital measured at the end of each month during the period.
Ratios include allocations of net investment loss and expenses from the
Offshore Fund and Master Fund. These ratios have been annualized for
2005.
10
THE ENDOWMENT TEI FUND, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 -- (CONTINUED)
(2) Had the Servicing Fee waiver not been in effect, the annualized ratio for
net investment loss to average partners' capital would have been (1.90)%
and (4.99)% during 2006 and 2005, respectively, and the annualized ratio
for expenses to average partners' capital would have been 2.48% and 5.64%
during 2006 and 2005, respectively.
(3) The Fund is invested exclusively in the Offshore Fund which in turn is
invested solely in the Master Fund, therefore this ratio reflects the
portfolio turnover of the Master Fund, which is for a full year.
(4) Calculated as geometrically linked monthly returns for each month in the
period. The reported total return amount for 2005 is negatively impacted
by the write off of both the Fund's Organizational Expenses and the
Offshore Fund's organization costs, which occurred at Inception of the
Fund's operations in accordance with GAAP. This treatment for GAAP
results in a negative total return for the Fund despite the increase
during the period in partners' capital resulting from operations. Had
these costs not been included as an expense at inception for the purposes
of the total return calculation and were instead amortized over 60 months
as they are being handled for capital allocation purposes, the total
return would have been 8.70% for 2005.
(10) SUBSEQUENT EVENT
The Adviser recommended to the Board that a tender offer in an amount of up
to $25,000,000 be made, based on the projected March 31, 2007 net asset value of
the Fund, to those partners who elect to tender their Interests prior to the
expiration of the tender offer period. The Board approved such recommendation
and a tender offer notice expiring February 28, 2007 was sent out to the
investors in the Fund.
11
THE ENDOWMENT TEI FUND, L.P.
(A LIMITED PARTNERSHIP)
SUPPLEMENTAL INFORMATION (UNAUDITED)
DECEMBER 31, 2006
DIRECTORS AND OFFICERS
The Fund's operations are managed under the direction and oversight of the
Board. Each Director serves for an indefinite term or until he or she reaches
mandatory retirement, if any, as established by the Board. The Board appoints
the officers of the Fund who are responsible for the Fund's day-to-day business
decisions based on policies set by the Board. The officers serve at the pleasure
of the Board.
The Directors and officers of the Fund may also be directors or officers of
some or all of the other registered investment companies managed by the Adviser
or its affiliates (the "Fund Complex"). The tables below show, for each Director
and executive officer, his or her full name, address and age (as of December 31,
2006), the position held with the Fund, the length of time served in that
position, his or her principal occupations during the last five years, the
number of portfolios in the Fund Complex overseen by the Director, and other
directorships held by such Director.
INTERESTED DIRECTORS
<Table>
<Caption>
NUMBER OF
POSITIO- PORTFOLIOS
N(S) LENGTH PRINCIPAL IN FUND OTHER
HELD OF OCCUPATION(S) COMPLEX(2) DIRECTORSHIPS
NAME, ADDRESS AND WITH TIME DURING THE PAST 5 OVERSEEN BY HELD BY
AGE FUND SERVED YEARS DIRECTOR DIRECTOR
- ----------------- -------- -------- ---------------------- ----------- -------------
John A. Directo- Since Member, Investment 3 0
Blaisdell(1) r, Co- January Committee of the
Age: 46 Princi- 2004 Adviser, since January
Address: c/o The pal 2004; Managing
Endowment Master Execu- Director of Salient,
Fund L.P. tive since December 2002;
4265 San Felipe, Officer Chief Executive
Suite 900, Officer of Wincrest
Houston, Texas Ventures, L.P., 1997-
77027 2002.
Andrew B. Directo- Since Member, Investment 3 0
Linbeck(1) r, Co- January Committee of the
Age: 42 Princi- 2004 Adviser, since January
Address: c/o The pal 2004; Managing
Endowment Master Execu- Director of Salient,
Fund L.P. tive since August 2002;
4265 San Felipe, Officer Partner and executive
Suite 900, officer of The
Houston, Tx 77027 Redstone Companies,
L.P. and certain
affiliates thereof
(collectively,
''Redstone"), 1998-
2002.
</Table>
12
THE ENDOWMENT TEI FUND, L.P.
(A LIMITED PARTNERSHIP)
SUPPLEMENTAL INFORMATION (UNAUDITED)
DECEMBER 31, 2006 -- (CONTINUED)
<Table>
<Caption>
NUMBER OF
POSITIO- PORTFOLIOS
N(S) LENGTH PRINCIPAL IN FUND OTHER
HELD OF OCCUPATION(S) COMPLEX(2) DIRECTORSHIPS
NAME, ADDRESS AND WITH TIME DURING THE PAST 5 OVERSEEN BY HELD BY
AGE FUND SERVED YEARS DIRECTOR DIRECTOR
- ----------------- -------- -------- ---------------------- ----------- -------------
A. Haag Sherman(1) Directo- Since Member, Investment 3 0
Age: 41 r, Co- January Committee of the
Address: c/o The Princi- 2004 Adviser, since January
Endowment Master pal 2004; Managing
Fund L.P. Execu- Director of Salient,
4265 San Felipe, tive since August 2002;
Suite 900, Officer Partner and executive
Houston, Tx 77027 officer of Redstone,
1998-2002.
Mark W. Yusko(1) Director Since Member, Investment 3 0
Age: 43 January Committee of the
Address: c/o The 2004 Adviser, since January
Endowment Master 2004; President of
Fund L.P. Morgan Creek Capital
4265 San Felipe, Management, since July
Suite 900, 2004; Principal,
Houston, Tx 77027 Hatteras Capital
Management, since
September 2003; Chief
Investment Officer of
the University of
North Carolina at
Chapel Hill, 1998-
2004.
</Table>
- --------
(1) This person's status as an "interested" director arises from his
affiliation with Salient Partners, L.P. ("Salient"), which itself is an
affiliate of the Fund, the Master Fund, The Endowment Registered Fund,
L.P. (the "Registered Fund"), and the Adviser.
(2) The Fund Complex includes the Fund, the Master Fund and the Registered
Fund.
13
THE ENDOWMENT TEI FUND, L.P.
(A LIMITED PARTNERSHIP)
SUPPLEMENTAL INFORMATION (UNAUDITED)
DECEMBER 31, 2006 -- (CONTINUED)
INDEPENDENT DIRECTORS
<Table>
<Caption>
NUMBER OF
POSITIO- PORTFOLIOS
N(S) LENGTH IN FUND OTHER
HELD OF PRINCIPAL COMPLEX(1) DIRECTORSHIPS
NAME, ADDRESS AND WITH TIME OCCUPATION(S) DURING OVERSEEN BY HELD BY
AGE FUND SERVED THE PAST 5 YEARS DIRECTOR DIRECTOR
- ----------------- -------- -------- -------------------- ----------- -------------
Bob L. Boldt Director Since Chief Executive 3 None
Age: 58 January Officer, University
Address: c/o The 2005 of Texas Investment
Endowment Master Management Co. 2002-
Fund L.P. 2006; Managing
4265 San Felipe, Director, Pivotal
Suite 900, Asset Management
Houston, Tx 77027 from 2000-2002;
Senior Investment
Officer for
California Public
Employee Retirement
System from 1995-
2000.
Jonathan P. Director Since Private investor for 3 None
Carroll January the past five years.
Age: 45 2004
Address: c/o The
Endowment Master
Fund L.P.
4265 San Felipe,
Suite 900,
Houston, Tx 77027
Richard C. Johnson Director Since Senior Counsel for 3 None
Age: 69 January Baker Botts LLP
Address: c/o The 2004 since 2002; Managing
Endowment Master Partner for Baker
Fund L.P. Botts from 1998-
4265 San Felipe, 2002; practiced law
Suite 900, at Baker Botts from
Houston, Tx 77027 1966-2002 (from 1972
to 2002 as a
partner)
</Table>
14
THE ENDOWMENT TEI FUND, L.P.
(A LIMITED PARTNERSHIP)
SUPPLEMENTAL INFORMATION (UNAUDITED)
DECEMBER 31, 2006 -- (CONTINUED)
<Table>
<Caption>
NUMBER OF
POSITIO- PORTFOLIOS
N(S) LENGTH IN FUND OTHER
HELD OF PRINCIPAL COMPLEX(1) DIRECTORSHIPS
NAME, ADDRESS AND WITH TIME OCCUPATION(S) DURING OVERSEEN BY HELD BY
AGE FUND SERVED THE PAST 5 YEARS DIRECTOR DIRECTOR
- ----------------- -------- -------- -------------------- ----------- -------------
G. Edward Powell Director Since Principal of Mills 3 Sterling
Age: 70 January & Stowell from March Bancshares,
Address: c/o The 2004 2002 to present; Inc.; Energy
Endowment Master Principal of Services
Fund L.P. Innovation Growth Interna-
4265 San Felipe, Partners in 2002; tional, Inc.
Suite 900, From 1994-2002, Mr.
Houston, Tx 77027 Powell provided
consulting services
to emerging and
middle market
businesses; Managing
Partner for Houston
office of Price
Waterhouse & Co.
from 1982 to his
retirement in 1994.
Scott F. Schwinger Director Since Senior Vice 3 None
Age: 41 January President, Chief
Address: c/o The 2004 Financial Officer
Endowment Master and Treasurer of the
Fund L.P. Houston Texans
4265 San Felipe,
Suite 900,
Houston, Tx 77027
Scott W. Wise Director Since Senior Vice 3 None
Age: 57 January President and
Address: c/o The 2004 Treasurer, Rice
Endowment Master University for the
Fund L.P. past five years.
4265 San Felipe,
Suite 900,
Houston, Tx 77027
</Table>
- --------
(1) The Fund Complex includes the Fund, the Master Fund and the Registered
Fund.
15
THE ENDOWMENT TEI FUND, L.P.
(A LIMITED PARTNERSHIP)
SUPPLEMENTAL INFORMATION (UNAUDITED)
DECEMBER 31, 2006 -- (CONTINUED)
OFFICERS OF THE FUND WHO ARE NOT DIRECTORS
<Table>
<Caption>
PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE POSITION(S) HELD WITH FUND DURING THE PAST 5 YEARS
- --------------------- ------------------------------ -----------------------
Jeremy L. Radcliffe Chief Compliance Officer Managing Director of Adviser,
Age: 32 since January 2004; Partner
Address: c/o The Endowment and Managing Director of
Master Fund L.P. Salient, since August 2002;
4265 San Felipe, Suite 900, Partner and officer of
Houston, Tx 77027 Redstone, 1998-2002.
John E. Price Treasurer; Principal Financial Director and Chief Financial
Age: 39 Officer Officer of the Adviser, since
Address: c/o The Endowment January 2004; Partner and
Master Fund L.P. Director of Salient, since
4265 San Felipe, Suite 900, October 2003; Controller of
Houston, Tx 77027 Wincrest Ventures, L.P., 1997-
2003.
Adam L. Thomas Secretary Director of Adviser since
Age: 32 January 2004; Partner and
Address: c/o The Endowment Director of Salient, since
Master Fund L.P. September 2002; Associate at
4265 San Felipe, Suite 900, Redstone, 2001-2002; Associate
Houston, Tx 77027 at Albrecht & Associates Inc.,
August 1996 through August
1999. Attended University of
Texas Business School, 1999-
2001.
</Table>
COMPENSATION FOR DIRECTORS
The Fund, the Master Fund and the Registered Fund together pay each
Independent Director an annual fee of $10,000, which is paid quarterly, a fee of
$2,500 per Board meeting and a $500 fee per meeting for each member on the audit
committee. In the interest of retaining Independent Directors of high quality,
the Board intends to periodically review such compensation and may modify it as
the Board deems appropriate.
16
THE ENDOWMENT TEI FUND, L.P.
(A LIMITED PARTNERSHIP)
SUPPLEMENTAL INFORMATION (UNAUDITED)
DECEMBER 31, 2006 -- (CONTINUED)
ALLOCATION OF INVESTMENTS
The following chart indicates the allocation of investments among the asset
classes in the Master Fund as of December 31, 2006.
<Table>
<Caption>
ASSET CLASS(1) FAIR VALUE %
- -------------- -------------- ------
Domestic Equity...................................... $ 154,230,694 14.89
International Equity................................. 179,125,197 17.29
Opportunistic Equity................................. 85,294,243 8.24
Absolute Return...................................... 170,285,007 16.44
Real Estate.......................................... 64,396,073 6.22
Natural Resources.................................... 130,037,011 12.56
Private Equity....................................... 60,461,239 5.84
Fixed Income......................................... 42,653,004 4.12
Enhanced Fixed Income................................ 142,262,725 13.74
Debt Fund............................................ 6,858,857 0.66
-------------- ------
TOTAL INVESTMENTS.................................... $1,035,604,050 100.00%
-------------- ------
</Table>
- --------
(1) The complete list of investments included in the following asset class
categories are included in the schedule of investments of the Master
Fund.
FORM N-Q FILINGS
The Fund files a complete schedule of portfolio holdings with the
Securities and Exchange Commission for the first and third quarters of each
fiscal year on Form N-Q. The Fund's Form N-Q is available on the Securities and
Exchange Commission website at http://www.sec.gov. The Fund's Form N-Q may be
reviewed and copied at the Securities and Exchange Commission Public Reference
Room in Washington, DC and information regarding operation of the Public
Reference Room may be obtained by calling 1-800-SEC-0330.
PROXY VOTING POLICIES
A description of the policies and procedures that the Fund uses to
determine how to vote proxies relating to portfolio securities is available (i)
without charge, upon request, by calling 1-800-725-9456; and (ii) on the
Securities and Exchange Commission website at http://www.sec.gov.
Information regarding how the Fund voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30 is available (i)
without charge, upon request, by calling 1-800-725-9456; and (ii) on the
Securities and Exchange Commission website at http://www.sec.gov.
ADDITIONAL INFORMATION
The Fund's private placement memorandum (the "PPM") includes additional
information about directors of the Fund. The PPM is available, without charge,
upon request by calling 1-800-725-9456.
17
LOGO
THE ENDOWMENT MASTER FUND, L.P.
SHAREHOLDERS' REPORT
December 31, 2006
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Partners
The Endowment Master Fund, L.P.:
We have audited the accompanying statement of assets, liabilities, and
partners' capital of The Endowment Master Fund, L.P. (the Fund), including the
schedule of investments, as of December 31, 2006, and the related statement of
operations for the year then ended, the statement of changes in partners'
capital for each of the years in the two-year period then ended, the statement
of cash flows for the year then ended, and the financial highlights for each of
the years in the three-year period then ended and for the period April 1, 2003
(inception) through December 31, 2003. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 2006, by correspondence with
custodians and investees. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of The
Endowment Master Fund, L.P. as of December 31, 2006, the results of its
operations for the year then ended, the changes in its partners' capital for
each of the years in the two-year period then ended, the cash flows for the year
then ended, and the financial highlights for each of the years in the three-year
period then ended and for the period April 1, 2003 (inception) through December
31, 2003, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG
Houston, Texas
February 26, 2007
THE ENDOWMENT MASTER FUND, L.P.
(A LIMITED PARTNERSHIP)
STATEMENT OF ASSETS, LIABILITIES, AND PARTNERS' CAPITAL
DECEMBER 31, 2006
<Table>
ASSETS
Investments in Investment Funds, at estimated fair value (cost $ 896,101,220
$770,630,180)..................................................
Investments in securities, at value (cost $134,852,417).......... 139,502,830
--------------
Total investments.............................................. 1,035,604,050
Cash and cash equivalents........................................ 3,734,891
Prepaid contributions to Investment Funds........................ 77,500,000
Interest and dividends receivable................................ 501,091
Prepaids and other assets........................................ 44,095
--------------
Total assets................................................... 1,117,384,127
==============
LIABILITIES AND PARTNERS' CAPITAL
Subscriptions received in advance................................ 85,422,935
Redemptions payable.............................................. 17,746,498
Management fees payable.......................................... 2,240,134
Offshore withholding tax payable................................. 441,284
Administration fees payable...................................... 88,698
Accounts payable and accrued expenses............................ 149,164
--------------
Total liabilities.............................................. 106,088,713
--------------
Paid in capital.................................................. 881,173,961
Net unrealized appreciation of investments....................... 130,121,453
--------------
Partners' capital.............................................. 1,011,295,414
--------------
Total liabilities and partners' capital........................ $1,117,384,127
==============
</Table>
See accompanying notes to financial statements.
1
THE ENDOWMENT MASTER FUND, L.P.
(A LIMITED PARTNERSHIP)
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2006
<Table>
<Caption>
% OF
SHARES/ PARTNERS'
PAR VALUE* FAIR VALUE CAPITAL
---------- -------------- ---------
Investments in Investment Funds
Limited Partnerships, Exempted Limited
Partnerships and Limited Liability Companies(2)
Cayman Islands
Absolute Return (2.02% of Partners' Capital)
Montricia Global Opportunities Fund,
L.P. ................................... $ 20,412,290
Domestic Equity (0.94% of Partners' Capital)
Tiedmann/Falconer Partners, L.P. .......... 9,526,947
International Equity (6.53% of Partners'
Capital)
Boyer Allan Pacific Partners, L.P. ........ 17,800,329
SR Global Fund -- Asia Portfolio (Class B,
L.P.)................................... 7,455,917
SR Global Fund -- Europe Portfolio (Class
A, L.P.)................................ 11,566,526
SR Global Fund -- International Portfolio
(Class C, L.P.)......................... 11,986,230
SR Global Fund -- Emerging Markets
Portfolio (Class G, L.P.)............... 13,329,570
SR Phoenicia L.P. (Class A-Phoenicia
Portfolio).............................. 3,900,887
Opportunistic Equity (1.88% of Partners'
Capital)
Global Undervalued Securities Fund (QP),
L.P. ................................... 18,990,334
Private Equity (0.05% of Partners' Capital)
Carlyle Japan International Partners II,
L.P. ................................... 200,782
Carlyle Japan International Partners II Co-
Invest, L.P. ........................... 44,456
India Asset Recovery Fund, L.P. ........... 271,011
--------------
Total Cayman Islands.................... 115,485,279
--------------
Scotland
Private Equity (0.09% of Partners' Capital)
Actis Umbrella Fund, L.P. ................. 946,519
--------------
Total Scotland.......................... 946,519
--------------
United Kingdom
Real Estate (0.05% of Partner's Capital)
Benson Elliot Real Estate Partners II,
L.P. ................................... 49,109
Patron Capital L.P. II..................... 453,650
--------------
Total United Kingdom.................... 502,759
--------------
United States
Absolute Return (12.67% of Partners' Capital)
Black River Commodity Multi-Strategy Fund,
LLC..................................... 10,728,222
Black River Global Multi-Strategy Leveraged
Fund, LLC............................... 18,034,941
Courage Special Situations Fund, (Class C,
L.P.)................................... 7,958,764
Highland Credit Strategies Fund, L.P. ..... 22,419,923
HomeField Partners, L.P. .................. 3,111,359
OZ Asia Domestic Partners, L.P. ........... 13,105,524
PIPE Equity Partners, LLC.................. 22,467,620
PSAM WorldArb Partners, L.P. .............. 20,836,591
Redbrick Capital, L.P. .................... 9,423,747
Domestic Equity (14.31% of Partners' Capital)
</Table>
See accompanying notes to financial statements.
2
THE ENDOWMENT MASTER FUND, L.P.
(A LIMITED PARTNERSHIP)
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2006 -- (CONTINUED)
<Table>
<Caption>
% OF
SHARES/ PARTNERS'
PAR VALUE* FAIR VALUE CAPITAL
---------- -------------- ---------
Bonanza Partners, L.P. .................... 7,841,047
Caduceus Capital II, L.P. ................. 11,616,698
CCM Small Cap Value Qualified Fund, L.P. .. 970,212
Contrarian Equity Fund, L.P. .............. 8,706,040
Copper Arch Fund, L.P. .................... 6,734,984
Criterion Horizons Fund, L.P. ............. 2,053,974
Criterion Institutional Partners, L.P. .... 12,459,261
HealthCor, L.P. ........................... 20,826,218
Leaf Investment Partners, L.P. ............ 14,518,104
Renaissance Institutional Equities Fund,
LLC..................................... 19,818,834
SCP Equity Fund Domestic, L.P. ............ 7,016,855
The Raptor Global Fund, L.P. .............. 20,245,357
Tiger Consumer Partners, L.P. ............. 11,896,164
Enhanced Fixed Income (13.60% of Partners'
Capital)
Arx Global High Yield Securities Fund I
L.P. ................................... 27,107,213
BDC Partners I, L.P. ...................... 19,141,295
Contrarian Capital Fund I, L.P. ........... 26,733,615
Greylock Global Opportunity Fund, L.P. .... 8,036,678
Harbinger Capital Partners Fund I, L.P. ... 20,998,366
Ore Hill Fund, L.P. ....................... 22,053,600
The Rohatyn Group Local Currency
Opportunity Partners, L.P. ............. 13,511,241
International Equity (7.26% of Partners'
Capital)
Avenue Asia Equity Investments, L.P. ...... 1,080,921
Gradient Europe Fund, L.P. ................ 17,220,783
L-R Global Partners, L.P. ................. 2,188,097
Monsoon India Inflection Fund 2, L.P. ..... 19,477,151
Steel Partners Japan Strategic Fund,
L.P. ................................... 8,256,830
Taiyo Fund, L.P. .......................... 3,325,437
The Explorador Fund, L.P. ................. 4,678,958
Torrey Pines Fund, LLC..................... 17,193,159
Natural Resources (8.31% of Partners'
Capital)
BP Capital Energy Equity Fund II, L.P. .... 24,242,161
Southport Energy Plus Partners, L.P. ...... 8,282,148
The Ospraie Fund, L.P. .................... 21,463,939
Tocqueville Gold Partners, L.P. ........... 523,936
Treaty Oak Partners, L.P. ................. 14,868,949
Velite Energy, L.P. ....................... 14,642,829
Opportunistic Equity (6.56% of Partners'
Capital)
AQR Absolute Return Institutional Fund,
L.P. ................................... 6,001,964
Bear Stearns Emerging Markets Macro Fund,
L.P. ................................... 9,720,806
GMO Mean Reversion Fund (Onshore).......... 10,333,044
Jetstream Global Institutional Fund,
L.P. ................................... 9,171,114
Maverick Fund USA, L.P. ................... 6,307,275
Pantera Global Macro Fund, L.P. ........... 3,816,024
</Table>
See accompanying notes to financial statements.
3
THE ENDOWMENT MASTER FUND, L.P.
(A LIMITED PARTNERSHIP)
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2006 -- (CONTINUED)
<Table>
<Caption>
% OF
SHARES/ PARTNERS'
PAR VALUE* FAIR VALUE CAPITAL
---------- -------------- ---------
Pardus European Special Opportunities Fund,
L.P. ................................... 16,317,937
Prism Partners QP, L.P. ................... 4,635,744
Private Equity (4.39% of Partners' Capital)
Audax Mezzanine Fund II, L.P. ............. 1,197,385
BDCM Opportunity Fund II, L.P. ............ 1,102,791
Brazos Equity Fund II, L.P. ............... 943,316
Capital Royalty Partners, L.P. ............ 248,966
Chrysalis Ventures III, L.P. .............. 319,792
Crosslink Crossover Fund IV, L.P. ......... 10,601,492
Encore Consumer Capital Fund, L.P. ........ 1,244,467
Harbinger Capital Partners Special
Situations Fund, L.P. .................. 11,343,501
Monomoy Capital Partners, L.P. ............ 1,802,750
Pinto America Growth Fund, L.P. ........... 482,762
Private Equity Investment Fund IV, L.P. ... 2,726,730
Q Funding III, L.P. ....................... 7,064,643
Sanderling Venture Partners VI Co-
Investment Fund, L.P. .................. 401,495
Sanderling Venture Partners VI, L.P. ...... 285,406
Sterling Capital Partners II, L.P. ........ 648,639
Sterling Group Partners II, L.P. .......... 1,453,763
Strategic Value Global Opportunities Fund
I-A, L.P. .............................. 1,506,034
VCFA Private Equity Partners IV, L.P. ..... 881,273
VCFA Private Equity Partners V, L.P. ...... 170,833
Real Estate (3.48% of Partner's Capital)
Aslan Realty Partners III, LLC............. 824,281
Clarion CRA Hedge Fund, L.P. .............. 15,474,554
ING Clarion Global, L.P. .................. 3,105,310
Legacy Partners Realty Fund II, LLC........ 2,763,079
Mercury Special Situations Fund, L.P. ..... 5,242,891
MONY/Transwestern Mezzanine Realty Partners
II, LLC (income producing security)..... 1,282,389
Parmenter Realty Fund III, L.P. ........... 2,368,284
Wells Street Partners, LLC................. 4,173,451
--------------
Total United States..................... 713,781,930
--------------
Total Limited Partnerships, Exempted
Limited Partnerships and Limited
Liability Companies (Cost
$716,101,614)......................... 830,716,487 82.14%
--------------
Passive Foreign Investment Companies(2)
Republic of Mauritius
International Equity (0.85% of Partners'
Capital)
India Capital Fund Ltd. A2 Shares.......... 3,208 8,548,919
Real Estate (0.09% of Partner's Capital)
Orbis Real Estate Fund I................... 991 906,511
--------------
Total Republic of Mauritius............. 9,455,430
--------------
</Table>
See accompanying notes to financial statements.
4
THE ENDOWMENT MASTER FUND, L.P.
(A LIMITED PARTNERSHIP)
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2006 -- (CONTINUED)
<Table>
<Caption>
% OF
SHARES/ PARTNERS'
PAR VALUE* FAIR VALUE CAPITAL
---------- -------------- ---------
Total Passive Foreign Investment
Corporations (Cost $5,491,154)........ 9,455,430 0.94%
--------------
Bermuda Exempted Mutual Fund Company(2)
Private Equity (1.44% of Partners' Capital)
Highland CDO Opportunity Fund, Ltd. ....... 14,572,432
--------------
Total Bermuda Exempted Mutual Fund
Company (Cost $12,000,000)............ 14,572,432 1.44%
--------------
Cayman Company Limited by Shares(2)
Absolute Return (2.16% of Partners' Capital)
Overseas CAP Partners, Inc. ............... 16,782 21,786,027
International Equity (1.16% of Partners'
Capital)
The Russian Prosperity Fund................ 9,829 11,764,278
Natural Resources (0.77% of Partners'
Capital)
Ospraie Special Opportunities (Offshore),
Ltd. ................................... 7,345 7,806,566
--------------
Total Cayman Company Limited by Shares
(Cost $37,037,412).................... 41,356,871 4.09%
--------------
Total Investments in Investment Funds
(Cost $770,630,180)................... 896,101,220 88.61%
--------------
Investment in Securities
Private Corporations
United States
Real Estate (1.02% of Partners' Capital)
Net Lease Private REIT V, Inc. ............ 3,000,000
Net Lease Private REIT VI, Inc. ........... 1,000,000
Security Capital Preferred Growth, Inc. ... 6,309,206
--------------
Total United States..................... 10,309,206
--------------
Total Private Corporations (Cost
$9,052,040)........................... 10,309,206 1.02%
--------------
Registered Investment Companies
United States
Enhanced Fixed Income (0.46% of Partners'
Capital)
GMO International Bond III................. 485,048 4,680,717
Fixed Income (0.56% of Partners' Capital)
Wasatch Hoisington US Treasury Fund........ 404,871 5,660,096
International Equity (1.89% of Partners'
Capital)
iShares MSCI Brazil Index Fund............. 245,606 11,506,641
GMO Emerging Markets Fund III.............. 303,151 7,658,038
Natural Resources (3.30% of Partners'
Capital)
BlackRock Global Resources Fund............ 379,832 19,492,964
The Tocqueville Gold Fund.................. 269,570 13,863,996
Real Estate (1.69% of Partner's Capital)
ING International Real Estate Fund......... 284,504 3,630,272
</Table>
See accompanying notes to financial statements.
5
THE ENDOWMENT MASTER FUND, L.P.
(A LIMITED PARTNERSHIP)
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2006 -- (CONTINUED)
<Table>
<Caption>
% OF
SHARES/ PARTNERS'
PAR VALUE* FAIR VALUE CAPITAL
---------- -------------- ---------
Morgan Stanley Institutional
Fund -- International Real Estate
Portfolio............................... 386,243 13,448,972
--------------
Total United States..................... 79,941,696
--------------
Total Registered Investment Companies
(Cost $74,490,183).................... 79,941,696 7.90%
--------------
Closed End Funds
United States
Financial (0.68% of Partners' Capital)
Aberdeen Asia-Pacific Income Fund, Inc. ... 100,300 622,863
Blackrock Broad Investment Grade 2009 Term
Trust................................... 12,500 188,000
Blackrock Income Opportunity Trust......... 52,400 538,148
iShares Goldman Sachs Investop Corporate
Bond.................................... 15,400 1,643,334
MFS Government Markets Income Trust........ 143,800 937,576
MFS Intermediate Income Trust.............. 154,000 945,560
Morgan Stanley Government Income Trust..... 60,200 571,298
Putnam Premier Income Trust................ 148,921 957,562
Western Asset/Claymore US Treasury
Inflation Protected Securities Fund..... 30,800 454,516
Natural Resources (0.48% of Partners'
Capital)
Energy Select Sector SPDR.................. 82,714 4,849,522
--------------
Total United States..................... 11,708,379
--------------
Total Closed End Funds (Cost
$11,889,434).......................... 11,708,379 1.16%
--------------
Fixed Income
United States
Treasuries (0.90% of Partners' Capital)
Treasury Inflation Protected Securities,
3.50%, 1/15/11.......................... 750,000 905,255
Treasury Inflation Protected Securities,
1.875%, 7/15/13......................... 275,000 291,909
Treasury Inflation Protected Securities,
2.00%, 7/15/14.......................... 150,000 155,863
Treasury Inflation Protected Securities,
1.875%, 7/15/15......................... 450,000 447,407
Treasury Inflation Protected Securities,
2.00%, 01/15/16......................... 250,000 245,428
Treasury Inflation Protected Securities,
3.625%, 4/15/28......................... 250,000 376,607
United States Treasury Bonds, 5.25%,
2/15/29................................. 2,000,000 2,097,500
United States Treasury Notes, 4.125%,
5/15/15................................. 860,000 825,768
United States Treasury Notes, 4.50%,
2/15/06................................. 950,000 934,859
United States Treasury Notes, 4.875%,
8/31/08................................. 750,000 749,942
United States Treasury Notes, 4.875%,
8/15/09................................. 300,000 300,902
United States Treasury Notes, 4.75%,
3/31/11................................. 750,000 751,260
United States Treasury Notes, 4.625%,
8/31/11................................. 500,000 498,418
United States Treasury Notes, 4.625%,
11/15/16................................ 500,000 496,719
Agencies (1.32% of Partners' Capital)
Federal Home Loan Bank, 4.20%, 3/30/11..... 1,000,000 966,500
Federal Home Loan Mortgage Corp., 4.75%,
11/3/09................................. 250,000 248,868
Federal Home Loan Mortgage Corp., 5.00%,
9/16/08................................. 250,000 249,763
Federal Home Loan Mortgage Corp., 5.25%,
7/18/11................................. 1,000,000 1,011,968
</Table>
See accompanying notes to financial statements.
6
THE ENDOWMENT MASTER FUND, L.P.
(A LIMITED PARTNERSHIP)
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2006 -- (CONTINUED)
<Table>
<Caption>
% OF
SHARES/ PARTNERS'
PAR VALUE* FAIR VALUE CAPITAL
---------- -------------- ---------
Federal Home Loan Mortgage Corp., Gold Pool
B10507, 4.50%, 10/1/18.................. 33,608 32,469
Federal Home Loan Mortgage Corp., Gold Pool
E74790, 5.00%, 2/1/14................... 66,435 65,670
Federal Home Loan Mortgage Corp., Gold Pool
E92286, 5.00%, 11/1/17.................. 18,104 17,841
Federal Home Loan Mortgage Corp., Gold Pool
E95383, 5.00%, 2/1/18................... 70,298 69,276
Federal Home Loan Mortgage Corp., Gold Pool
B14009, 5.00%, 5/1/19................... 66,481 65,462
Federal Home Loan Mortgage Corp., Gold Pool
G11777, 5.00%, 10/1/20.................. 493,989 485,354
Federal Home Loan Mortgage Corp., Gold Pool
G18156, 5.00%, 12/1/21.................. 500,000 491,177
Federal Home Loan Mortgage Corp., Gold Pool
E75753, 5.50%, 3/1/14................... 31,616 31,724
Federal Home Loan Mortgage Corp., Gold Pool
E94694, 5.50%, 2/1/18................... 14,849 14,868
Federal Home Loan Mortgage Corp., Gold Pool
J03616, 5.50%, 10/1/21.................. 490,199 489,816
Federal Home Loan Mortgage Corp, Gold Pool
C77936, 5.50% , 2/01/33................. 51,198 50,721
Federal Home Loan Mortgage Corp., Gold Pool
A10760, 5.50%, 6/1/33................... 10,576 10,475
Federal Home Loan Mortgage Corp., Gold Pool
A16536, 5.50%, 12/1/33.................. 51,369 50,877
Federal Home Loan Mortgage Corp., Gold Pool
C01812, 5.50%, 4/1/34................... 284,381 281,660
Federal Home Loan Mortgage Corp., Gold Pool
A52827, 5.50%, 10/1/36.................. 249,502 246,721
Federal Home Loan Mortgage Corp., Gold Pool
P20433, 6.00%, 10/1/31.................. 499,851 503,990
Federal Home Loan Mortgage Corp., Gold Pool
A53123, 6.00%, 10/1/36.................. 249,542 251,388
Federal Home Loan Mortgage Corp., Series
2750, Class OB, 4.00%, 7/15/15.......... 201,000 197,791
Federal Home Loan Mortgage Corp., Series
3182, Class YB, 5.00%, 9/15/28.......... 500,000 489,531
Federal National Mortgage Association,
5.25%, 9/15/16.......................... 250,000 254,520
Federal National Mortgage Association,
5.375%, 7/15/16......................... 750,000 770,748
Federal National Mortgage Association,
5.68%, 11/27/15......................... 500,000 499,500
Federal National Mortgage Association, Pool
730353, 4.50%, 7/1/18................... 28,225 27,295
Federal National Mortgage Association, Pool
767658, 5.00%, 2/1/19................... 141,532 139,577
Federal National Mortgage Association, Pool
777737, 5.00%, 5/1/34................... 127,088 122,853
</Table>
See accompanying notes to financial statements.
7
THE ENDOWMENT MASTER FUND, L.P.
(A LIMITED PARTNERSHIP)
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2006 -- (CONTINUED)
<Table>
<Caption>
% OF
SHARES/ PARTNERS'
PAR VALUE* FAIR VALUE CAPITAL
---------- -------------- ---------
Federal National Mortgage Association, Pool
254188, 5.50%, 1/1/09................... 100,392 100,597
Federal National Mortgage Association, Pool
902291, 5.50%, 11/1/21.................. 494,509 494,437
Federal National Mortgage Association, Pool
698979, 5.50%, 4/1/33................... 91,720 90,804
Federal National Mortgage Association, Pool
723874, 5.50%, 7/1/33................... 22,451 22,222
Federal National Mortgage Association, Pool
767299, 5.50%, 1/1/34................... 78,152 77,356
Federal National Mortgage Association, Pool
778316, 5.50%, 6/1/34................... 319,776 316,348
Federal National Mortgage Association, Pool
803745, 6.00%, 7/1/19................... 681,100 684,704
Federal National Mortgage Association, Pool
415971, 6.00%, 11/1/28.................. 37,652 38,081
Federal National Mortgage Association, Pool
689659, 6.00%, 3/1/33................... 33,657 33,940
Federal National Mortgage Association, Pool
555528, 6.00%, 4/1/33................... 19,320 19,496
Federal National Mortgage Association, Pool
783382, 6.00%, 8/1/34................... 100,117 100,868
Federal National Mortgage Association, Pool
380839, 6.12%, 11/1/08.................. 293,003 294,654
Federal National Mortgage Association, Pool
699436, 7.00%, 2/1/33................... 13,882 14,285
Federal National Mortgage Association, Pool
545210, 6.118%, 10/1/11(1).............. 175,239 179,589
Federal National Mortgage Association,
Series 2005-91, Class DA, 4.5%,
10/25/20................................ 670,865 649,167
Government National Mortgage Association,
Pool 782114, 5.00%, 9/15/36............. 496,673 483,096
Government National Mortgage Association,
Pool 80749, 5.125%, 10/20/33(1)......... 300,940 304,721
Government National Mortgage Association,
Pool 621822, 5.50%, 12/15/33............ 27,619 27,518
Government National Mortgage Association,
Pool 562508, 5.50%, 2/15/34............. 81,999 81,656
Government National Mortgage Association,
Pool 628111, 5.50%, 5/15/34............. 197,208 196,383
Government National Mortgage Association,
Pool 650209, 5.50%, 2/15/36............. 491,000 488,639
Government National Mortgage Association,
Pool 451883, 6.00%, 7/15/28............. 44,464 45,195
Government National Mortgage Association,
Pool 603650, 6.00%, 4/15/33............. 10,397 10,552
</Table>
See accompanying notes to financial statements.
8
THE ENDOWMENT MASTER FUND, L.P.
(A LIMITED PARTNERSHIP)
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2006 -- (CONTINUED)
<Table>
<Caption>
% OF
SHARES/ PARTNERS'
PAR VALUE* FAIR VALUE CAPITAL
---------- -------------- ---------
Government National Mortgage Association,
Pool 488259, 6.50%, 8/15/29............. 18,124 18,641
Government National Mortgage Association,
Pool 501012, 6.50%, 4/15/31............. 2,586 2,658
Government National Mortgage Association,
Series 2004-78, Class C, 4.658%,
4/16/29................................. 250,000 241,894
New Valley Generation II, Series 2001,
5.572%, 5/1/20.......................... 42,705 42,921
Overseas Private Investment Corp., 3.74%,
4/15/15................................. 142,402 135,154
Asset-Backed Securities (1.06% of Partners'
Capital)
Alesco Preferred Funding LTD, Series 5A,
Class C3, 6.31%, 12/23/34(1)............ 200,000 199,852
American Business Financial Services,
Series 2002-2, 6.68%, 7/15/33........... 360,695 356,260
Bank of America Funding Corp., Series 2006-
5, Class 2A7, 6.00%, 9/25/36............ 868,554 874,525
Bank of America Mortgage Securities, Series
2004-8, Class 2B1, 6.00%, 10/25/34...... 234,133 232,105
Bank of America Mortgage Securities, Series
2005-5, 5.50%, 6/25/35.................. 366,471 363,996
Bear Stearns Adjustable Rate Mortgage
Trust, Series 2003-1, Class 6A1, 5.06%,
4/25/33(1).............................. 126,330 126,585
Bear Stearns Adjustable Rate Mortgage
Trust, Series 2003-1, Class 3A1, 5.39%,
4/25/33(1).............................. 124,132 123,057
Citicorp Mortgage Securities, Inc., Series
2006-3, Class 1A6, 6.00%, 6/25/36(1).... 476,901 476,563
Citigroup Mortgage Loan Trust, Inc., Series
2004-HYB4, Class 3B2, 4.46%,
12/25/34(1)............................. 193,497 185,213
Citigroup Mortgage Loan Trust, Inc., Series
2005-1, Class 2A2B, 4.78%, 4/25/35(1)... 174,197 171,792
Countrywide Alternative Loan Trust, Series
2004-33, Class 2B1, 5.20%, 12/25/34(1).. 212,428 207,714
Countrywide Alternative Loan Trust, Series
2005-19CB, Class A4, 5.50%, 6/25/35..... 188,305 186,436
Countrywide Home Loans, Series 2003-3,
Class M6, 6.90%, 7/25/32(1)............. 32,553 33,137
Countrywide Home Loans, Series 2003-20,
Class 1A14, CMO, 5.50%, 7/25/33......... 130,579 127,357
CS First Boston Mortgage Securities Corp.,
Series 2002-10, Class 1M2, 7.00%,
5/25/32................................. 180,000 179,294
CS First Boston Mortgage Securities Corp.,
Series 2004-8, Class 4A4, 5.50%,
12/25/34................................ 131,075 129,432
CS First Boston Mortgage Securities Corp.,
Series 2005-5, Class 4A2, 6.25% ,
7/25/35................................. 131,099 131,816
CS First Boston Mortgage Securities Corp.,
Series 2005-11, Class 7A2, 6.00%,
12/25/35................................ 242,606 242,574
Credit Suisse Mortgage Capital Certificate,
Series 2006-2, Class 4A11, 5.75%
3/25/36................................. 326,293 326,367
</Table>
See accompanying notes to financial statements.
9
THE ENDOWMENT MASTER FUND, L.P.
(A LIMITED PARTNERSHIP)
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2006 -- (CONTINUED)
<Table>
<Caption>
% OF
SHARES/ PARTNERS'
PAR VALUE* FAIR VALUE CAPITAL
---------- -------------- ---------
Credit Suisse Mortgage Capital Certificate,
Series 2006-4, Class 3A2, 6.50%
5/25/36................................. 184,380 186,436
Diversified REIT Trust, Series 1999-1A,
Class D, 6.78%, 3/18/11................. 135,000 135,270
Drexel Burnham Lambert CMO Trust, Series V,
Class 1, PO, 0.00%, 9/1/18.............. 42,062 36,315
First Horizon Alternative Mortgage
Securities, Series 2005-FA5, Class 3A2,
5.50%, 8/25/35.......................... 271,564 267,963
First Republic Mortgage Loan Trust, Series
2000-FRB1, Class A2, 6.19%, 6/25/30(1).. 257,466 256,339
GSR Mortgage Loan Trust, Series 2004-11,
Class B2, 4.56%, 9/25/34(1)............. 296,596 289,644
GSR Mortgage Loan Trust, Series 2005-5F,
Class 3A3, 5.00%, 6/25/35............... 269,179 261,110
GSR Mortgage Loan Trust, Series 2005-9F,
Class 6A2, 6.50%, 1/25/36............... 294,418 299,550
Harborview Mortgage Loan Trust, Series,
2004-7, Class 3A2, 4.68%, 11/19/34(1)... 174,042 171,846
Impac Secured Assets Corp., Series 2002-3,
Class M2, 7.18%, 8/25/32(1)............. 200,000 202,519
JP Morgan Mortgage Trust, Series 2004-A1,
Class 3A2, 4.98%, 02/25/34(1)........... 206,565 203,362
JP Morgan Mortgage Trust, Series 2004-A3,
Class 3A2, 4.97%, 07/25/34(1)........... 162,697 159,035
Master Asset Securitization Trust, Series
2006-1, Class 1A5, 5.75%, 5/25/36....... 475,822 476,595
Master Seasoned Securities Trust, Series
2004-1, Class 15B2, 6.23%, 8/25/17(1)... 236,127 236,545
Option One Mortgage Loan Trust, Series
2005-1, Class M6, 7.00%, 2/25/35(1)..... 250,000 252,686
Residential Accredit Loans, Inc., Series
2003-QS7, Class M2, 6.00%, 4/25/33...... 127,341 125,479
Residential Asset Funding Mortgage, Inc.,
Series 2002-S17, Class A1, 5.00%,
11/25/17................................ 342,171 334,318
Residential Asset Mortgage Products, Inc.,
Series 2004-SL2, Class A1, 6.50%,
10/25/16................................ 113,956 115,443
Residential Funding Mortgage Securities,
Inc., Series 2002-S11, Class A1, 5.75%,
8/25/17................................. 101,692 100,894
Structured Asset Securities Corp., Series
2003-4, Class A6, 5.00%, 2/25/33........ 119,052 115,229
Washington Mutual, Series 2003-S11, Class
1A, 5.00%, 11/25/33..................... 75,028 72,291
Washington Mutual, Series 2003-AR4, Class
A6, 3.42%, 5/25/33...................... 401,000 393,205
Wells Fargo Mortgage Backed Securities
Trust, Series 2003-4, Class A15, 5.50%,
6/25/33................................. 182,546 181,659
</Table>
See accompanying notes to financial statements.
10
THE ENDOWMENT MASTER FUND, L.P.
(A LIMITED PARTNERSHIP)
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2006 -- (CONTINUED)
<Table>
<Caption>
% OF
SHARES/ PARTNERS'
PAR VALUE* FAIR VALUE CAPITAL
---------- -------------- ---------
Wells Fargo Mortgage Backed Securities
Trust, Series 2003-K, Class 1A2, 4.49%,
11/25/33(1)............................. 159,451 153,225
Wells Fargo Mortgage Backed Securities
Trust, Series 2004-W, Class B2, 4.63%,
11/25/34(1)............................. 198,643 192,153
Wells Fargo Mortgage Backed Securities
Trust, Series 2004-S, Class A3, 3.54%,
9/25/34(1).............................. 150,895 150,107
Wells Fargo Mortgage Backed Securities
Trust, Series 2006-12, Class A17, 6.00%,
10/25/36................................ 665,000 665,003
Corporate (0.41% of Partners' Capital)
Consumer (0.00% of Partners' Capital)
General Motors Acceptance Corp., 6.125%,
1/22/08............................... 50,000 49,890
Electric-Integrated (0.10% of Partners'
Capital)
Dominion Resources, Inc., 5.15%,
7/15/15............................... 500,000 484,307
Southern Power Co., 6.25%, 7/15/12...... 500,000 516,600
Finance (0.18% of Partners' Capital)
Bank of America Corp., 5.375%, 8/15/11.. 500,000 503,456
CIT Group, Inc., 5.20%, 11/3/10......... 500,000 497,774
General Electric Capital Corp., 5.375%,
10/20/16.............................. 500,000 500,666
JP Morgan Chase & Co., 5.15%, 10/1/15... 325,000 318,926
Multimedia (0.10% of Partners' Capital)
Comcast Cable Communications, 6.75%,
1/30/11............................... 475,000 497,700
Walt Disney Co., 5.625%, 9/15/16........ 500,000 503,479
REIT (0.03% of Partners' Capital)
Weingarten Realty Corp., 4.99%, 9/3/13.. 375,000 364,114
--------------
Total United States..................... 37,357,024
--------------
Total Fixed Income (Cost $37,524,760)... 37,357,024 3.69%
--------------
Option
United States
Index (0.02% of Partners' Capital)
iShares MSCI Emerging Markets Index
Fund -- Put Option (Strike Price $92.52,
Expiration 4/2/07)(2)................... 308,052 186,525
--------------
Total United States..................... 186,525
--------------
Total Option (Cost $1,896,000).......... 186,525 0.02%
--------------
Total Investments in Securities (Cost
$134,852,417)......................... 139,502,830 13.79%
--------------
Total Investments (Cost
$905,482,597)...................... $1,035,604,050 102.40%
==============
</Table>
- --------
* Shares or par value is listed for each investment if it is applicable for
that investment type.
CMO -- Collateralized Mortgage Obligation
PO -- Principal Only
REIT -- Real Estate Investment Trust
(1) Security is a "variable rate" bond. The rate reflected is as of December 31,
2006.
(2) Non-income producing security, unless otherwise indicated.
See accompanying notes to financial statements.
11
THE ENDOWMENT MASTER FUND, L.P.
(A LIMITED PARTNERSHIP)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2006
<Table>
Investment income:
Dividend income (net of foreign tax of $334,358)................. $ 2,012,438
Interest income.................................................. 1,268,460
-----------
Total investment income....................................... 3,280,898
-----------
Expenses:
Management fees.................................................. 5,782,079
Administration fees.............................................. 350,022
Legal fees....................................................... 99,697
Professional fees................................................ 102,225
Custodian fees................................................... 102,652
Directors fees................................................... 79,833
Other expenses................................................... 279,981
-----------
Total expenses................................................ 6,796,489
-----------
Net investment loss................................................ (3,515,591)
-----------
Net realized and unrealized gain from investments:
Net realized gain from investments............................... 8,627,340
Realized gains from capital gain distributions................... 8,257,202
Net unrealized gain from investments............................. 64,798,835
-----------
Net realized and unrealized gain from investments............. 81,683,377
-----------
Net increase in partners' capital resulting from
operations............................................... $78,167,786
===========
</Table>
See accompanying notes to financial statements.
12
THE ENDOWMENT MASTER FUND, L.P.
(A LIMITED PARTNERSHIP)
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 2006 AND 2005
<Table>
Partners' capital at December 31, 2004........................... $ 280,216,027
Contributions.................................................... 73,321,507
Distributions.................................................... (11,808,134)
Net increase in partners' capital resulting from operations:
Net investment loss............................................ (1,478,351)
Net realized gain from investments............................. 3,533,829
Net unrealized gain from investments........................... 32,384,181
--------------
Net increase in partners' capital resulting from
operations................................................ 34,439,659
--------------
Partners' capital at December 31, 2005........................... 376,169,059
--------------
Contributions.................................................... 613,013,510
Distributions.................................................... (56,054,941)
Net increase in partners' capital resulting from operations:
Net investment loss............................................ (3,515,591)
Net realized gain from investments............................. 16,884,542
Net unrealized gain from investments........................... 64,798,835
--------------
Net increase in partners' capital resulting from
operations................................................ 78,167,786
--------------
Partners' capital at December 31, 2006........................... $1,011,295,414
==============
</Table>
See accompanying notes to financial statements.
13
THE ENDOWMENT MASTER FUND, L.P.
(A LIMITED PARTNERSHIP)
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2006
<Table>
<Caption>
2006
-------------
Cash flow from operating activities:
Net increase in partners' capital resulting from operations.... $ 78,167,786
Adjustments to reconcile net increase in partners' capital
resulting from operations to net cash used in operating
activities:
Purchases of investments.................................... (665,584,530)
Proceeds from disposition of investments.................... 87,178,263
Net realized gain from investments.......................... (16,884,542)
Net unrealized gain from investments........................ (64,798,835)
Accretion of bond discount, net............................. (213,170)
Increase in prepaid contributions to Investment Funds....... (62,400,000)
Decrease in interest and dividends receivable............... 280,725
Decrease in Investment Funds receivable..................... 349,183
Increase in prepaids and other assets....................... (32,369)
Increase in management fees payable......................... 1,327,154
Increase in offshore withholding tax payable................ 208,592
Increase in administration fees payable..................... 67,520
Increase in accounts payable and accrued expenses........... 41,464
-------------
Net cash used in operating activities..................... (642,292,759)
-------------
Cash flow from financing activities:
Borrowings on line of credit................................ 53,086,219
Repayments on line of credit................................ (67,476,645)
Increase in subscriptions received in advance............... 85,422,935
Increase in redemption payable.............................. 17,746,498
Contributions from partners................................. 613,013,510
Distributions to partners................................... (56,054,941)
-------------
Net cash provided by financing activities................. 645,737,576
-------------
Net increase in cash and cash equivalents........................ 3,444,817
Cash and cash equivalents at beginning of year................... 290,074
-------------
Cash and cash equivalents at end of year......................... $ 3,734,891
=============
Supplemental disclosure of cash activity:
Cash paid for interest...................................... $ 61,797
</Table>
See accompanying notes to financial statements.
14
THE ENDOWMENT MASTER FUND, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006
(1) ORGANIZATION
The Endowment Master Fund, L.P. (the "Fund") is a limited partnership
organized under the laws of the state of Delaware. The Fund began operations in
April 2003 ("Inception"). The Fund operated as an unregistered investment
vehicle until March 10, 2004, at which time it registered as a nondiversified,
closed-end management investment company under the Investment Company Act of
1940 (the "1940 Act"). The Fund is the master fund in a master-feeder structure
in which there are currently six feeder funds.
The Fund's investment objective is to preserve capital and to generate
consistent long-term appreciation and returns across all market cycles. The Fund
pursues its investment objective by investing its assets in a variety of
investment vehicles including but not limited to limited partnerships and
limited liability companies, offshore corporations (collectively, the
"Investment Funds"), registered investment companies and direct investments in
marketable securities and derivative instruments. The Fund is primarily a "fund
of funds" and is intended to afford investors the ability to invest in a multi-
manager portfolio, exhibiting a variety of investment styles and philosophies,
in an attempt to achieve positive risk-adjusted returns over an extended period
of time. The Fund's investments are managed by a select group of investment
managers identified by the Adviser, as hereinafter defined, to have investments
that when grouped with other investments of the Fund result in a portfolio that
is allocated more broadly across markets, asset classes, and risk profiles.
The Endowment Fund GP, L.P., a Delaware limited partnership, serves as the
general partner of the Fund (the "General Partner"). To the fullest extent
permitted by applicable law, the General Partner has irrevocably delegated to a
board of directors (the "Board" and each member a "Director") its rights and
powers to monitor and oversee the business affairs of the Fund, including the
complete and exclusive authority to oversee and establish policies regarding the
management, conduct, and operation of the Fund's business. A majority of the
members of the Board are independent of the General Partner and its management.
To the extent permitted by applicable law, the Board may delegate any of its
rights, powers and authority to, among others, the officers of the Fund, the
Adviser, or any committee of the Board.
The Board is authorized to engage an investment adviser and it has selected
Endowment Advisers, L.P. (the "Adviser"), to manage the Fund's portfolio and
operations, pursuant to an investment management agreement (the "Investment
Management Agreement"). The Adviser is a Delaware limited partnership that is
registered as an investment adviser under the Investment Advisers Act of 1940
(the "Advisers Act"). Under the Investment Management Agreement, the Adviser is
responsible for the establishment of an investment committee (the "Investment
Committee"), which is responsible for developing, implementing, and supervising
the Fund's investment program subject to the ultimate supervision of the Board.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(a) BASIS OF ACCOUNTING
The accompanying financial statements have been presented on the accrual
basis of accounting in conformity with U.S. generally accepted accounting
principles ("GAAP").
(b) CASH EQUIVALENTS
The Fund considers all unpledged temporary cash investments with a maturity
date at the time of purchase of three months or less to be cash equivalents.
15
THE ENDOWMENT MASTER FUND, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 -- (CONTINUED)
(c) INVESTMENT SECURITIES TRANSACTIONS
The Fund records security transactions on a trade-date basis.
Securities that are held by the Fund, including those that have been sold
but not yet purchased, are marked to estimated fair value at the date of the
financial statements, and the corresponding unrealized gain or loss is included
in the statement of operations.
Realized gains or losses on the disposition of investments are accounted
for based on the first in first out ("FIFO") method.
(d) VALUATION OF INVESTMENTS
The valuation of the Fund's investments will be determined as of the close
of business at the end of any fiscal period, generally monthly. The valuation of
the Fund's investments is calculated by BISYS Fund Services Ohio, Inc.
("BISYS"), the Fund's independent administrator (the "Independent
Administrator") in consultation with the Adviser. The valuation procedures of
the Fund's underlying investments are reviewed by a committee approved by the
Board that was established to oversee the valuation of the Fund's investments
(the "Valuation Committee"), in consultation with the Adviser and the
Independent Administrator. The net assets of the Fund will equal the value of
the total assets of the Fund, less all of its liabilities, including accrued
fees and expenses.
Investments held by the Fund are valued as follows:
- INVESTMENT FUNDS -- Investments in Investment Funds are ordinarily
carried at estimated fair value based on the valuations provided to the
Independent Administrator by the investment managers of such Investment
Funds or the administrators of such Investment Funds. These Investment
Funds value their underlying investments in accordance with policies
established by such Investment Funds. All valuations utilize financial
information supplied by each Investment Fund and are net of management
and estimated performance incentive fees or allocations payable to the
Investment Funds' managers pursuant to the Investment Funds' agreements.
Because of the inherent uncertainty of valuation, this estimated fair
value may differ from the value that would have been used had a ready
market for the investments in Investment Funds existed. The Fund's
investments in Investment Funds are subject to the terms and conditions
of the respective operating agreements and offering memoranda of such
Investment Funds, as appropriate.
- SECURITIES LISTED ON A SECURITIES EXCHANGE -- Securities listed 1) on one
or more of the national securities exchanges or the OTC Bulletin Board
are valued at the last reported sales price on the date of determination;
and 2) on the Nasdaq Stock Market are valued at the Nasdaq Official
Closing Price ("NOCP"), at the close of trading on the exchanges or
markets where such securities are traded for the business day as of which
such value is being determined. If the last reported sales price or the
NOCP is not available, the securities are valued at the mean between the
"bid" and "ask" prices at the close of trading on that date. Securities
traded on a foreign securities exchange will generally be valued at their
closing prices on the exchange where such securities are primarily traded
and translated into U.S. dollars at the current exchange rate. If an
event occurs between the close of the foreign exchange and the
computation of the Fund's net asset value that would materially affect
the value of the security and the net asset value of the Fund, the value
of such security and the net asset value of the Fund will be adjusted to
reflect the change in the estimated value of the security.
16
THE ENDOWMENT MASTER FUND, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 -- (CONTINUED)
- OPTIONS -- Options that are listed on a securities exchange or traded
over-the-counter are valued at the mean between the closing "bid" and
"ask" prices for such options on the date of determination.
- SECURITIES NOT ACTIVELY TRADED -- The value of securities, derivatives or
synthetic securities that are not actively traded on an exchange shall be
determined by obtaining indicative quotes from brokers that normally deal
in such securities or by an unaffiliated pricing service that may use
actual trade data or procedures using market indices, matrices, yield
curves, specific trading characteristics of certain groups of securities,
pricing models or a combination of these procedures.
- OTHER -- Where no value is readily available from an Investment Fund or
other security or where a value supplied by an Investment Fund is deemed
not to be indicative of the Investment Fund's value, the Valuation
Committee and/or the Board, in consultation with the Independent
Administrator or the Adviser will determine, in good faith, the estimated
fair value of the Investment Fund or security.
(e) INVESTMENT INCOME
Generally, the values of the investments in Investment Funds are determined
whereby the Fund records the investment at its acquisition cost and the value is
adjusted to reflect the Fund's share of the income or loss (including realized
gains and losses) and additional contributions or withdrawals from the
Investment Funds. In general, distributions received from Investment Funds are
accounted for as a reduction to cost and any proceeds received above the cost
basis results in a realized gain. The net changes in unrealized appreciation or
depreciation of investments in Investment Funds is included in net unrealized
gains (losses) from investments and is reflected in the value of the Investment
Funds.
For investments in securities, dividend income is recorded on the ex-
dividend date. Interest income is recorded as earned on the accrual basis and
includes amortization or accretion of premiums or discounts.
(f) FUND EXPENSES
Unless otherwise voluntarily or contractually assumed by the Adviser or
another party, the Fund bears all expenses incurred in its business, including,
but not limited to, the following: all costs and expenses related to investment
transactions and positions for the Fund's account; legal fees; accounting,
auditing and tax preparation fees; recordkeeping and custodial fees; costs of
computing the Fund's net asset value; fees for data and software providers;
research expenses; costs of insurance; registration expenses; certain offering
costs; expenses of meetings of the partners; directors fees; all costs with
respect to communications to partners; transfer taxes and taxes withheld on non-
US dividends; interest and commitment fees on loans and debit balances; and
other types of expenses as may be approved from time to time by the Board.
Offering costs are amortized over a twelve-month period or less from the date
they are incurred.
(g) INCOME TAXES
The Fund itself is not subject to income taxes because such taxes are the
responsibility of the individual partners in the Fund. Accordingly, no provision
for income taxes has been made in the Fund's financial statements.
(h) USE OF ESTIMATES
The preparation of the financial statements in accordance with GAAP
requires management to make estimates and assumptions relating to the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
17
THE ENDOWMENT MASTER FUND, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 -- (CONTINUED)
(i) ORGANIZATIONAL EXPENSES
The Fund's organizational expenses (the "Organizational Expenses") were
initially borne by the Adviser or an affiliate thereof and for capital account
allocation purposes assumed to be reimbursed, over not more than a 60 month
period of time, notwithstanding that such Organizational Expenses were expensed
in accordance with GAAP for Fund reporting purposes upon commencement of
operations.
(j) NEW ACCOUNTING PRONOUNCEMENTS
During July 2006, the Financial Accounting Standards Board ("FASB")
released FASB Interpretation No. 48, "Accounting for Uncertainty in Income
Taxes" ("FIN 48"). FIN 48 provides guidance for how uncertain tax positions
should be recognized, measured, presented and disclosed in financial statements.
FIN 48 requires the evaluation of tax positions taken or expected to be taken in
the course of preparing the Fund's tax returns to determine whether the tax
positions will "more-likely-than-not" be sustained by the applicable tax
authority. Tax positions not deemed to meet the more-likely-than-not threshold
would be recorded as a tax benefit or expense in the current year. Adoption of
FIN 48 is required for fiscal years beginning after December 15, 2006 and is to
be applied to all open tax years as of the effective date. Management does not
believe that the adoption of FIN 48 will materially impact the Fund's financial
statements.
During September 2006, the FASB issued Statement on Financial Accounting
Standards ("SFAS") No. 157, "Fair Value Measurements." This standard establishes
a single authoritative definition of fair value, sets out a framework for
measuring fair value and requires additional disclosures about fair value
measurements. SFAS No. 157 applies to fair value measurements already required
or permitted by existing standards. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. The changes to current GAAP from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. Management does not believe that the adoption of SFAS No.
157 will impact the Fund's financial statements. However, additional disclosures
may be required about the inputs used to develop the measurements and the effect
of certain measurements on changes in net assets for the period.
(3) PARTNERS' CAPITAL ACCOUNTS
(a) ISSUANCE OF INTERESTS
Upon receipt from an eligible investor of an initial or additional
application for interests (the "Interests"), which will generally be accepted as
of the first day of each month, the Fund will issue new Interests. The Interests
have not been registered under the Securities Act of 1933, as amended (the
"Securities Act"), or the securities laws of any state. The Fund issues
Interests only in private placement transactions in accordance with Regulation D
or other applicable exemptions under the Securities Act. No public market exists
for the Interests, and none is expected to develop. The Fund is not required,
and does not intend, to hold annual meetings of its partners. The Interests are
subject to substantial restrictions on transferability and resale and may not be
transferred or resold except as permitted under the Fund's limited partnership
agreement (the "LP Agreement"). The Fund reserves the right to reject any
applications for subscription of Interests.
(b) ALLOCATION OF PROFITS AND LOSSES
For each fiscal period, generally monthly, net profits or net losses of the
Fund are allocated among and credited to or debited against the capital accounts
of all partners as of the last day of each fiscal period in accordance with the
partners' respective capital account ownership percentage for the fiscal period.
Net profits or net losses are measured as the net change in the value of the net
assets of the Fund, including any net change in unrealized
18
THE ENDOWMENT MASTER FUND, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 -- (CONTINUED)
appreciation or depreciation of investments and income, net of expenses, and
realized gains or losses during a fiscal period. Net profits or net losses are
allocated after giving effect for any initial or additional applications for
Interests, which generally occur at the beginning of the month or any
repurchases of Interests.
(c) REPURCHASE OF INTERESTS
A partner will not be eligible to have the Fund repurchase all or any
portion of an Interest at the partner's discretion at any time. However, the
Adviser expects that it will recommend to the Board that the Fund offer to
repurchase Interests each calendar quarter, pursuant to written tenders by
partners. The Board retains the sole discretion to accept or reject the
recommendation of the Adviser and to determine the amount, if any, that will be
purchased in any tender offer that it does approve. In the event Interests are
repurchased, there will be a substantial period of time between the date as of
which partners must accept the Fund's offer to repurchase their Interests and
the date they can expect to receive payment for their Interests from the Fund.
(4) INVESTMENTS IN PORTFOLIO SECURITIES
As of December 31, 2006, the Fund had investments in Investment Funds,
registered investment companies, options and marketable securities in a
separately managed account, which is managed by a sub-adviser ("Sub-Adviser").
The $77,500,000 in prepaid contribution to Investment Funds as of December 31,
2006 represents funding of a portion of the January 2007 investment in such
funds. The agreements related to investments in Investment Funds provide for
compensation to the Investment Funds' managers/general partners or advisors in
the form of management fees ranging up to 2.5% of net assets annually. In
addition, many Investment Funds also provide for performance incentive
fees/allocations ranging up to 25% of an Investment Fund's net profits, although
it is possible that such ranges may be exceeded for certain investment managers.
These fees and incentive fees are in addition to the management fees charged by
the Fund.
In general, most of the Investment Funds in which the Fund invests, other
than Investment Funds investing primarily in private equity, energy and real
estate transactions, provide for periodic redemptions ranging from monthly to
annually with lock up provisions usually for a period of up to four years.
Investment Funds that do provide for periodic redemptions may, depending on the
Investment Fund's governing documents, have the ability to deny or delay a
redemption request.
For the year ended December 31, 2006, the aggregate cost of purchases and
proceeds from sales of investments (excluding short-term investments) were
$662,107,750 and $85,914,201 respectively.
The cost of the Fund's underlying investments for Federal income tax
purposes is adjusted for items of taxable income allocated to the Fund from such
investments. The allocated taxable income is generally reported to the Fund by
its underlying investments on Schedules K-1, 1099's or PFIC statements.
The underlying investments generally do not provide the Fund with tax
reporting information until well after year end and as a result, the Fund is
unable to calculate the year end tax cost of its investments until after year
end, when the Fund's tax return is completed. The book cost and tax cost of the
Fund's investments as of 12/31/05 was $309,978,618 and $337,117,979,
respectively. The Fund's book cost as of 12/31/06 was $905,482,597 resulting in
an accumulated net unrealized appreciation of $130,121,453 consisting of
$136,129,433 in gross unrealized appreciation and $6,007,980 in gross unrealized
depreciation.
(5) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Investment Funds in which the Fund
invests trade various derivative securities and other financial instruments, and
enter into various investment activities with off-balance sheet risk both as an
investor and as a principal. The Fund's risk of loss in these Investment Funds
is limited to the value of the investment in such
19
THE ENDOWMENT MASTER FUND, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 -- (CONTINUED)
Investment Funds as reported by the Fund. In addition, the Fund may from time to
time invest directly in derivative securities or other financial instruments to
gain greater or lesser exposure to a particular asset class.
(6) DUE FROM BROKERS
The Fund conducts business with brokers for its investment activities. The
clearing and depository operations for the investment activities are performed
pursuant to agreements with the brokers. The Fund is subject to credit risk to
the extent any broker with whom the Fund conducts business is unable to deliver
cash balances or securities, or clear security transactions on the Fund's
behalf. The Fund monitors the financial condition of the brokers with which the
Fund conducts business and believes the likelihood of loss under the
aforementioned circumstances is remote.
(7) ADMINISTRATION AGREEMENT
In consideration for administrative, accounting, and recordkeeping
services, the Fund will pay the Independent Administrator a monthly
administration fee (the "Administration Fee") based on the month end net assets
of the Fund. The Fund is charged, on an annual basis, 8 basis points on Fund net
assets of up to $100 million, 7 basis points on Fund net assets between the
amounts of $100 million and $250 million and 6 basis points for amounts over
$250 million. The asset based fees are assessed based on month end net assets
and are payable monthly in arrears. The Independent Administrator will also
provide the Fund with legal, compliance, transfer agency, and other investor
related services at an additional cost.
The fees for Fund administration will be paid out of the Fund's assets,
which will decrease the net profits or increase the net losses of the partners
in the Fund. As of December 31, 2006, the Fund had $1,011,295,414 in net assets.
The total administration fee incurred for the year ended December 31, 2006 was
$350,022.
(8) RELATED PARTY TRANSACTIONS
(a) INVESTMENT MANAGEMENT FEE
In consideration of the advisory and other services provided by the Adviser
to the Fund pursuant to the Investment Management Agreement, the Fund will pay
the Adviser an investment management fee (the "Investment Management Fee"),
equal to 1.00% on an annualized basis of the Fund's net assets calculated based
on the Fund's net asset value at the end of each month, payable quarterly in
arrears. The Investment Management Fee will decrease the net profits or increase
the net losses of the Fund that are credited to or debited against the capital
accounts of its limited partners. For the year ended December 31, 2006,
$5,782,079 was incurred for Investment Management Fees.
(b) PLACEMENT AGENTS
The Fund may engage one or more placement agents (each, a "Placement
Agent") to solicit investments in the Fund. Sanders Morris Harris, Inc. ("SMH"),
an affiliate of the General Partner and the Adviser, has been engaged by the
Fund to serve as a Placement Agent. SMH is a full-service investment banking,
broker-dealer, asset management and financial services organization. A Placement
Agent may engage one or more sub-placement agents. The Adviser or its affiliates
may pay a fee out of their own resources to Placement Agents and sub-placement
agents.
(9) INDEBTEDNESS OF THE FUND
Pursuant to the Fund LP Agreement, the Fund may borrow up to, but not more
than, 10% of the net assets of the Fund (at the time such borrowings were made
and after taking into account the investment and/or deployment of such proceeds)
for the purpose of making investments, funding redemptions and for other working
capital and general Fund purposes. For purposes of the Fund's investment
restrictions and certain investment limitations under the 1940 Act,
20
THE ENDOWMENT MASTER FUND, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 -- (CONTINUED)
including for example, the Fund's leverage limitations, the Fund will not "look
through" Investment Funds in which the Fund invests. Investment Funds may also
use leverage, whether through borrowings, futures, or other derivative products
and are not subject to the Fund's investment restrictions. However, such
borrowings by Investment Funds are without recourse to the Fund and the Fund's
risk of loss is limited to its investment in such Investment Funds, other than
for some Investment Funds in which the Fund has made a capital commitment. For
some Investment Funds in which the Fund has made a capital commitment that will
be funded over a period of time, such as private equity and real estate funds,
the Fund, in certain instances, may commit to fund up to twice its initial
capital commitment. The rights of any lenders to the Fund to receive payments of
interest or repayments of principal will be senior to those of the partners, and
the terms of any borrowings may contain provisions that limit certain activities
of the Fund.
The Fund maintains a credit facility for which the investments of the Fund
serve as collateral for the facility. The maximum amount that can be borrowed is
based on the value of the underlying collateral; provided, however, that the
Fund's fundamental policies provide that the Fund cannot borrow more than 10% of
the value of the Fund's net assets. As of December 31, 2006, no borrowings were
outstanding under the credit facility. The weighted average interest rate paid
on the line of credit during the year was 7.37%.
(10) FINANCIAL HIGHLIGHTS
<Table>
<Caption>
PERIOD
APRIL 1, 2003
YEAR ENDED YEAR ENDED YEAR ENDED (INCEPTION) TO
DECEMBER 31, 2006 DECEMBER 31, 2005 DECEMBER 31, 2004 DECEMBER 31, 2003
----------------- ----------------- ----------------- -----------------
Net investment loss to
average partners'
capital(1)............. (0.61)% (0.44)% (0.92)% (0.26)%
Expenses to average
partners' capital(1)... 1.18% 1.19% 1.40% 0.66%
Portfolio Turnover....... 15.31% 12.65% 10.29% 11.90%
Total Return(2).......... 12.37% 10.40% 8.90% 21.66%
Partners' capital, end of
period................. $1,011,295,414 $376,169,059 $280,216,027 $109,262,447
Average amount of
borrowings outstanding
during the period...... $ 145,442 $ 762,381 $ 233,334 --
</Table>
An investor's return (and operating ratios) may vary from those reflected
based on different fee arrangements and the timing of capital transactions.
- --------
(1) Ratios are calculated by dividing the indicated amount by average
partners' capital measured at the end of each month during the period.
The 2003 ratios have been annualized.
(2) Calculated as geometrically linked monthly returns for each month in the
period. Performance prior to March 10, 2004 reflects pre-registration
performance; thus returns may have differed had the Fund been subject to
the regulations of the 1940 Act since inception.
(11) SUBSEQUENT EVENT
The Adviser recommended to the Board that a tender offer in an amount of up
to $100,000,000 be made, based on the projected March 31, 2007 net asset value
of the Fund, to those partners who elect to tender their Interests prior to the
expiration of the tender offer period. The Board approved such recommendation
and a tender offer notice expiring February 28, 2007 was sent out to the
partners in the Fund.
21
THE ENDOWMENT MASTER FUND, L.P.
(A LIMITED PARTNERSHIP)
SUPPLEMENTAL INFORMATION (UNAUDITED)
DECEMBER 31, 2006
DIRECTORS AND OFFICERS
The Fund's operations are managed under the direction and oversight of the
Board. Each Director serves for an indefinite term or until he or she reaches
mandatory retirement, if any, as established by the Board. The Board appoints
the officers of the Fund who are responsible for the Fund's day-to-day business
decisions based on policies set by the Board. The officers serve at the pleasure
of the Board.
The Directors and officers of the Fund may also be directors or officers of
some or all of the other registered investment companies managed by the Adviser
or its affiliates (the "Fund Complex"). The tables below show, for each Director
and executive officer, his or her full name, address and age (as of December 31,
2006), the position held with the Fund, the length of time served in that
position, his or her principal occupations during the last five years, the
number of portfolios in the Fund Complex overseen by the Director, and other
directorships held by such Director.
INTERESTED DIRECTORS
<Table>
<Caption>
NUMBER OF
POSITIO- PORTFOLIOS
N(S) LENGTH IN FUND OTHER
HELD OF COMPLEX(2) DIRECTORSHIPS
NAME, ADDRESS AND WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
AGE FUND SERVED DURING THE PAST 5 YEARS DIRECTOR DIRECTOR
- ----------------- -------- -------- ----------------------- ----------- -------------
John A. Directo- Since Member, Investment 3 0
Blaisdell(1) r, January Committee of the
Age: 46 Co- 2004 Adviser, since January
Address: c/o The Princi- 2004; Managing Director
Endowment Master pal of Salient, since
Fund L.P. Execu- December 2002; Chief
4265 San Felipe, tive Executive Officer of
Suite 900, Officer Wincrest Ventures,
Houston, Texas L.P., 1997-2002.
77027
Andrew B. Directo- Since Member, Investment 3 0
Linbeck(1) r, January Committee of the
Age: 42 Co- 2004 Adviser, since January
Address: c/o The Princi- 2004; Managing Director
Endowment Master pal of Salient, since
Fund L.P. Execu- August 2002; Partner
4265 San Felipe, tive and executive officer
Suite 900, Officer of The Redstone
Houston, Tx 77027 Companies, L.P. and
certain affiliates
thereof (collectively,
''Redstone"), 1998-
2002.
</Table>
22
THE ENDOWMENT MASTER FUND, L.P.
(A LIMITED PARTNERSHIP)
SUPPLEMENTAL INFORMATION (UNAUDITED)
DECEMBER 31, 2006 -- (CONTINUED)
<Table>
<Caption>
NUMBER OF
POSITIO- PORTFOLIOS
N(S) LENGTH IN FUND OTHER
HELD OF COMPLEX(2) DIRECTORSHIPS
NAME, ADDRESS AND WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY
AGE FUND SERVED DURING THE PAST 5 YEARS DIRECTOR DIRECTOR
- ----------------- -------- -------- ----------------------- ----------- -------------
A. Haag Sherman(1) Directo- Since Member, Investment 3 0
Age: 41 r, Co- January Committee of the
Address: c/o The Princi- 2004 Adviser, since January
Endowment Master pal 2004; Managing Director
Fund L.P. Execu- of Salient, since
4265 San Felipe, tive August 2002; Partner
Suite 900, Officer and executive officer
Houston, Tx 77027 of Redstone, 1998-2002.
Mark W. Yusko(1) Director Since Member, Investment 3 0
Age: 43 January Committee of the
Address: c/o The 2004 Adviser, since January
Endowment Master 2004; President of
Fund L.P. Morgan Creek Capital
4265 San Felipe, Management, since July
Suite 900, 2004; Principal,
Houston, Tx 77027 Hatteras Capital
Management, since
September 2003; Chief
Investment Officer of
the University of North
Carolina at Chapel
Hill, 1998-2004
</Table>
- --------
(1) This person's status as an "interested" director arises from his
affiliation with Salient Partners, L.P. ("Salient"), which itself is an
affiliate of The Endowment Registered Fund, L.P. (the "Registered Fund"),
the Fund, The Endowment TEI Fund, L.P. (the "TEI Fund"), and the Adviser.
(2) The Fund Complex includes the Registered Fund, the TEI Fund and the Fund.
23
THE ENDOWMENT MASTER FUND, L.P.
(A LIMITED PARTNERSHIP)
SUPPLEMENTAL INFORMATION (UNAUDITED)
DECEMBER 31, 2006 -- (CONTINUED)
INDEPENDENT DIRECTORS
<Table>
<Caption>
NUMBER OF
POSITIO- PORTFOLIOS
N(S) LENGTH IN FUND OTHER
HELD OF PRINCIPAL COMPLEX(1) DIRECTORSHIPS
NAME, ADDRESS AND WITH TIME OCCUPATION(S) DURING OVERSEEN BY HELD BY
AGE FUND SERVED THE PAST 5 YEARS DIRECTOR DIRECTOR
- ----------------- -------- -------- -------------------- ----------- -------------
Bob L. Boldt Director Since Chief Executive 3 None
Age: 58 January Officer, University
Address: c/o The 2005 of Texas Investment
Endowment Master Management Co. 2002-
Fund L.P. 2006; Managing
4265 San Felipe, Director, Pivotal
Suite 900, Asset Management
Houston, Tx 77027 from 2000-2002;
Senior Investment
Officer for
California Public
Employee Retirement
System from 1995-
2000.
Jonathan P. Director Since Private investor for 3 None
Carroll January the past five years.
Age: 45 2004
Address: c/o The
Endowment Master
Fund L.P.
4265 San Felipe,
Suite 900,
Houston, Tx 77027
Richard C. Johnson Director Since Senior Counsel for 3 None
Age: 69 January Baker Botts LLP
Address: c/o The 2004 since 2002; Managing
Endowment Master Partner for Baker
Fund L.P. Botts from 1998-
4265 San Felipe, 2002; practiced law
Suite 900, at Baker Botts from
Houston, Tx 77027 1966-2002 (from 1972
to 2002 as a
partner)
</Table>
24
THE ENDOWMENT MASTER FUND, L.P.
(A LIMITED PARTNERSHIP)
SUPPLEMENTAL INFORMATION (UNAUDITED)
DECEMBER 31, 2006 -- (CONTINUED)
<Table>
<Caption>
NUMBER OF
POSITIO- PORTFOLIOS
N(S) LENGTH IN FUND OTHER
HELD OF PRINCIPAL COMPLEX(1) DIRECTORSHIPS
NAME, ADDRESS AND WITH TIME OCCUPATION(S) DURING OVERSEEN BY HELD BY
AGE FUND SERVED THE PAST 5 YEARS DIRECTOR DIRECTOR
- ----------------- -------- -------- -------------------- ----------- -------------
G. Edward Powell Director Since Principal of Mills 3 Sterling
Age: 70 January & Stowell from March Bancshares,
Address: c/o The 2004 2002 to present; Inc.; Energy
Endowment Master Principal of Services
Fund L.P. Innovation Growth Interna-
4265 San Felipe, Partners in 2002; tional, Inc.
Suite 900, From 1994-2002, Mr.
Houston, Tx 77027 Powell provided
consulting services
to emerging and
middle market
businesses; Managing
Partner for Houston
office of Price
Waterhouse & Co.
from 1982 to his
retirement in 1994.
Scott F. Schwinger Director Since Senior Vice 3 None
Age: 41 January President, Chief
Address: c/o The 2004 Financial Officer
Endowment Master and Treasurer of the
Fund L.P. Houston Texans
4265 San Felipe,
Suite 900,
Houston, Tx 77027
Scott W. Wise Director Since Senior Vice 3 None
Age: 57 January President and
Address: c/o The 2004 Treasurer, Rice
Endowment Master University for the
Fund L.P. past five years.
4265 San Felipe,
Suite 900,
Houston, Tx 77027
</Table>
- --------
(1) The Fund Complex includes the Registered Fund, the TEI Fund and the Fund.
25
THE ENDOWMENT MASTER FUND, L.P.
(A LIMITED PARTNERSHIP)
SUPPLEMENTAL INFORMATION (UNAUDITED)
DECEMBER 31, 2006 -- (CONTINUED)
OFFICERS OF THE FUND WHO ARE NOT DIRECTORS
<Table>
<Caption>
PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE POSITION(S) HELD WITH FUND DURING THE PAST 5 YEARS
- --------------------- ------------------------------ ------------------------------
Jeremy L. Radcliffe Chief Compliance Officer Managing Director of Adviser,
Age: 32 since January 2004; Partner
Address: c/o The Endowment and Managing Director of
Master Fund L.P. Salient, since August 2002;
4265 San Felipe, Suite 900, Partner and officer of
Houston, Tx 77027 Redstone, 1998-2002.
John E. Price Treasurer; Principal Financial Director and Chief Financial
Age: 39 Officer Officer of the Adviser, since
Address: c/o The Endowment January 2004; Partner and
Master Fund L.P. Director of Salient, since
4265 San Felipe, Suite 900, October 2003; Controller of
Houston, Tx 77027 Wincrest Ventures, L.P., 1997-
2003.
Adam L. Thomas Secretary Director of Adviser since
Age: 32 January 2004; Partner and
Address: c/o The Endowment Director of Salient, since
Master Fund L.P. September 2002; Associate at
4265 San Felipe, Suite 900, Redstone, 2001-2002; Associate
Houston, Tx 77027 at Albrecht & Associates Inc.,
August 1996 through August
1999. Attended University of
Texas Business School, 1999-
2001.
</Table>
COMPENSATION FOR DIRECTORS
The Fund, the Registered Fund and the TEI Fund together pay each
Independent Director an annual fee of $10,000, which is paid quarterly, a fee of
$2,500 per Board meeting and a $500 fee per meeting for each member on the audit
committee. In the interest of retaining Independent Directors of high quality,
the Board intends to periodically review such compensation and may modify it as
the Board deems appropriate.
26
THE ENDOWMENT MASTER FUND, L.P.
(A LIMITED PARTNERSHIP)
SUPPLEMENTAL INFORMATION (UNAUDITED)
DECEMBER 31, 2006 -- (CONTINUED)
ALLOCATION OF INVESTMENTS
The following chart indicates the allocation of investments among the asset
classes in the Master Fund as of December 31, 2006.
<Table>
<Caption>
ASSET CLASS(1) FAIR VALUE %
- -------------- -------------- ------
Domestic Equity...................................... $ 154,230,694 14.89
International Equity................................. 179,125,197 17.29
Opportunistic Equity................................. 85,294,243 8.24
Absolute Return...................................... 170,285,007 16.44
Real Estate.......................................... 64,396,073 6.22
Natural Resources.................................... 130,037,011 12.56
Private Equity....................................... 60,461,239 5.84
Fixed Income......................................... 42,653,004 4.12
Enhanced Fixed Income................................ 142,262,725 13.74
Debt Fund............................................ 6,858,857 0.66
-------------- ------
TOTAL INVESTMENTS.................................... $1,035,604,050 100.00%
-------------- ------
</Table>
- --------
(1) The complete list of investments included in the following asset class
categories are included in the schedule of investments of the Master
Fund.
FORM N-Q FILINGS
The Fund files a complete schedule of portfolio holdings with the
Securities and Exchange Commission for the first and third quarters of each
fiscal year on Form N-Q. The Fund's Form N-Q is available on the Securities and
Exchange Commission website at http://www.sec.gov. The Fund's Form N-Q may be
reviewed and copied at the Securities and Exchange Commission Public Reference
Room in Washington, DC and information regarding operation of the Public
Reference Room may be obtained by calling 1-800-SEC-0330.
PROXY VOTING POLICIES
A description of the policies and procedures that the Fund uses to
determine how to vote proxies relating to portfolio securities is available (i)
without charge, upon request, by calling 1-800-725-9456; and (ii) on the
Securities and Exchange Commission website at http://www.sec.gov.
Information regarding how the Fund voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30 is available (i)
without charge, upon request, by calling 1-800-725-9456; and (ii) on the
Securities and Exchange Commission website at http://www.sec.gov.
ADDITIONAL INFORMATION
The Fund's private placement memorandum (the "PPM") includes additional
information about directors of the Fund. The PPM is available, without charge,
upon request by calling 1-800-725-9456.
27
ITEM 2. CODE OF ETHICS.
(a) The registrant has adopted a code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions. This code of ethics is included as an Exhibit.
(b) During the period covered by the report, with respect to the
registrant's code of ethics that applies to its principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions; there have been no
amendments to, nor any waivers granted from, a provision that relates to
any element of the code of ethics definition enumerated in paragraph (b) of
this Item 2.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
3(a)(1) The registrant's board of directors has determined that the registrant
has at least one audit committee financial expert serving on its audit
committee.
3(a)(2) The audit committee financial expert is G. Edward Powell, who is
"independent" for purposes of this Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
[DESCRIBE THE NATURE OF THE FEES LISTED BELOW.]
CURRENT YEAR PREVIOUS YEAR
------------ -------------
Audit Fees $7,000 $3,000
Audit-Related Fees $ 0 $ 0
Tax Fees $ 0 $ 0
All Other Fees $ 0 $ 0
(e) (1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
The audit committee may delegate its authority to pre-approve audit and
permissable non-audit services to one or more members of the committee. Any
decision of such members to pre-approve services shall be presented to the full
audit committee at its next regularly scheduled meeting.
(2) Disclose the percentage of services described in each of paragraphs (b)
through (d) of this Item that were approved by the audit committee pursuant to
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
CURRENT YEAR PREVIOUS YEAR
- ------------ -------------
0% 0%
(f) Not applicable.
(g) Disclose the aggregate non-audit fees billed by the registrant's accountant
for services rendered to the registrant, and rendered to the registrant's
investment adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under
common control with the adviser that provides ongoing services to the
registrant for each of the last two fiscal years of the registrant.
CURRENT YEAR PREVIOUS YEAR
- ------------ -------------
$0 $0
(h) Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
A closed-end management investment company that is filing an annual report on
this Form N-CSR must, unless it invests exclusively in non-voting securities,
describe the policies and procedures that it uses to determine how to vote
proxies relating to portfolio securities, including the procedures that the
company uses when a vote presents a conflict between the interests of its
shareholders, on the one hand, and those of the company's investment adviser;
principal underwriter; or any affiliated person (as defined in Section 2(a)(3)
of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(3)) and the rules
thereunder) of the company, its investment adviser, or its principal
underwriter, on the other. Include any policies and procedures of the company's
investment adviser, or any other third party, that the company uses, or that are
used on the company's behalf, to determine how to vote proxies relating to
portfolio securities.
These policies are included as Exhibit 12(a)(4).
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
THE ADVISER'S INVESTMENT COMMITTEE MEMBERS
The Investment Committee is responsible for the day-to-day management of
the Fund's portfolio. The Endowment Master Fund, L.P. (the "Master Fund"), The
Endowment TEI Fund, L.P. (the "TEI Fund") and The Endowment Registered Fund,
L.P. (the "Registered Fund") are registered investment companies (collectively,
the "Fund Complex" and each individually the "Fund"). The members of the
Investment Committee (each an "Investment Committee Member") are: Messrs. John
A. Blaisdell, Andrew B. Linbeck, A. Haag Sherman and Mark W. Yusko.
Mr. Blaisdell has served as an Investment Committee Member since January
2004 and Managing Director of Salient Partners, L.P. ("Salient") since December
2002. Previously, he held the position of Chief Executive Officer of Wincrest
Ventures, L.P. (from 1997-2002). Mr. Linbeck has served as an Investment
Committee Member since January 2004 and Managing Director of Salient since
August 2002. Previously, he held the position of Partner and executive officer
of The Redstone Companies, L.P. and certain affiliates thereof (from 1998-2002).
Mr. Sherman has served as an Investment Committee Member since January 2004 and
Managing Director of Salient since August 2002. Previously, he held the position
of Partner and executive officer of Redstone (from 1998-2002). Mr.Yusko has
served as an Investment Committee Member since January 2004. He is also
President of Morgan Creek Capital Management (since July 2004) and Principal of
Hatteras Capital Management (since September 2003). Previously, Mr. Yusko held
the position of Chief Investment Officer of the University of North Carolina at
Chapel Hill (from 1998-2004). Each member of the Investment Committee reviews
asset allocation recommendations by the Adviser's staff, manager due diligence
and recommendations and, by a majority vote of the Investment Committee,
determines asset allocation and manager selection.
The Adviser and certain other entities controlled by the Principals manage
investment programs which are similar to that of the Fund, and the Adviser
and/or the Principals may in the future serve as an investment adviser or
otherwise manage or direct the investment activities of other registered and/or
private investment companies with investment programs similar to the Fund's.
OTHER ACCOUNTS MANAGED BY THE INVESTMENT ADVISER
Certain Investment Committee Members, who are primarily responsible for the
day-to-day management of the Fund, also manage other registered investment
companies, other pooled investment vehicles and other accounts, as indicated
below. The following tables identify, as of December 31, 2006: (i) the number of
registered investment companies (including the Fund), other pooled investment
vehicles and other accounts managed by the Investment Committee Member and the
total assets of such companies, vehicles and accounts; and (ii) the number and
total assets of such companies, vehicles and accounts with respect to which the
advisory fee is based on performance.
Registered Investment Pooled Investment
Companies Managed by Vehicles Managed by Other Accounts
Investment Committee Investment Committee Managed by Investment
Member Member Committee Member
Name of Investment ----------------------- ----------------------- ---------------------------
Committee Member Number Total Assets Number Total Assets Number Total Assets
- ------------------ ------ -------------- ------ -------------- ------ ------------------
John A. Blaisdell 3 $1.011 billion 4 $ 309 million >724 >1.013 billion (1)
Andrew B. Linbeck 3 $1.011 billion 4 $ 309 million >724 >1.013 billion (1)
A. Haag Sherman 3 $1.011 billion 4 $ 309 million >724 >1.013 billion (1)
Mark W. Yusko 8 $1.258 billion 14 $1.125 billion 10 >1.100 billion (2)
(1) Messrs. Blaisdell, Linbeck and Sherman serve as principal executive
officers of Salient, which owns Salient Trust Co., LTA, a trust company
chartered under the laws of the state of Texas. In such capacities, Messrs.
Blaisdell, Linbeck and Sherman have investment responsibilities on the
clients of such entities. However, the number of accounts and asset figures
cited in the table relate to the accounts and assets over which Messrs.
Blaisdell, Linbeck and Sherman have discretion in their capacities as
principal executive officers of such entities.
(2) $133 million included in Total Assets of Other Pooled Vehicles Managed is
also included in Total Assets of Other Separate Discretionary Accounts
Managed.
Registered Investment Pooled Investment Vehicles
Companies Managed by Managed by Other Accounts Managed by
Investment Committee Member Investment Committee Member Investment Committee Member
--------------------------- ---------------------------- ---------------------------
Total Assets Total Assets Total Assets
Number with with Number with with Number with with
Name of Investment Performance Performance Performance Performance Performance Performance
Committee Member Based Fees Based Fees Based Fees Based Fees Based Fees Based Fees
- ------------------ ----------- ------------ ----------- -------------- ----------- ------------
John A. Blaisdell 0 $ 0 2 $ 256 million 0 $0
Andrew B. Linbeck 0 $ 0 2 $ 256 million 0 $0
A. Haag Sherman 0 $ 0 2 $ 256 million 0 $0
Mark W. Yusko 5 $247 million 14 $1.125 billion 10 $0(1)(2)
(1) Mr. Yusko, in his capacities as president of Morgan Creek Capital
Management and principal of Hatteras Capital Management, has investment
responsibilities on certain clients of such entities.
(2) $133 million included in Total Assets of Other Pooled Vehicles Managed is
also included in Total Assets of Other Separate Discretionary Accounts
Managed.
CONFLICTS OF INTEREST OF THE ADVISER
From time to time, potential conflicts of interest may arise between an
Investment Committee Member's management of the investments of the Fund, on the
one hand, and the management of other registered investment companies, pooled
investment vehicles and other accounts (collectively, "other accounts"), on the
other. The other accounts might have similar investment objectives or strategies
as the Fund, track the same index the Fund tracks or otherwise hold, purchase,
or sell securities that are eligible to be held,
purchased or sold by the Fund. The other accounts might also have different
investment objectives or strategies than the Fund.
Knowledge and Timing of Fund Trades. A potential conflict of interest may
arise as a result of the Investment Committee Member's day-to-day management of
a Fund. Because of their positions with the Fund, the Investment Committee
Members know the size, timing and possible market impact of the Fund's trades.
It is theoretically possible that the Investment Committee Members could use
this information to the advantage of other accounts they manage and to the
possible detriment of the Fund.
Investment Opportunities. A potential conflict of interest may arise as a
result of the Investment Committee Member's management of a number of accounts
with varying investment guidelines. Often, an investment opportunity may be
suitable for both the Fund and other accounts managed by the Investment
Committee Member, but may not be available in sufficient quantities for both the
Fund and the other accounts to participate fully. Similarly, there may be
limited opportunity to sell an investment held by the Fund and other accounts.
The Adviser has adopted policies and procedures reasonably designed to allocate
investment opportunities on a fair and equitable basis over time.
Performance Fees. An Investment Committee Member may advise certain
accounts with respect to which the advisory fee is based entirely or partially
on performance. Performance fee arrangements may create a conflict of interest
for the Investment Committee Member in that the Member may have an incentive to
allocate the investment opportunities that he or she believes might be the most
profitable to such other accounts instead of allocating them to the Fund.
COMPENSATION TO INVESTMENT COMMITTEE MEMBERS
Messrs. Blaisdell, Linbeck, Sherman and Yusko own equity interests in the
Adviser. As it relates to the Fund and other funds within the Fund Complex,
Messrs. Blaisdell, Linbeck, Sherman and Yusko receive all of their compensation
based on the size of the Fund and the other funds within the Fund Complex and
the management and advisory fees charged thereon. Accordingly, they believe that
a significant driver of their compensation is the performance of the Fund and
the Fund Complex, which has a significant bearing on the ability to raise
additional assets. Messrs. Blaisdell, Linbeck, Sherman and Yusko also own equity
in the general partner of another fund, and are compensated directly on
performance (based on an incentive allocation) and the size of the fund's asset
base. In addition, Messrs. Blaisdell, Linbeck and Sherman are partners and
principal executive officers of Salient and related affiliates and subsidiaries
(collectively, the "Salient Group"), which pays them a base salary (but no
bonus) and is obligated to make distributions of profits to them, as well as the
other partners, on an annual basis. These individuals are responsible for the
investment processes and management of the Salient Group. Messrs. Blaisdell,
Linbeck and Sherman believe that to the extent that they are successful in their
investment endeavors, the greater the number of assets over time and the more
significant their compensation from the Salient Group.
Mr. Yusko is a partner of Morgan Creek Capital Management, which pays him a
base salary and is anticipated to make distributions of profits above and beyond
that which is necessary to operate the business. Mr. Yusko is chiefly
responsible for the
investment processes and management of Morgan Creek Capital Management which
manages and provides investment advisory services to other registered investment
companies, pooled investment vehicles and other accounts. Morgan Creek Capital
Management is compensated directly on performance (based on "incentive fees" and
asset size). Mr. Yusko believes that to the extent that he and the staff at
Morgan Creek Capital Management are successful in their investment endeavors,
the greater the number of assets over time and the more significant their
compensation.
SECURITIES OWNERSHIP OF INVESTMENT COMMITTEE MEMBERS
The table below shows the dollar range of the interests of each Fund
beneficially owned as of December 31, 2006 by each Investment Committee Member
(2).
Investment Committee Member Master Fund Registered Fund TEI Fund
- --------------------------- ---------------------- --------------- ------------------
John A. Blaisdell over $1,000,000 over $1,000,000 $100,001 to $500,000
Andrew B. Linbeck over $1,000,000 over $1,000,000 $100,001 to $500,000
A. Haag Sherman over $1,000,000 over $1,000,000 $100,001 to $500,000
Mark W. Yusko $500,001 to $1,000,000 $0 $0
(2) Includes the portion of investments made by the Salient Group beneficially
owned and personal investments
PORTFOLIO MANAGER COMPENSATION
Mr. Adam L. Thomas has significant day-to-day duties in the management of
the portfolio of the Fund, including providing analysis and recommendations on
asset allocation and Investment Fund selection to the Investment Committee. Mr.
Thomas owns equity interests in the Adviser. In addition, Mr. Thomas receives an
additional interest in a portion of the revenues of the Adviser. As it relates
to the Fund and other funds within the Fund Complex, Mr. Thomas receives all of
his compensation based on the size of the Fund and the other funds within the
Fund Complex and the management and advisory fees charged thereon. Accordingly,
he believes that a significant driver of his compensation is the performance of
the Fund and the Fund Complex, which has a significant bearing on the ability to
raise additional assets. Mr. Thomas also owns equity in the general partner of
another fund (and Mr. Thomas also owns a interest in a portion of the revenues
derived by such general partner), and is compensated directly on performance
(based on an incentive allocation) and the size of the fund's asset base (as of
December 31, 2006, this fund's asset base was approximately $116 million). In
addition, Mr. Thomas is a partner and officer of entities within the Salient
Group, which pay him a base salary and he may receive a bonus, and Salient is
obligated to make distributions of profits to him, as well as the other
partners, on an annual basis. Mr. Thomas believes that to the extent that he is
successful in his investment endeavors, the greater the number of assets over
time and the more significant his compensation from the Salient Group will be.
SECURITIES OWNERSHIP OF PORTFOLIO MANAGER
The table below shows the dollar range of shares of the Fund beneficially
owned as of December 31, 2006, by Mr. Thomas (3):
Master Registered TEI
------ --------------- -------------------
over $1,000,000 over $1,000,000 $100,001 - $500,000
(3) Includes the portion of investments made by the Salient Group beneficially
owned
THE SUB-ADVISER
In accordance with the Investment Management Agreement, the Adviser has
engaged Tanglewood Asset Management, LLC ("Tanglewood") as a sub-adviser (the
"Sub-Adviser") to manage portions of the Master Fund's traditional fixed income
investment portfolio. Tanglewood does not invest in Investment Funds, but rather
invests directly in debt securities and open and closed end funds.
Tanglewood is a North Carolina limited liability company, is registered as
an investment adviser under the Advisers Act, and is located at 110 Oakwood
Drive, Suite 210, Winston-Salem, NC 27103. Tanglewood offers advisory and
portfolio management services for fixed income, equity, and balanced accounts.
Tanglewood manages a moderate duration fixed income portfolio for the Master
Fund, the fees for which are 0.25%, on an annualized basis, for the first $10
million of assets managed, 0.20% on the next $20 million, and 0.15% thereafter.
SUB-ADVISER PRINCIPALS
Persons responsible for the day-to-day management of the portions of the
Fund's assets that are managed by Tanglewood are: Wayne Forrest Morgan, Samuel
Meador Gibbs, II, and Alfred Reiner Guenthner (each, a "Principal").
Other Accounts Managed by the Sub-Adviser
Certain Principals who are primarily responsible for the day-to-day
management of certain portions of the Master Fund's assets, also manage other
registered investment companies, other pooled investment vehicles and other
accounts, as indicated below. The following tables identify, as of December 31,
2006: (i) the number of other registered investment companies, pooled investment
vehicles and other accounts managed by these Principals and the total assets of
such companies, vehicles and accounts; and (ii) the number and total assets of
such companies, vehicles and accounts with respect to which the advisory fee is
based on performance.
The table below includes only those Tanglewood Principals who are primarily
involved in the portfolio management of the Master Fund's assets:
Registered Investment Pooled Investment
Companies Vehicles Managed Other Accounts
Managed by Principal(1) by Principal Managed by Principal(2)
------------------------ --------------------- ------------------------
Name of Principal Number Total Assets Number Total Assets Number Total Assets
- ----------------- ------ ------------ ------ ------------ ------ ------------
Wayne F. Morgan 1 $46 million 2 $8 million 8 $495 million
Samuel M. Gibbs, II 0 $ 0 0 $0 0 $ 0
Alfred R. Guenthner 0 $ 0 0 $0 41 $ 68 million
(1) The Endowment Master Fund account is the only Registered Investment
Company managed by Tanglewood.
(2) Excludes Investment Management Companies and Pooled Investment Vehicle
Accounts.
Registered Investment Pooled Investment
Companies Managed by Vehicles Managed Other Accounts
Principal by Principal Managed by Principal
------------------------- ------------------------- --------------------------
Total Total Total
Number with Assets with Number with Assets with Number with Assets with
Name of Performance Performance Performance Performance Performance Performance
Principal -Based Fees Based Fees -Based Fees Based Fees -Based Fees Based Fees
- --------- ----------- ----------- ----------- ----------- ----------- ------------
Wayne F.
Morgan 0 $0 0 $0 1 $58 million
Samuel M.
Gibbs, II 0 $0 0 $0 0 $ 0
Alfred R.
Guenthner 0 $0 0 $0 0 $ 0
CONFLICTS OF INTEREST OF THE SUB-ADVISER
From time to time, potential conflicts of interest may arise between a
portfolio manager's management of the investments of the Master Fund, on the one
hand, and the management of other registered investment companies, pooled
investment vehicles and other accounts (collectively, "other accounts"), on the
other. The other accounts might have similar investment objectives or strategies
as the Master Fund, track the same index the Fund tracks or otherwise hold,
purchase, or sell securities that are eligible to be held, purchased or sold by
the Master Fund. The other accounts might also have different investment
objectives or strategies than the Master Fund. Tanglewood manages the
"traditional fixed income" portfolio of the Master Fund and principally invests
directly in US government and agency securities as well as US "investment grade"
corporate fixed income securities as well as open and closed end fixed income
funds. In general, the market for such securities is deep and highly liquid.
Accordingly, Tanglewood is not subject to the same conflict of interest issues
that many other Investment Managers are (e.g., market impact of trades and
allocation of investment opportunities).
Tanglewood believes that its largest potential conflict of interest relates
to the allocation of trades and brokerage commissions to its various accounts.
Tanglewood has adopted policies and procedures reasonably designed to allocate
investment opportunities and brokerage commissions on a fair and equitable basis
over time.
Knowledge and Timing of Master Fund Trades. A potential conflict of
interest may arise as a result of the Principal's day-to-day management of a
portion of the assets of the Master Fund. Because of their positions with the
Master Fund, the portfolio managers know the size, timing and possible market
impact of the Master Fund's trades. It is theoretically possible that the
portfolio managers could use this information to the
advantage of other accounts they manage and to the possible detriment of the
Master Fund.
Investment Opportunities. A potential conflict of interest may arise as
result of the Principal's management of a number of accounts with varying
investment guidelines. Often, an investment opportunity may be suitable for both
the Master Fund and other accounts managed by the Principal, but may not be
available in sufficient quantities for both the Master Fund and the other
accounts to participate fully. Similarly, there may be limited opportunity to
sell an investment held by the Master Fund and another account. Tanglewood has
adopted policies and procedures reasonably designed to allocate investment
opportunities on a fair and equitable basis over time.
Performance Fees. A portfolio manager may advise certain accounts with
respect to which the advisory fee is based entirely or partially on performance.
Performance fee arrangements may create a conflict of interest for the portfolio
manager in that the portfolio manager may have an incentive to allocate the
investment opportunities that he or she believes might be the most profitable to
such other accounts instead of allocating them to the Master Fund.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
(a)Total (b) Average (d) Maximum Number (or
Number of Price (c) Total Number of Approximate Dollar Value) of
Shares Paid per Shares (or Units) Shares (or Units) that May
(or Units) Share Purchases as Part of Publicly Yet Be Purchased Under the
Period Purchased (or Unit) Announced Plans or Programs Plans or Programs
- ------ ---------- ----------- ----------------------------- ----------------------------
July 1, 2006 through $ 0 N/A N/A N/A
July 31, 2006
August 1, 2006 through $ 0 N/A N/A N/A
August 31, 2006
September 1, 2006 through $247,100 N/A N/A N/A
September 30, 2006
October 1, 2006 through $ 0 N/A N/A N/A
October 31, 2006
November 1, 2006 through $ 0 N/A N/A N/A
November 30, 2006
December 1, 2006 through $220,854 N/A N/A N/A
December 31, 2006
--------
Total $467,954
========
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 11. CONTROLS AND PROCEDURES.
The registrant's principal executive officer and principal financial officer
have concluded, based on their evaluation of the registrant's disclosure
controls and procedures as conducted within 90 days of the filing date of this
report, that these disclosure controls and procedures are adequately designed
and are operating effectively to ensure that information required to be
disclosed by the registrant on Form N-CSR is (i) accumulated and communicated to
the investment company's management, including its certifying officers, to allow
timely decisions regarding required disclosure; and (ii) recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
There were no changes in the registrant's internal control over financial
reporting that occurred during the second fiscal quarter of the period covered
by this report that have materially affected or are reasonably likely to
materially affect, the registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) The code of ethics that is the subject of the disclosure required by
Item 2 is attached hereto.
(a)(2) Certifications pursuant to Rule 30a-2(a) are attached hereto.
(a)(3) Not applicable.
(a)(4) Proxy voting policies and procedures pursuant to Item 7 are attached
hereto.
(b) Certifications pursuant to Rule 30a-2(b) are furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) The Endowment TEI Fund, L.P.
By (Signature and Title) /s/ John A. Blaisdell
-------------------------------------
John A. Blaisdell
Co-Principal Executive Officer
Date February 26, 2007
By (Signature and Title) /s/ Andrew B. Linbeck
-------------------------------------
Andrew B. Linbeck
Co-Principal Executive Officer
Date February 26, 2007
By (Signature and Title) /s/ A. Haag Sherman
-------------------------------------
A. Haag Sherman
Co-Principal Executive Officer
Date February 26, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title) /s/ John A. Blaisdell
-------------------------------------
John A. Blaisdell
Co-Principal Executive Officer
Date February 26, 2007
By (Signature and Title) /s/ Andrew B. Linbeck
-------------------------------------
Andrew B. Linbeck
Co-Principal Executive Officer
Date February 26, 2007
By (Signature and Title) /s/ A. Haag Sherman
-------------------------------------
A. Haag Sherman
Co-Principal Executive Officer
Date February 26, 2007
By (Signature and Title) /s/ John E. Price
-------------------------------------
John E. Price
Principal Financial Officer
Date February 26, 2007