2025 Endowment Radar: Stories from the edges

At the outer edge ¹ of the Endowment Radar map, we show results for the most well-endowed institutions where the endowment plays a significant and sustainable role. Endowment distributions cover nearly 30% of the operating budget and exceed the tuition discounts awarded for financial aid and scholarships (Figure 1). A 6x endowment-to-debt ratio provides balance sheet ballast and capacity for strategic uses of endowment and long-term debt. For those with top-quartile net flow rates, the significant role of the endowment is sustainable, or may even expand, because the combined rates of spending and fundraising enable the endowment to grow with the enterprise.

There is a very different story at the inner edge of the Endowment Radar map. At the 5th percentile, institutions have limited endowment support and net flow is stressed, compromising the endowment’s future role (Figure 2). Endowment spending supports less than 3% of the operating budget and replaces less than 10% of financial aid and scholarships. The endowment market value only slightly exceeds long-term debt at a ratio of 1.4x, limiting balance sheet capacity to absorb strategic initiatives. The -6.9% net flow rate reflects unsustainable spending levels and limited fundraising, which threaten long-term endowment purchasing power.

Median Endowment Radar metrics represent the midpoint, where the endowment plays an important and sustainable role. But this cohort does not enjoy the same level of flexibility and financial strength as the more well-endowed institutions in 75th percentile (Figure 3). Endowment spending funds 17% of operating expenses and offsets more than half of the tuition discounts. An endowment-to-debt ratio of 4.4x coverage indicates balance sheet health. The net flow rate of -3.2% indicates this role should be sustainable in the near term.

Notable shifts in 2025: The growing gap between revenue and expenses

Endowment Radar results in our study were relatively unchanged from 2024 to 2025, with two notable exceptions that highlight the growing wealth gap:

• An increase in median endowment dependence showed a growing reliance on endowment support for the operating budget.
• For the highest spending institutions, the rate of higher spending exceeded historic levels and threatened to erode endowment purchasing power.

Median endowment dependence grew from 16.3% to 17.0%. There are different individual reasons for higher reliance on the endowment. For some institutions, the growth may be explained by endowment growth generating higher levels of funding for the operating budget. For institutions with operating challenges, the growth in dependence may be due to higher spending rates that are needed to fund more of the budget.

These varying results are shown when we review operating margins before and after endowment spending (Figure 4). While there is a wide range of margins across institutions, the pattern is consistent: endowment distributions provide a meaningful cushion that shifts operating results from deficit to modest surplus for many colleges and universities. When 2025 margins are compared to the prior fiscal year:

• The average margin before endowment fell from -15.3% in 2024 to -16.6% in 2025, suggesting the higher education business model is increasingly reliant on endowment spending to buffer operations.
• The average overall margin declined from 4.4% in 2024 to 3.9% in 2025, providing some cushion, but less than in 2024.
• The majority (72%) of institutions had a positive overall margin in 2025, while 28% broke even or had a negative overall margin.

Some institutions relied on higher spending from the endowment to respond to operating challenges (Figure 5). Spending pressures became more pronounced at the highest spending quartile, where effective rates ranged from 5.7% to 9.0%. Spending at the 5th percentile jumped from 7.4% last year to nearly double digits this year. The upward shift in spending suggests continued operating headwinds, placing increased pressure on endowment assets as a source of liquidity and budgetary support.

Spending directly impacts the purchasing power of existing endowment funds. Over time, high spending can erode this purchasing power if withdrawals outpace investment returns, while disciplined spending can help preserve and grow the endowment. However, spending is only part of the equation. The net flow rate (Figure 6) is an important component of the Endowment Radar because it captures the combined effect of both outflows (i.e., spending) and inflows (i.e., new gifts or contributions). By considering net flow, we gain a more complete picture of the endowment’s future role and sustainability. Positive inflows strengthen the endowment’s purchasing power and expand its capacity to support institutional priorities, making net flow a key indicator of the long-term role of the endowment.

Endowment Radar in action: Addressing strategic questions

Endowment Radar is designed to inform decisions about immediate needs and long-term priorities. The annual results provide a framework for discussions about financial sustainability and the role of the endowment in the future. We consider key questions raised by Endowment Radar case studies.

1. Do we have capacity on our balance sheet?

The endowment-to-debt ratio is an indicator of balance sheet strength and borrowing capacity. The ratio can inform discussions about the strategic use of debt in the near term and long term, as well as the role of the endowment required to support financing plans. Many institutions increased their long-term debt obligations in 2025 (Figure 7). Some borrowed more and continued to maintain a healthy endowment-to-debt ratio, whereas increased borrowing by others resulted in a less healthy ratio.

It is important for fiduciaries to understand the connections between the endowment and debt obligations, including future capital needs, debt repayment schedules, refinancing expectations, and key ratios and covenants that may involve endowment market values and/or liquidity.

2. Is our increased commitment to financial aid sustainable?

A well-endowed institution is in an enviable position, as the endowment plays a significant role in supporting the operating budget, financial aid strategy, and the balance sheet. Figure 8 shows the results for a university that increased its commitment to financial aid in 2025.

The institution maintained strong Endowment Radar metrics, but the growing role of the endowment required a 6% spending rate. With minimal inflows of 1.0%, the net flow rate was -5.0%. The results on the Endowment Radar map are designed to spur a discussion about the endowment’s capacity going forward. For example, will the endowment be part of an ongoing strategy to increase financial aid or will other funding contribute? Endowment Radar can be a communication tool with donors, who may be motivated to sustain this commitment with new endowment gifts or annual gifts.

3. Do we have a healthy reliance on the endowment?

Endowment support is an important source of operating funding, but overreliance on the endowment can jeopardize that support in future years. The Endowment Radar map in Figure 9 shows an institution under stress.

Endowment reliance of 15% comes with a weak endowment-to-debt ratio and unsustainable -8.0% net flow rate (10% spending offset by 2% inflows). Endowment support-to-financial aid also indicates that the endowment is not keeping pace with the university’s discount rate. This institution is under-endowed. A more sustainable financial equation will require greater reliance on other revenue sources, an infusion of endowment funds and/or cuts to expenses.

Conclusion

The 2025 Endowment Radar Study underscores the increasingly strategic role of the endowment as colleges and universities face persistent financial, political, and operational challenges. Endowment wealth has become a defining factor in institutional resilience and competitiveness. The Endowment Radar provides a snapshot of endowment health and impact. The map is designed to inform discussions about immediate funding needs and long-term priorities. Ultimately, it provides a framework for navigating a dynamic higher education environment and considering how endowment resources will empower institutions to fulfill their missions for generations to come.

Explore our Endowment Radar tool and request your free, customized endowment radar chart to discover how to maximize the success of your endowment here.

Geoffrey Bollier and Raul Najera Bahena also contributed to this publication.

Footnotes

1. The 75th percentile results mark the institutions where the endowment plays a significant role in the enterprise.

The post Endowment Radar Study 2025: A Widening Divide appeared first on Cambridge Associates.

Some institutions expect to spend more than policy

The institutions that expect to draw more from endowments (14%) cite that federal funding cuts and operating stress are driving most spending increases. Colleges and universities are spending more in response to financial stress that requires endowment funding to balance the operating budget. Several universities are taking additional endowment draws to fund capital projects or to pay debt service. Foundations are spending more than typical policy to replace some of the federal funding cuts. While a few hospitals are spending more because of operating stress and interruptions in government funding, more reported spending draws from their long-term investment portfolios (LTIP) to fund growth initiatives and investments in strategic plans.

Other themes also emerged in the survey responses.

• The seven colleges and universities that spent more in 2025 are private institutions. Six of the higher spending institutions expect to continue to spend beyond policy in 2026.
• There is only one public university among the eight schools that anticipate spending more in 2026. It is a public research university that is increasing spending in response to federal cuts to research and other funding.
• Five of eight hospitals distribute spending from their long-term portfolio at least once a year. Four of the hospitals (50%) have a formal spending policy for their long-term investment portfolio LTIP.
• More than a quarter of foundations surveyed spent more in 2025 and nearly one-third (30%) intend to spend beyond policy in 2026.

Governance matters

The full board of trustees is responsible for determining the level of spending at more than half of the endowments and foundations surveyed and the finance committee decides at nearly one-third. The investment committee controls the spending decision at only 12% of the organizations, which means that strong communication is needed among stakeholders to make sure that endowment spending and investment policy decisions are closely linked.

The political environment has disrupted nonprofit funding sources and operations in 2025, and this is expected to continue in 2026. Given the dynamic funding and operating environment, liquidity needs and risk tolerance can change if higher endowment spending is needed to balance budgets, fund capital, and seed growth.

Footnotes

1. The 75th percentile results mark the institutions where the endowment plays a significant role in the enterprise.

The post Higher Endowment Spending Needed for Some in Challenging Environment appeared first on Cambridge Associates.

In June, the House of Representatives passed legislation that would have dramatically increased investment excise tax rates for many colleges, universities, and private foundations. The final legislation that was signed into law in July was less severe than feared, particularly for private foundations and some smaller colleges that actually wound up better off.

Nonetheless, this recent experience surfaced potential issues, concerns, concrete steps, and best practices that private foundations and endowments should be aware of in order to deal with the current environment and be prepared if changes are proposed in future legislation.

In this Part 2 session, we discussed:

• What did and didn’t happen, and what we can learn from it: How did the final legislation affect university endowments and private foundations? What can we learn from the experience, and how should we think about possible future legislation?
• Actionable strategies: What can investors do now to prepare the portfolio for both immediate and future challenges, whether we see any further changes in excise tax rates and rules or not?
• Professional insights: Our hosts shared insights from their more than 25 years of finance and investment experience, specializing in enterprise risk, tax-aware investing, spending policy, and financial sustainability.

Footnotes

1. The 75th percentile results mark the institutions where the endowment plays a significant role in the enterprise.

The post Video: Endowment/Foundation Excise Taxes appeared first on Cambridge Associates.

1. Understand what might be changing: Follow the new proposals, including how they may evolve or change as the legislative process progresses.
2. Assess the trade-offs and difficult choices: Analyze how the organization would be affected by the new proposals—if at all—and the trade-offs that additional tax burden could introduce between current spending and the future role of the endowment.
3. Know what you own (and what to do with it now): Update the tax cost basis of the organization’s investments and consider transactions, like potential sales of investments with significant built-in gain, that could be worth taking before any new tax proposals are effective.
4. Plan ahead for tax-favorable strategies should the new rules be enacted: Consider potential changes in investment strategies and implementation that could mitigate additional tax costs from the new proposals.

To watch our recording from June 5 on “Excise Tax Hikes: Is Your Endowment Ready?” click here.

Step 1: Understand What Might Be Changing

The House Bill would significantly increase the rate schedules for two types of excise tax currently paid by certain colleges, universities, and private foundations. Since 1969, private non-operating foundations have paid an excise tax, currently 1.39%, on net investment income (which includes realized capital gains). Approximately 50 colleges and universities have paid a 1.4% excise tax on net investment income since 2018. A recent sample of private foundation tax filings showed payments that ranged from 0–19 basis points (bps) and averaged 7 bps of asset value; payments were not surprisingly correlated with total investment return. ²

For private colleges and universities, the House Bill proposes new tiers of taxation that would significantly increase the applicable tax rates and potentially the number of colleges and universities subject to the excise tax. On its face, the tax would continue to be assessed only on private institutions with more than $500,000 endowment per student, but international students would be excluded from the denominator, increasing the endowment per student for almost all institutions. Figure 1 shows the proposed tax rates, as well as our estimates of tax cost.

For most private foundations, the House Bill introduces new tiers of taxation based on asset size, as shown in Figure 2.

First and foremost, institutions should determine whether they would even be subject to the proposed new taxes. Most public charities, private operating foundations, and public colleges and universities would not be, unless they are sufficiently related to other institutions that are. Organizations potentially subject to the proposed new taxes should not be hasty in assuming they will be adopted exactly as set forth in the House Bill (or at all), since the road from House passage to enactment can be long and nonlinear, especially for major tax and budget legislation. Instead, the immediate focus should be on triage and preparation. We will continue to monitor the legislative process and update our perceptions and recommendations as needed, and affected organizations should do likewise.

Step 2: Assess the Trade-offs and Difficult Choices

Affected colleges and universities would be forced to make a difficult choice: either increase endowment spending and risk eroding the endowment’s purchasing power and reducing future institutional funding or pay the tax from operating funds, without increasing endowment spending. The latter effectively reduces available operating funds—whether viewed as a smaller endowment draw for operations or simply an added expense—creating immediate pressure to cut other costs or increase revenues, if possible. Colleges and universities do have other revenue sources in their financial equation, but they might have less flexibility to pivot to these sources if they are highly reliant on the endowment today. Endowment tax proposals are also coming at a time when university enterprises are additionally stressed by federal funding cuts and enrollment challenges.

Since this is an endowment tax, spending more from the endowment seems like a logical decision for colleges and universities to absorb the cost of the tax. Higher endowment spending also buys the operating budget some time to adapt. However, if the tax remains in place, it eventually reduces the value of the endowment. The costs of higher endowment spending today will be borne in future budgets, when a diminished endowment will yield less and less support. Institutions facing high costs of this tax will grapple with cutting costs sooner or later. Decisions will depend on the severity of the tax, current reliance on the endowment, and on flexibility to adjust expenses and raise other revenues.

Meanwhile, most private non-operating foundations are entirely reliant on the endowment to fund grants and program staff, so their choices are limited to reducing grantmaking to cover the tax (recognizing that the tax does reduce a foundation’s required distributable amount) or paying the tax in addition to established granting amounts, which may exceed sustainable levels (depending on the foundation’s investment returns and time horizon) and necessitate lower grant levels in the future.

In considering these choices, affected institutions should examine and model their current and anticipated spending needs, investment returns, budget flexibility, and revenue opportunities. This will enable them to assess the potential impacts of the new tax rules, consider steps they might take to mitigate those effects, and determine whether to absorb the tax as an additional expense or to offset it by reducing operating budgets or grant levels.

Step 3: Know What You Own (and What to Do With It Now)

Organizations that could be affected by the new tax proposals should update cost basis information for their investments to accurately assess built-in capital gain or loss. Unfortunately, it is not yet certain if the “correct” cost basis to use will be original acquisition cost or fair market value (FMV) as of a particular date, with potential modifications thereafter, so institutions might need to consider multiple possibilities.

• When the existing 1.4% college/university endowment tax was enacted in 2017, the statute was silent on this question, but subsequent IRS guidance clarified that FMV as of December 31, 2017, could be used as a starting point for investments acquired before then. Colleges and universities might reasonably assume that FMV date would still be relevant under the new tax tiers, or perhaps it will be December 31, 2025, right before the new tax tiers would take effect for these organizations.
• Private foundations could conservatively assume original acquisition cost (or December 31, 1969, FMV) will continue to be the relevant starting point for most assets, while hoping IRS guidance will allow FMV as of a date in 2025, at least for application of any higher tax rates above the current 1.39%.
• Whether the starting point for cost basis is acquisition cost, fair market value as of a specific date, or another measure, it serves only as an initial reference. Organizations will need to make appropriate adjustments to their tax basis. For example, with investments held in partnership form, cost basis can fluctuate as income, gains, and losses are reported out from year to year, even without distributions being taken.

For assets with significant unrealized capital gains to date under the worst cost basis assumptions, institutions should consider whether the asset should be sold to realize the built-in gain before the new rules take effect. These sales could be immediate, or they could be planned for immediate execution if the new rules are enacted, during the likely gap between enactment and applicable effective dates.

• These investment decisions will depend on several factors, including:
• The asset’s ongoing investment merits relative to others;
• The possibility of holding the asset indefinitely with little or no ongoing tax liability regardless of rates;
• The ability to reacquire the asset at a new, higher basis if desired (noting that “wash sale” rules, even if applicable, apply only to realization of losses, not gains), especially if the asset is generally unavailable for new investments; and
• Transaction and switching costs, manager constraints, and other logistical considerations.

Meanwhile, if they remain suitable investments, assets with unrealized losses to date may be worth retaining if those losses could later offset higher tax costs under the new rules.

Step 4: Plan Ahead for Tax-Favorable Strategies if the New Rules Are Enacted

If the new tax tiers are enacted, affected institutions should consider adopting some approaches that are already used by US taxable investors. These could include tax-managed direct indexing, as well as greater orientation toward investment strategies and entry vehicles with lower levels of ongoing income and gain and greater tax deferral benefits.

At the same time, institutions should also recognize that even the highest new tax rates will be far from the top individual tax rates, so some investment strategies (such as municipal bonds) will be less suitable than they are for taxable investors, and the costs and considerations described in Step 3 must still be assessed.

In addition to endowment spending and tax favorable investment strategies, organizations might also employ a range of other means to absorb the financial brunt of the new tax rules. For foundations, this may be a shift away from a perpetual time horizon or a contraction in grantmaking. For colleges and universities, these levers could include increasing enrollment to reduce endowment-per-student figures, directing new donations to current spending rather than to the endowment, and finding greater current funding from unaffiliated organizations. These other means will depend on an institution’s specific circumstances and must not run afoul of any anti-abuse authority or rules against circumventing the new tax provisions.

While the outcome of the tax proposals may evolve, taking practical steps now can help nonprofit organizations avoid last-minute decisions and better manage potential risks to the endowment. Careful preparation today may make it easier to adapt should these tax changes become law.

Footnotes

1. The 75th percentile results mark the institutions where the endowment plays a significant role in the enterprise.
2. Private foundations report their tax expense in publicly filed 990-PFs, and these estimates are based on available 990-PF reporting for 29 foundations with assets exceeding $1 billion for 2020–22. Note: 0.01% = 1 bps.

The post New Taxes on Endowments and Foundations? Four Steps to Take Now appeared first on Cambridge Associates.

This note highlights the key takeaways in the 2024 Endowment Radar Study and concludes with commentary about the role of the endowment going forward in a more challenging environment.

In 2024, endowments continued to deliver essential funding and stability for the nonprofit businesses of colleges and universities. The majority of institutions in our study:

• Relied on endowment funding to balance the budget of a nonprofit business model.
• Increased endowment spending to fund the growing costs of delivering higher education and making education affordable and accessible.
• Increased funding of financial aid and increased the tuition discount rate.
• Maintained a healthy balance sheet and limited growth of debt.

Endowment Spending Is Essential to Funding the Nonprofit Business Model

The colleges and universities in the Endowment Radar Study are nonprofit organizations, meaning they do not have shareholders or distribute profits. If there is an operating surplus or investment gain at the end of a fiscal year, those net assets are retained by the organization to support future fiscal years. The financial model works because subsidies afforded by tax-exempt status—fundraising and endowment distributions—make up the deficit between expenses and earned revenues (money earned from teaching and research). Most of the endowed colleges and universities in our study do not have sufficient revenues to fund their annual expenses without subsidies provided by spending from their endowment funds (Figure 2). The average operating deficit (margin) before endowment spending was -15.3%. An infusion of endowment spending provides a modest cushion and shifts the average margin to 4.4%.

Endowment Spending Has Grown to Outpace Inflation and Deliver Consistently

Colleges and universities are not immune from inflation. Over the past four years, median expenses for the cohort have grown 27% compared to 22% inflation growth for the broader economy, as measured by the Consumer Price Index (CPI). In 2024, the median expense growth rate was 6.5% exceeding 3.0% CPI. Endowment spending increased to contend with higher costs. The median change in endowment dollars distributed to the educational enterprise was 8.4% in 2024, a pace that exceeded inflation and the 6% median endowment growth rate (Figure 3).

Endowment Spending Reduces the Cost of Attendance

One of the pressure points for the operating margin is the growing “cost” of forgone revenue in the form of discounted tuition provided to students as financial aid and scholarships. Financial aid commitments have increased for the colleges and universities in our study every year. This trend continued in 2024, when the average growth rate in financial aid was 7.4%.

Nearly every institution in our study increased institutionally funded scholarships and financial aid awards in 2024 (Figure 4). The median tuition discount rate was 46%, meaning that only 54% of gross tuition charges were actually collected from students. Sticker prices do not tell the full story of the price of college.

The endowment distribution directly supports financial aid and scholarships via endowments restricted for those purposes and indirectly by subsidizing total costs, which increases the availability of other funds that can be used to support financial aid. Endowment support-to-financial aid is a coverage ratio that considers the direct and indirect roles the endowment plays in pricing strategy. It measures the relationship between endowment spending and financial aid discounts to students.

Figure 5 shows the range of endowment distribution-to-financial aid coverage ratios. At the 75th percentile, institutions have slightly more than a one-to-one coverage ratio; the endowment distribution exceeds the scholarships and aid awards. For the median institution, a ratio of 0.6x means that 60% of aid is offset by endowment subsidy. At the 25th percentile, the 0.3x ratio indicates that one-third of scholarships are offset by endowment spending. Those institutions are discounting at a level that exceeds endowment support.

Endowment Assets Are Key to Balance Sheet Health

The endowment-to-debt ratio helps us understand balance sheet health and reveals that most colleges and universities have been prudently managing their balance sheets. The median remained at a healthy 4.4x ratio, but the bottom quartile’s ratio (1.5x) indicates less balance sheet flexibility for future challenges. Average endowment growth (6.5%) outpaced growth in outstanding debt (4.2%). But for some, debt growth far exceeded the average (Figure 6). This may indicate strategic use of borrowing but could also be a sign of distress. Balance sheet health will be important as institutions weather the tumultuous 2025 operating environment.

Net Flow Rate Indicates Future Role of the Endowment

In addition to long-term performance, net flow—the ratio that calculates the net rate of endowment spending and inflows—is an indicator of whether the endowment will keep pace with the enterprise, lose purchasing power, or take on a greater role in the future. Most colleges and universities have negative net flow rates, but the degree that inflows offset spending from the endowment determine the liquidity profile and purchasing power of the portfolio.

This year, the median net flow rate was -3.0%, which is similar to prior years. In 2024, a higher range of endowment spending is notable, but not alarming. Average spending inched closer to 5% and at the highest quartile, spending ranged from 5.3% to 7.1% (Figure 7). This trend will be something to watch in 2025 for colleges and universities contending with new costs and impaired revenues imposed by an adverse political environment.

Conclusion

Why do endowments keep growing? While it may seem counterintuitive, endowments grow in size because they support institutions that are managing the higher costs of delivering their missions, like wages, physical plant and expanded programming. In 2024, college and university endowments had capacity to fund growing costs and commitments to financial aid. So far, the increase in endowment distributions has been sustainable as endowment growth has outpaced debt growth and new gifts and disciplined endowment spending have helped maintain endowment purchasing power.

In 2025, this sustainable business model faces intense headwinds that threaten to destabilize the financial equation. Revenue challenges include declining demographics for college students and new policies that could reduce government funding for financial aid and research. Potential taxation could increase costs to endowments and reduce endowment funding available for the mission. It will be challenging to maintain the vital role of the endowment in the near term. But endowment funds will be even more essential to delivering education, innovation, and research that benefit the greater good.

Footnotes

1. The 75th percentile results mark the institutions where the endowment plays a significant role in the enterprise.
2. Private foundations report their tax expense in publicly filed 990-PFs, and these estimates are based on available 990-PF reporting for 29 foundations with assets exceeding $1 billion for 2020–22. Note: 0.01% = 1 bps.
3. Endowment Radar is a methodology that Cambridge Associates developed to visually evaluate the endowment’s role in the college and university enterprise. Data as reported to Cambridge Associates LLC, or as reported in publicly available audited financial statements for 90 private colleges and universities.

The post Endowment Radar Study 2024: Why Colleges and Universities Have Endowments appeared first on Cambridge Associates.

This paper frames a decision-making process to enable an institution to achieve something that feels untenable—a roadmap for action (or not). The result may feel unsatisfactory, perhaps for all stakeholders on some level, but a divisive climate demands a clear perspective and an explicable institutional response. Fiduciaries have a responsibility to determine a course of action that considers the future of the institution given its mission and mandate.

A return to first principles and an orderly decision-making process can enable an institution to move forward and feel confident about how and why the outcome was achieved. The resulting position and/or action around divestment is an outcome of the process.

In summary, our experience suggests a decision-making process as follows:

1. Define the exclusion. Each institution needs a well-defined process to evaluate divestment proposals and determine the specific investments that would be excluded from the portfolio. Included in the exclusion definition are the reasons for divestment, expected outcomes, and how they would be measured. Following a consistent process and criteria are especially important to address fervent opinions equitably and to communicate clearly.
2. Navigate complex issues with good governance. Good governance is a roadmap that can provide structure, processes, and policies to respond to and communicate with stakeholders while upholding fiduciary responsibilities.
3. Weigh other considerations. There are several related considerations that need to be included in the evaluation, namely costs, timing, legal requirements, and the relationship to a bigger picture.

Define the Exclusion

What is Divested and Why

What set of investments should be excluded from the investment portfolio? Divestment proposals usually start with a sentiment or concern. Recommendations for divestment may be as broad as a demand to avoid affiliation with perceived unacceptable behavior or more specific recommendations for exclusion of economic sectors, regions, nations, or companies associated with or involved in conflict, human rights violations, and other harms. To implement a divestment effort, the investment management team needs clarity about the investments that should be excluded from the investment portfolio. This is often quite difficult, as investments that fail an aspect of the exclusion criteria may have other qualities that are additive to the portfolio in other ways.

Closely related to the recommendation of what should be excluded is the answer to why should it be excluded. Is the reason for the divestment decisions a moral statement or an effort to influence policy through economic impact? Some divestment policies require an economic reason if endowment resources are going to be redeployed because the endowment is an asset with economic value. Would the institution divest to avoid economic risk and stranded assets, or is the intention to influence geopolitical strife—such as compelling a company to stop supplying equipment to an aggressor nation—through withholding capital? If change is the goal, investor engagement as a shareholder may provide a more direct path to influence a company’s decisions.

Values

Many calls for divestment ask an institution to express its values or exercise power to change the course of a conflict or to support a specific movement. Organizational values can be more specific for a private foundation, but shared values are harder to define for a university. By their very nature, universities are designed to explore and cultivate different perspectives. For example, students may weigh values differently or may have different values entirely, especially in today’s divisive political and cultural environment. Faculty and alumni stakeholders bring their values and expectations as well. As a result, it is difficult to eliminate a particular type of investment based on shared institutional values. It is up to those with fiduciary responsibilities to determine whether these divestment requests reflect the mission and commitments of the entire institution.

Goals and Outcomes

What will be the outcome of eliminating a sector or set of companies? How will the impact of the divestment decision be measured over time? Before embarking on a divestment journey, it is important to understand the destination. What is the ultimate goal of the call to action? Are outcomes measurable within the institution or beyond?

Decision makers must determine if the goal is achievable and aligns with institutional and investment principles and policies. This includes weighing fiduciary responsibility, investment implications, and institutional and societal implications.

Navigate Complex Issues with Good Governance

Stakeholder concerns are a form of engagement, and each endowment program needs effective governance to acknowledge and respond to inquiries and requests clearly and effectively. Endowment governance shapes the structure, policies, and processes that direct endowment investments. Good governance is the framework for engagement and communication.

Structure

The first step is to develop a governance structure to consider requests, so that a group is prepared to do the work on behalf of the institution if a divestment issue is presented. Who is eligible to make a divestment recommendation? Who decides whether to implement the request? A decision that involves an interpretation or amendment to existing policy is the responsibility of the Board of Trustees. However, an institutional governance structure can identify the group of people that will receive the divestment proposal. That body may be the Board, the investment committee, a sub-committee of the Board, or a separate group designated to evaluate resources in light of institutional policies. ⁵ Policies and guidelines provide a framework for the group to assess the considerations of the proposal and to determine the best course of action. While one viewpoint may be expressed in the divestment proposal, it is important for the group to consider different sides of the issue within the institutional community.

Process

What is the review and evaluation process? Process establishes the criteria for consideration and the steps for how a proposal may flow from consideration to potential adoption. Criteria for consideration will provide guidelines on specificity of the divestment request, rationale, and goals. Some institutions specifically ask that a proposal include how divestment will help achieve the desired goal. Criteria should also determine the financial and broader considerations for the institution, such as reputation and social or moral implications. Providing the basis and expectations for the divestment request will enable the governing groups to assess the institutional merit and determine how the proposal fits into the broader policy framework.

Policy

The investment policy ultimately must reflect all of the guidance for how endowment assets will be invested. Institutional leadership must base their decision in policy and have a firm understanding of both the short-term and long-term financial implications of divestment. How does the justification for divestment align with institutional bylaws and investment policy? Does the current investment policy outline ethical investment guidelines or environmental, social, and governance (ESG) guidelines? If current policies are insufficient, the Board may need to revise or augment them. Some institutions also have a specific divestment policy to manage proposals.

• Investment policy: The investment policy governs endowment investments. It outlines the goals of the investment program, investment strategy, and asset allocation guidelines, risk and liquidity parameters, and any ESG and impact investment guidelines. If the investment policy rules out divestment or outlines divestment consideration criteria, then no additional policy is needed to address divestment.
• Divestment policy: Some institutions also have a specific divestment policy or statement to outline how divestment considerations are managed. A divestment policy can be employed to outline criteria for consideration and the decision-making process. If a recommendation to divest is approved and requires a change in investment policy, the Board will need to refer to the divestment statement or revise the investment policy to accommodate the new approach.

Weigh Other Considerations

There are further considerations that fiduciaries need to weigh before making a divestment decision because endowment assets are part of a vast institutional ecosystem and must comply with laws and regulations. When responding to calls to divest, we believe institutions should assess financial and regulatory implications, and if the endowment is the appropriate mechanism to affect the issue at hand.

Costs

Divestment narrows the investment opportunity set and introduces new trade-offs. In addition to the elimination of certain direct investments, the divestment decision may steer the portfolio away from asset managers that do not screen for the excluded investments. The divested assets may ultimately become less favorable holdings because of growing pressure to move away from the goods and services involved in the conflict. Or they may be profitable endeavors, and, as a result of divestment, the institution chooses not to participate in financial gains. For example, firms with sales generated in aerospace and defense outperformed the broader index of stocks over the past five years.

Is the institution willing to trade off real, long-term dollars that could be used to provide impact in a different way? Higher endowment returns educate more students, hire more faculty, and invest in teaching and research that can influence policy through writing, legal work, and media. How should the institution balance current causes and views with future views, obligations, and priorities? The endowment is composed of long-term capital intended to support the institution in perpetuity. A change in investment policy can alter the long-term return potential of the portfolio.

Timeline

Very specific, short-term changes to investment policy are contrary to the long-term nature of a diversified investment strategy and the time horizon of the perpetual assets. It takes time to divest, especially if ownership is through external investment managers and private investments that involve longer-term lock-ups for limited partners. Does the timing of the cause inspiring divestment align with the long-term nature of an endowment? Are there other more immediate forms of expression that could affect change sooner?

Another element of timing is how often fiduciaries will review the divestment. How long will the institution withhold capital? If the offending company or industry changes its ways will positive change call for restored investment? At what frequency will circumstances be reviewed to evaluate outcomes? Are those responsibilities defined in the governance process? Questions of timing are connected to the desired outcomes and the nature of the concern.

Legal and Fiduciary Responsibilities

The endowment functions within the bylaws of the institution, as well as regional and national laws. It is important to understand whether the exclusionary action of divestment is permitted under those laws. The action may also be counter to government policy, so it is important to understand the potential impact on government contracts and oversight. Does the opposition impel the institution to extend its boycott to its own government?

Bigger Picture

Endowment policy fits into broader institutional strategy and actions. If the divestment issue is an institutional priority, are other elements of the institution also being employed or deployed to address the issue? How does the endowment’s divestment fit into a broader strategy? Is the endowment one piece of an activist strategy? Would the divestment action be amplified by other forms of activism and collective change? For example, if the endowment is divesting from a popular food chain that is operating in a contentious region, but members of the university community continue to eat at the local franchise, the endowment would be held to a different standard than the community and would be divesting in an isolated vacuum.

Concluding Thoughts

Divestment is a complex decision. The endowment portfolio is composed of a group of gifts entrusted to the institution in perpetuity. Endowment funds are invested with a shared mandate to withstand geopolitical and economic tumult and to equitably distribute funding to multiple generations of stakeholders. The endowment assets serve the entire institution, forever. Fiduciaries have a responsibility to determine a course of action that considers the future of the institution, given its mission and mandate.

This paper offers considerations for how to manage calls for divestment and raises questions that need to be answered to respond clearly and effectively to divestment requests. To navigate tumultuous times and passionate entreaties, we believe institutions need to lean into good governance. It is important that the decision-making process provides clarity, and by extension an opportunity for learning, listening, and engagement, especially when the outcome of the process will not satisfy all stakeholders. An orderly process and response can enable an institution to move forward and feel confident about how and why the outcome was achieved.

Footnotes

1. The 75th percentile results mark the institutions where the endowment plays a significant role in the enterprise.
2. Private foundations report their tax expense in publicly filed 990-PFs, and these estimates are based on available 990-PF reporting for 29 foundations with assets exceeding $1 billion for 2020–22. Note: 0.01% = 1 bps.
3. Endowment Radar is a methodology that Cambridge Associates developed to visually evaluate the endowment’s role in the college and university enterprise. Data as reported to Cambridge Associates LLC, or as reported in publicly available audited financial statements for 90 private colleges and universities.
4. There is a separate but related question that asks if an institution should take a political stance, from acknowledgement to action.
5. Relevant policies may include the investment policy, ethical investing guidelines, ESG guidelines, divestment criteria or policy, and university mission and values statements.

The post The Divestment Question: Focus on Governance appeared first on Cambridge Associates.

This year we saw endowment strength in three of the four metrics.

• The endowment’s role grew slightly as it supported a higher portion of growing operating budgets compared to 2022. At the median of our data set, the endowment supported 16% of operating expenses.
• The endowment maintained the level of coverage of growing financial aid commitments. Endowment distributions represented 0.7x coverage of tuition discounts.
• Endowment market values and debt balances grew in sync in 2023 as the endowment continued to provide ballast on the balance sheet, measured by a 4.4x median endowment-to-debt ratio.
• Due to higher effective spending rates, the net flow rate (-3.1%) was weaker in 2023, but new gifts continued to provide an additional source of endowment growth and liquidity.

The Endowment Is Supporting a Growing Portion of Growing Costs

Levels of endowment dependence vary across the 80 colleges and universities in the 2023 Endowment Radar Study. Endowment support ranges from a small fraction of the university budget to supporting more than half (Figure 2).

The median level of endowment dependence was 16.3% in 2023, which was similar to 2021 and higher than 2022 (14.1%). This year’s growth in endowment dependence is notable, given the significant growth in operating budgets that the endowments are supporting. For the median institution, the growing level of endowment support was driven by a 10.5% increase in endowment distribution, which outpaced the significant 8.3% growth rate of expenses. For the colleges and universities in our study, expense growth outpaced broader inflation ⁷ in 2023, but kept pace with recent trends, as higher education costs caught up with broader inflation growth over the past three years (Figure 3).

Revenues also increased in 2023, but the 6.3% median revenue increase did not keep pace with the 8.3% growth in expenses. This dynamic is demonstrated in slightly narrower operating margins (Figure 4). On average, core operating margins before endowment and gift subsidies were more negative (-21.8% in 2023 versus -18.6% in 2022). The median overall margin finished positive but had less cushion (2.1% in 2023 versus 4.2% in 2022). The number of institutions completing the fiscal year with a negative margin more than doubled in 2023, indicating the challenging financial environment for many.

Putting all of these financial pieces together, we can see that the endowment is taking on a growing role in supporting growing costs that are outpacing other revenue sources for most colleges and universities in the Endowment Radar study.

Tuition Discounts Keep Pace With Tuition Prices

One of the pressure points for the operating margin is the growing “cost” of forgone revenue in the form of discounted tuition provided to students as financial aid and scholarships. Financial aid commitments have increased for the colleges and universities in our study every year. This trend continued in 2023 when the average growth rate in financial aid was 5.2%, keeping pace with the growth in tuition charges, which increased 5.1%. ⁸ The average tuition discount was 44%, meaning, on average, institutions collected 56% of the tuition charged to students. Net tuition revenue growth has been limited, as schools have increased financial and merit aid to respond to growing student needs and the competitive enrollment landscape.

The endowment distribution directly supports financial aid and scholarships via endowments restricted for those purposes and indirectly by subsidizing total costs, which increases the availability of other funds that can be used to support financial aid. Endowment support-to-financial aid is a coverage ratio that considers the direct and indirect roles the endowment plays in pricing strategy. ⁹ It measures the relationship between endowment distribution and tuition discounts to compare the endowment subsidy to the budget to the forgone revenue discounted to students. The coverage ratio of endowment distribution-to-financial aid ranged from 0.1x to 4.6x and the median was 0.7x (Figure 5).

The institutions that have endowment “coverage” for financial aid can offset forgone tuition revenue with endowment spending (Figure 6). This enables them to deliver their discounted price to students from a position of strength as shown in light blue shading in the upper-right quadrant. The colleges and universities in yellow shading on the lower-right side are offering high discount rates, but from a weaker financial position. Without a higher subsidy from the endowment to offset this forgone revenue, they will need to employ other financial levers—such as auxiliary revenue, annual fund gifts, and careful expense management—to fund these commitments and balance the budget.

Endowment Values Shifted the Balance Sheet

Balance sheets were strengthened for many institutions in 2023 as the median endowment market value grew (2.1%) and the median debt burden decreased (-1.5%). Growth in assets relative to liabilities resulted in the median endowment-to-debt ratio of 4.4x, an uptick from the 4.0x median in 2022. At the institutional level, we see a range of experiences (Figure 7). More than 75% of the institutions saw an increase in 2023 market value, and approximately 60% reduced their debt obligations. Nearly 40% of the institutions saw greater balance sheet strength with a combination of increased endowment market value and decreased outstanding debt obligations.

Net Flow Rate

In addition to long-term performance, net flow—the ratio that calculates the net rate of spending and inflows—is an indicator of whether the endowment will keep pace with the enterprise, lose purchasing power, or take on a greater role in the future. Most colleges and universities have negative net flow rates, but the degree that inflows offset spending from the endowment determine the liquidity profile and purchasing power of the portfolio.

Net flow is a metric that tends to vary considerably by institution, and from year to year for some institutions, because it is sensitive to cash flow timing and the unanticipated event, such as the gift of a large bequest (Figure 8). The calculated rate is also sensitive to the beginning endowment market value, which is the ratio’s denominator. In 2023, there were more negative net flow rates, driven by higher rates of spending.

The 1.5% median inflow rate was the same as the prior year, but the median effective spending rate increased from -3.8% to -4.4%, resulting in a shift in the median net flow rate from -2.1% to -3.0%. This was a result of lower beginning endowment market values for many institutions, as well as higher spending volume. As noted in the endowment dependence discussion, distributions increased more than 10%, as more dollars were spent from the endowment in 2023.

Higher spending coincides with higher costs this year and puts more reliance on strong investment performance to maintain purchasing power of existing endowment funds. Purchasing power should be monitored over longer cycles that are in line with the long-term nature of endowment capital and policy goals.

Conclusion

Endowments provided an important ballast to the private college and university business model in 2023. For many the institutions, higher costs and financial aid commitments were accompanied by growing endowment market values. Greater endowment dependence was fueled by higher rates of spending. Balance sheet health improved for the majority of institutions.

Endowment Radar brings together analysis of several financial metrics that can and often do change from year to year. Reviewing these results helps to manage with an eye toward future risks that may impact investment markets and university operations, including inflation, interest rates, and demographics. Evaluating these metrics and the role of the endowment in supporting colleges and universities during these tumultuous times helps to support near-term and long-term decisions and strategies.

Footnotes

1. The 75th percentile results mark the institutions where the endowment plays a significant role in the enterprise.
2. Private foundations report their tax expense in publicly filed 990-PFs, and these estimates are based on available 990-PF reporting for 29 foundations with assets exceeding $1 billion for 2020–22. Note: 0.01% = 1 bps.
3. Endowment Radar is a methodology that Cambridge Associates developed to visually evaluate the endowment’s role in the college and university enterprise. Data as reported to Cambridge Associates LLC, or as reported in publicly available audited financial statements for 90 private colleges and universities.
4. There is a separate but related question that asks if an institution should take a political stance, from acknowledgement to action.
5. Relevant policies may include the investment policy, ethical investing guidelines, ESG guidelines, divestment criteria or policy, and university mission and values statements.
6. Endowment Radar is a methodology that Cambridge Associates developed to visually evaluate the endowment’s role in the college and university enterprise. Data as reported to Cambridge Associates LLC, or as reported in publicly available audited financial statements for 80 private colleges and universities.
7. Consumer inflation measured by Urban Consumer Price Index: CPI-U.
8. The 2022 to 2023 comparison is for a constant universe of 73 institutions. Financial aid commitment is measured as all scholarship aid provided to students as reported on financial statements, including aid for undergraduate and graduate students, and aid to tuition, fees, room, and board.
9. Note that the endowment distribution is not all designated for financial aid. We are simply comparing the subsidy from endowment to the forgone revenue of student aid. We are also using discount rate as a barometer of price, recognizing that it is an imperfect assumption.

The post Endowment Radar Study 2023: Endowment Dependence Grows with Higher Costs appeared first on Cambridge Associates.

This paper explores the strategic and expanding role of the endowment in the public university business model. We analyze the components of endowment spending and endowment growth, and how spending can drive growth. We demonstrate how transparency about endowment net flows can deepen understanding of the current and future role of the endowment and strengthen communication with donors about the impact of their gifts.

The Role of the Public University Endowment

Public university endowments support the university through three types of spending:

• Funding the operating budget and directly support student scholarships, faculty positions, research, and service delivery. This level of spending is determined by the endowment spending policy, which is designed to keep pace with inflation and deliver consistent support every year.
• Funding for revenue enhancing activities, such as fundraising infrastructure and investment management. Public universities and foundations often source this additional funding via an administrative fee (also known as an admin fee), which is assessed on the endowment market values.
• If flexible funds are available, an additional draw from the endowment may support sporadic needs, such as capital campaign costs, capital project financing or other strategic priorities.

These three categories of spending add up to the total amount of withdrawals from the endowment. To maintain purchasing power, endowment return must equal the rate of total spending plus inflation over time.

Over the past ten years, the median experience of public university endowments has met that goal (Figure 1). After adjusting for inflation, investment returns, and spending, an endowment starting at $100 in 2013 grew to an adjusted value of $108 in 2023. The median real (adjusted for inflation) average annual compound return (AACR) of 5.3% slightly exceeded spending, and the median growth rate net of spending was 0.8%. This growth indicates that the endowment maintained purchasing power and delivered to donors and stakeholders who have consistently benefited from endowment spending.

To move beyond maintenance of current spending levels and expand the role of endowment assets, a university needs to raise new endowment funds. New inflows increase the purchasing power of the endowment, and the endowment spending that funds the mission. Inflows represent new commitments to funding more of the mission. A growing endowment relieves reliance on student revenues, state appropriations, and annual fundraising dollars. Inflows also provide an investment advantage, as they replenish endowment liquidity needed to fund spending. They offer more flexibility for the investment strategy to incorporate illiquidity that comes with long-term investment commitments in venture capital and private equity.

The combination of spending and fundraising is net flow. Inflows from successful fundraising efforts have been a significant driver of public university endowment growth over the past ten years. When we analyze endowment performance and factor in all elements of net flow (shown as the real return after net flow in Figure 2), we see that the median growth rate of public university endowments has grown 5.7% annually since 2013. Inflows augmented strong performance and provided a 67% bump to overall growth after spending over this ten-year period.

Sources of Growth

There is a delicate balance between spending, sustainability, and growth, especially when sourcing revenue enhancing funding from an administrative fee assessed on endowment assets. The implementation and disbursement of the administrative fee is a balancing act, with a goal to fund strategic investments and growth without eroding the purchasing power of existing endowment funds. For those that strike the right balance, the admin fee can support sustainability and growth. But if the admin fee is too high, it will erode purchasing power and ultimately divert resources away from the mission. It is the responsibility of the board, with direction from the investment committee and the finance committee, to strike this balance. The calibration of endowment uses and sources will affect investment performance, liquidity, spending, and sustainable growth. When applied strategically, the admin fee can be an investment in endowment growth (Figure 3). In 2023, we saw a correlation between levels of admin fees and endowment fundraising achievement; those with admin fees of 1% or higher experience gift flow rates of 3% and above.

How Attention to Net Flow Can Transform the Role of the Endowment

In the following case study, we consider the correlation between net flow and specifically how a higher administrative fee that yields higher gift flow can expand the endowment support delivered to the university. We model two public university endowments over the past ten years that both earn the average investment returns for their peer group (7.9% nominal AACR) and have the same spending policy rate (3.5% effective spending). University A assesses a lower admin fee of 0.8% and has a gift flow of 2.0%, while University B has a higher admin fee of 1.25% and a higher gift flow of 4.0% (Figure 4).

Net flow matters. University B’s net flow of -0.75% versus University A’s -2.3% results in higher market value, endowment spending, and administrative fee revenue (Figure 5). Both endowments grow over the ten-year period from 2013 to 2023, but stronger net flow contributed to an expanded role for the University B endowment. The University B endowment ends with $32.7 million more in endowment value and delivers $1 million more in annual budget funding by Year 10 and $1.2 million more in administrative fee revenue.

Net Flow Strategy

In 2023 we saw a range of net flow results for public colleges, universities, and affiliated foundations (Figure 6). The net flow rate is time-sensitive, and we expect it to fluctuate year to year because the ratio is a function of fiscal year spending and fundraising achievement (dollars in the door) and market values.

Institutions on the left side of Figure 6 had strong net flow that contributed to endowment growth in 2023. Institutions on the right side had limited fundraising and higher spending, which may have eroded purchasing power. The net flow metric measures the combination of inflows and outflows and communicates important information about the role of the endowment and the plan for the future role of the endowment. What-if analysis about net flows and the power of new endowment gifts can help donors understand the direct link to endowment assets and a sustainable financial model for important programs and purposes. Given that net flow tells us a great deal about portfolio liquidity and the current and future role of the endowment in the university financial model, it makes sense for the Board, leadership team, advancement team, investment management team, and the investment committee to communicate about this metric every year.

Conclusion

The public university endowment can be much more than a static funding source. A strong investment program that is augmented by successful fundraising and disciplined spending can propel endowment growth. Moving beyond a balanced budget, forward-thinking public universities are considering how endowment growth can transform the revenue model and expand resources available to students and faculty. Net flow analysis can provide transparency about the current and future role of the endowment and strengthen communication with donors about the long-term impact of their endowment gifts. Endowment strategy that factors in net flow patterns and plans can achieve an investment edge and inspire fundraising.

Footnotes

1. The 75th percentile results mark the institutions where the endowment plays a significant role in the enterprise.
2. Private foundations report their tax expense in publicly filed 990-PFs, and these estimates are based on available 990-PF reporting for 29 foundations with assets exceeding $1 billion for 2020–22. Note: 0.01% = 1 bps.
3. Endowment Radar is a methodology that Cambridge Associates developed to visually evaluate the endowment’s role in the college and university enterprise. Data as reported to Cambridge Associates LLC, or as reported in publicly available audited financial statements for 90 private colleges and universities.
4. There is a separate but related question that asks if an institution should take a political stance, from acknowledgement to action.
5. Relevant policies may include the investment policy, ethical investing guidelines, ESG guidelines, divestment criteria or policy, and university mission and values statements.
6. Endowment Radar is a methodology that Cambridge Associates developed to visually evaluate the endowment’s role in the college and university enterprise. Data as reported to Cambridge Associates LLC, or as reported in publicly available audited financial statements for 80 private colleges and universities.
7. Consumer inflation measured by Urban Consumer Price Index: CPI-U.
8. The 2022 to 2023 comparison is for a constant universe of 73 institutions. Financial aid commitment is measured as all scholarship aid provided to students as reported on financial statements, including aid for undergraduate and graduate students, and aid to tuition, fees, room, and board.
9. Note that the endowment distribution is not all designated for financial aid. We are simply comparing the subsidy from endowment to the forgone revenue of student aid. We are also using discount rate as a barometer of price, recognizing that it is an imperfect assumption.

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