How America’s Wealthiest Colleges Get Richer Faster Than Schools With Small Endowments

The booming stock market in late 2020 and early 2021 produced a bumper year for college endowments of all sizes, but just like the rest of America, the gap between rich and poor in education higher grows.

The average college endowment returned 30.6% for the fiscal year ending June 30, 2021, according to an annual survey conducted by the National Association of College and University Business Officers (Nacubo). For schools with endowments of at least $1 billion, the average return was 37.3%, compared to an average of 23.9% for schools in the smallest category under $25 million. The S&P 500 climbed 38% during this period.

The 720 schools surveyed have an average endowment of $1.1 billion, up 35% from the 2020 report, though that number is skewed by the earnings of the most elite schools with endowments worth as much as the 53 billion dollars from Harvard. While 19% of schools boasted endowments of at least $1 billion, this subset holds 84% ​​of the cumulative endowment value of $821 billion. The median endowment in the survey was $197 million.

“There’s more wealth concentrated at the top now – that’s a fact both for universities and for many other nonprofits and individuals,” says Ken Redd, director of research and development. policy analysis at Nacubo. “Our results really reflect what is happening in society at large.”

The returns reported last fall for some of America’s best-known universities were astonishing: 65% for Washington University in St. Louis, 57% for Vanderbilt, 56% for Duke and MIT. All Ivy League schools but Harvard and Columbia returned over 40%. .

These wealthy schools were able to outperform the stock market thanks in large part to their private market portfolios. The 136 billion-dollar schools invested an average of 30% of their endowments in private equity and venture capital funds, nearly double the allocation to those two asset classes by the second-largest large category of endowments between $501 million and $1 billion.

Large endowments reported average returns of around 50% in fiscal 2021 for their private equity and venture capital investments, fueling this group’s overall outperformance. Schools with endowments worth less than $250 million, representing the majority of the sample, allocated less than 9% of their portfolios to these categories. This cohort of small endowments invested on average at least half of their portfolios in core US stocks and fixed income funds, while these categories made up less than 20% of large endowments.

“Small schools don’t have the money to hire enough staff to do really deep dives into private market opportunities,” says Charles Skorina, a consultant who specializes in helping endowments to hire endowment officers. ‘investment. “If you’re a $500 million or $750 million endowment, your staff is probably just a few people, a CIO, and an analyst or two.”

For small schools, finding lucrative opportunities in the private market isn’t just about manpower. Liquidity and access are also concerns when they need to be able to access their endowment funds to support their operating budgets. Fund sponsors at top-performing venture capital firms like Sequoia Capital often have to write nine-figure checks without seeing rewards for years, an impossibility for most institutions.

These liquidity restrictions also make it harder for elite schools to spend some of their paper bargains, which can be scaled back before they’re even realised. The start of fiscal 2022 has been much more subdued for both public and private markets, with stocks up just 1% since last July.

“What I take away is that these returns are misleading because they’re so exceptional and they don’t happen again,” Skorina says. “These are one-time returns, but you can expect a stock market crash probably every 10 years. So don’t spend any money.

The average spend rate remained almost stable at 4.5% for the whole sample, with little correlation with the size of the endowment. Nearly half of the spending went to student financial aid. The largest endowments spent 4.7% of their funds last year, although a steady rate of a growing pool of cash still translates into billions of dollars more for the benefit of students at these prestigious institutions. .

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