The Case Against Endowments, Part I

Are fundraisers the uncompensated arm of the asset management industry?

The best part about working on the frontiers of scientific research is that you get to talk with donors about solutions.  

Solutions to climate change. Solutions to cancer.  Solutions to water shortages.  Global WiFi provided by a network of low altitude geostationary satellites.  Being a fundraising professional for three global research powerhouses meant surfing the endless frontier of human progress.  

But what I also loved most about working in scientific fundraising was that I got to make the case - day after day after day - for why donors should support projects and programs with current-use dollars, rather than through endowments.  I would reason that the problems facing researchers today, from physicists and biologists to social scientists and even historians, are remarkably complex, requiring sustained, high-intensity inputs to create the necessary escape velocity towards real solutions.  Besides, once a given problem is solved, the endowment and its income become superfluous.  

But beyond the obvious logic regarding the pursuit of real solutions, I also did some calculations that caused me to direct nearly all of the funds I helped secure about $100M towards current use projects: research, fellowships and postdoctoral training, programmatic enhancements, physical plant renovations and capital construction, even internal capacity building.  

Why did I do this? Because I did some math.

As a productive fundraiser, I successfully encouraged my donors to give between $10M-$15M/year every year. That’s a lot of money, for sure.  But if I encouraged those donors to support the university’s endowment, My work would generate $200K-$300k in additional fees (at the "2% and 20%" hedge fund fee structure) for the University’s asset managers and only $500K-$750K for the entire university.  

Think about that for a second.  OK, maybe take a minute.  

I then thought about extending that analysis across the $150B academic and medical fundraising industry.  And assuming 1/3 of funds raised end up parked in endowment accounts, you end up estimating that the university fundraising industry generates an additional $1,000,000,000 (That’s 1,000 million dollars) in fees for private asset managers (again, assuming the preposterous 2-and-20% fee structure) every year, after year, after year...you get the idea.

OK, so maybe my math is wrong. Maybe the total number is inflated.  Maybe 20% ends up in endowments.  Maybe fee structures are lower than 2-and-20.  But then again, maybe they’re not.  Maybe the nonprofit industry has been gently convinced that endowments matter, that money in the bank matters more than solving the problems facing the world today?  Or even more insidiously, have we been co-opted by private equity, hedge, and venture capital industries to help them generate fee-producing assets - without being compensated for doing so?  

So when you are faced with a choice between encouraging your donors to decide between current use and endowed gifts, think about what problems they can solve for society, or for your organization, right now.

Otherwise, you might be a hedge fund salesperson - without a commission, of course.