Who do we really work for?
And why it matters.
After graduate school, full of optimism and purpose, I accepted a job as a major gifts officer.
I imagined finding ways to redistribute the extraordinary wealth being created from the internet and finance booms. But my motivations were deeply personal: I wanted to raise money to fund scholarships so kids like me wouldn’t start their post-secondary lives digging out of a $30,000 hole. Because that’s a lot of jack to owe before you even have a job.
And I think I was successful as a fundraiser, but not in the way I’d imagined. Because over my career, despite working with donors on gifts totaling more than $100M, the average student loan burden grew at a rate beyond the rate of inflation (and college tuition rose in tandem) such that student debt now averages more than $54,000 for the average student graduating from a private college. All this despite endowment returns compounded at more than 7.5%/year and robust fundraising growth at nearly every college and university in America.
So what in the dang hell is going on?
I have a theory about this, and it starts with the multi-billion dollar capital campaign industry and its obsession with endowment size and growth.
Since 2000, there have been 65 $1B+ capital campaigns launched in the United States, and many more are in the planning phase. Still, despite these audacious ambitions on the fundraising side, spending the money we raise is grandma’s game, and most endowment spending policies remained at 5% or even less. In fact, I think my grandma spent more income on Lotto tickets as a percentage of her assets than my college spent on its students. My first employer, my alma mater Colby College, boasted about its 4% endowment spending policy as a way to boost the size of its endowment, while simultaneously admitting 10% of its students solely on their ability to pay full tuition (This latter practice has been called, “white affirmative action” - more on that practice in a future post), and having students like me sign promissory notes that wouldn’t get paid off until our 10th Reunion.
Anyhow, in the era of compounding asset increases and low payouts, asset bases at selective colleges and universities grew at astounding rates, and yet endowment payouts remained relatively low. And while that happened, something equally insidious was happening too: student lending increased at a rate equal to the rise in annual tuition.
So if students are still borrowing a ton of money, and Universities are raising a ton of money, where did it all go?
It went to the asset management industry.
Here’s a very crude example. If a fundraiser works with a donor on a $1M donation, and that donation goes into the University’s endowment, that college will receive about $50,000 in income once the fund reaches the $1M level. The money manager gets his 2%, so instantly he earns $20,000 for doing nothing.
But let’s say the endowment manager helps the fund double over 5 years to $2M. Wow, pretty good right? Well given the standard alt-asset 2% and 20% fee structure, the money manager will earn 2% per year on the corpus and 20% of the asset’s growth.
That means that while the University will have another $100,000 to spend each year, the money manager now earns $40,000/year in baseline fees, plus has taken 20% of returns. And with 20% returns, the money manager gets about $40,000/year in addiitonal fees.
So $100K to the college. $80K to the…money guy?
But this has to be a mistake right? Nope. In fact, over that 5-year period, if the initial $1M gift doubles, the college will have put a total of $450,000 towards student aid, educational programs, or some other designated charitable purpose, but the money manager will have earned almost the exact same total: $420,000.
Because that’s how these dang fees work.
So the next time your Board of Trustees tells you that you need to raise more money for the endowment, ask that person who he/she/they would prefer to support: Students, or money managers. The answer will lead you in surprising directions.