If you’re familiar with the institutional LP space, you’ve probably come across the common grouping of endowments (the Es) and foundations (the Fs). While they exhibit many similarities, they shouldn’t be grouped together.
Before you come at me in the comments, let me explain. In David Swensen’s Pioneering Portfolio Management, he shares the tale of two Es and an F: Harvard, Yale, and The Carnegie Institution of Washington (aka Carnegie Science). By 1911, Carnegie’s balance was $22 million, Harvard’s was $23 million, and Yale’s was $12 million. Fast forward to today, and the latter two are at $53 billion and $41 billion, respectively, while Carnegie Science is at $980 million. I would caution against hastily concluding that Carnegie Science hasn't been managed well. Far from it. But there are important differences that allow university endowments to grow spectacularly while foundations grow at a more muted pace.
1. Gifts: Big Alumni, Big Bucks
Gift sizes vary significantly between foundations and university endowments. Sticking to our three main characters, last year Harvard received over $1 billion and Yale over $400 million, while Carnegie received only $7.5 million. (I have learned from working with institutional LPs that single-digit millions should be preceded by “only.”) While the absolute amount of gifts varies annually, we can reasonably assume the order of magnitude remains the same. Moreover, some gifts have restrictions attached, but I’ve tried my best to construct an apples-to-apples comparison. Lastly, it’s worth noting that these funds didn’t all go to the endowments (i.e., Yale’s endowment grew by $231 million from gifts, not the full $400 million).
2. Endowment Income as a Percentage of Operating Revenue
Endowments contribute a sizable amount to their university’s operating budget, but as a percentage of total revenue, that contribution pales in comparison to foundations. In the last fiscal year, investment income made up 64% of total revenues for Carnegie, while Yale and Harvard’s endowments contributed 34% and 37%, respectively.
Great analysis, Ali, but what are you getting at? For starters, gifts are a powerful tailwind, especially when they’re in the form of nine- or ten-digit bank wires. They help endowments weather tough patches and grow the universe of programs the university can support. Foundations aren’t lucky enough to have alumni who go on to lead prosperous lives and give back to their alma maters.
As for the dependence piece, while university endowments contribute significantly, investment income is effectively the only source of revenue for foundations once you strip out government and research grants. Consequently, investors at these foundations must make safer bets than their counterparts at university endowments and ensure their portfolios are more liquid.
So, I hope I’ve convinced you that these two entities shouldn’t be grouped together. When we do so, we implicitly suggest their performances are comparable, when they’re clearly not. If this has done nothing but vex you, let’s schedule a demo so I can assuage your anger with some nifty piece of software.