Funding the Future of Endowments and Foundations

Executive Summary:

• The funding pressures that foundations and endowments face today make investment and mission alignment critical. 
• Private markets, particularly private equity investments, may offer long-term advantages that fulfill this need as public markets become more concentrated. 
• Impact investing strategies may be well-positioned to achieve these funding goals without added volatility, enabling full-portfolio mission alignment. 
• This paper explores how private markets and impact investing approaches may support endowments and foundations as they adapt to new structural realities. 

Endowments and foundations are increasingly confronting new pressures and fast-changing realities. Shifting tax structures, broad reductions in federal and institutional grant funding and the looming demographic cliff for university endowments specifically have all converged to threaten revenue streams and strain liquidity for these organizations. Many higher education institutions, especially those with smaller- or mid-sized endowments, face steep drops in college-bound students and international matriculation, putting billions of dollars at risk and leaving schools with unplanned revenue shortfalls. Enter impact investments. 

The reality is that further reliance on endowments as essential components of institutional stability compels higher annual spend rates and, by necessity, raises long-term investment return targets. At the same time, these institutions are continuously looking for ways to expand support for their missions and values across their operations.   

Private markets can meet the moment 

Historically, in many small- and mid-sized institutions, public markets have powered portfolio growth, but recent cycles have left equity gains concentrated in just a handful of mega-cap stocks. With valuations stretched and future returns uncertain, private equity (PE) stands out as a potentially compelling tool available to address these mounting pressures. Why is that? Endowment pools, with their perpetual investment horizons and limited immediate liquidity requirements, are potentially well-suited to harvest private markets’ long-term investment advantages. While larger institutions have long leveraged PE to allow capital to work harder and more efficiently, we are increasingly seeing small- and mid-sized institutions embrace the asset class to solve these new challenges.  

Prominent endowment leaders think so too. Co-Founder and Executive Director of the Crane Institute of Sustainability George Dyer, who leads the Intentional Endowments Network, recently highlighted the motivation and opportunity set: "Over the past decade, endowments have increasingly focused on the social and environmental impacts of their investments for a variety of reasons – to align with their mission, reduce portfolio risk and identify new opportunities. They recognize that the right investments can help address systemic risks related to issues such as climate change and extreme inequality that, over time, can erode portfolio value. And many endowments see particularly strong opportunities for risk-adjusted returns in the private markets, specifically in impact investments."  

Importantly, while the transition to private markets may seem daunting, partnering with managers who have significant private markets experience, ready-to-invest menus of products backed by long and robust track records (and, critically, the private markets data needed to make the best decisions) may help institutions successfully navigate the asset class. The more long-term and stable an institution’s funding pool, the greater its capacity to consider private equity strategies as part of a broader, diversified approach aimed at providing attractive risk-adjusted returns, even for resource-constrained investment teams.  

Yet, in today’s climate, foundations, university endowments and many faith-based investors are not just seeking financial results; they also face intensifying demands from stakeholders, including donors, students and faculty, beneficiaries and the wider community in which they are engaged to align investments with their institutional missions and core values. Rather than confining mission-driven priorities to grantmaking or siloed sleeves, a full-portfolio approach to aligned investing enables the endowment itself to drive meaningful change while simultaneously fulfilling its fiduciary duty.  

The case for impact investing 

While “impact investing” of the past was often viewed as involving high-risk venture investments, frequently made in emerging markets, the landscape has shifted dramatically over the past 10 years. The menu of institutional-quality impact offerings focused on more mature businesses and regions has rapidly expanded. In fact, some of the most compelling business opportunities that exist today – the companies driving true innovation across sustainability, education, health, electrical grid resiliency and operational efficiency – are overwhelmingly private, especially those positioned for transformative growth. Growth-focused impact investments tend to use less leverage, prioritizing technology and smarter processes that make industries and communities more resilient. Recent performance data suggest that sustainable strategies may meet or surpass broader market benchmarks without additional volatility, helping illustrate that impact investing does not require sacrificing returns. 

Rolling Fund Performance
Sustainability Five-Year Rolling TWRs

Dispersion of Gross Deal IRRs
Realized Deals Only, Deal Vintages 2010-2020

As groups rethink their portfolios for the long haul, the case for combining PE and impact investing grows stronger each year. Perpetual capital pools may pursue a more integrated approach that considers both financial and societal objectives, and can help to further align their capital base with their missions and values. By collaborating with experienced partners, investors can explore ways to navigate structural market shifts, mitigate concentration risk in public markets and construct their portfolios to reflect evolving stakeholder priorities.

Shaping the future 

In these uncertain times, foundations and endowments are compelled to do more than safeguard assets as they seek to fund the future. While increasing allocations to private equity and impact strategies may be a useful investment tactic, it's also an opportunity to authentically align an organization's mission while pursuing attractive risk-adjusted returns driven by some of today’s most compelling opportunities. With a full-portfolio perspective and the support of experienced partners, foundations and endowments can aim to secure lasting financial legacies while catalyzing the ideas and solutions that will shape tomorrow’s world.