Now that we know what a nonprofit endowment is, it’s important to recognize that establishing an endowment fund is a significant goal for any nonprofit organization. A successfully managed endowment often leads to long-term financial health and mission fulfillment. An endowment acts as a financial safety net, enabling nonprofits to weather economic fluctuations and invest in their future. However, that doesn’t mean that every nonprofit should automatically endeavor to establish one. To set this cornerstone effectively, it’s crucial to ask the right questions, ensuring the endowment aligns with the organization’s goals and more importantly–its capabilities.
Endowments are not the only way to establish nonprofit financial resilience. To jump to Fairlight’s Resilience X-Ray series, click here.
Endowments are typically associated with universities, however nonprofits with only a fraction of those institutions’ budgets have endowments. Research from MIT and the University of Illinois Urbana-Champaign of over 310,000 public nonprofit organizations in 2017, identified almost 35,000 that had endowment funds totaling $800 billion in assets under management. That comes to just slightly over 11% or 1 in 9 nonprofits. The average nonprofit with an endowment keeps about one-third of all assets in endowment funds.
The following table breaks down the percentage of nonprofits that have endowments, their average value and percentage endowment size of total organizational assets.
| Nonprofit Sector | % Orgs with Endowment | Average Size Endowment ($m) | % Endowment of All Assets |
| Arts | 22.60% | 10.1 | 33.90% |
| Higher Education | 69.60% | 252.9 | 26.40% |
| Education | 20.00% | 21 | 37.10% |
| Hospitals | 32.90% | 37.7 | 6.50% |
| Environment | 18.60% | 5.3 | 27.40% |
| Health | 16.30% | 6.8 | 26.20% |
| Human Services | 11.90% | 3.5 | 23.90% |
| International | 11.00% | 20.3 | 31.70% |
| Mutual Benefit | 10.60% | 5.8 | 47.10% |
| Public & Societal Benefit | 15.60% | 13.4 | 37.50% |
| Religion | 6.90% | 3.3 | 34.20% |
| Other | 3.80% | 16.5 | 36.90% |
| All | 11.20% | 20.3 | 30.40% |
The above table demonstrates that some nonprofits are more likely to leverage an endowment for long-term financial resilience than other types of nonprofits. For example, 69.6% of Higher Education nonprofits have an endowment averaging almost $253m. On the other hand, only 6.9% of religious organizations have endowments averaging $3.3m in assets. The MIT/University of Illinois research also found that nonprofits that have endowments also grow assets and revenues more quickly than similar nonprofits that don’t have an endowment. This discovery indicates the importance of endowments in nurturing a nonprofit’s charitable services.
If an endowment is a long-term goal for a nonprofit, the organization should conduct a feasibility study that establishes the endowment’s purpose, understands the organization’s financial health and sets a fundraising plan to seed the endowment.
Strategic Planning Before Launching Endowment
Endowment Purpose
The first critical question is, “What program do you want to focus on?” This inquiry helps clarify the endowment’s purpose. The answer will allow the nonprofit to align its fundraising and financial planning with its core mission and strategic goals. A well-defined focus ensures that the endowment has a targeted impact, supporting specific initiatives without diluting resources across too many areas. For nonprofits with multiple programs, this question helps prioritize which ones will benefit most from endowment funding, leading to more strategic asset allocation and use.
What might constitute an endowment with a mismatched mission? A nonprofit might decide not to launch an endowment restricted to building out a small, ancillary program that would siphon time and financial resources away from the nonprofit’s core programs. The best endowments are focused primarily on core, strategic plans that move the organization forward and increase impact.
Fundraising Plan
How will the nonprofit seed the endowment? To answer this question, the nonprofit must determine the strength of its current donor base and identify potential donors to seed the endowment. An endowment may be an effective way to attract donors who prefer to contribute in a way that has lasting impact. In addition, does the nonprofit have a donor base that would allow for continuous contributions vital for the endowment’s growth and the nonprofit’s financial stability? This steady income stream supports the organization’s activities and plays a crucial role in its long-term sustainability.
Financial Health
An assessment of budgeting and financial forecasting comes next. How much does the organization anticipate spending from the endowment on its programs? Accurate budgeting ensures that the endowment can support the intended programs without compromising its principal, allowing for sustainable growth and financial stability.
Let’s say the budgeting and financials line up and look good–now who’s going to manage the endowment? This decision establishes accountability and effective fund management. The designated individual or team should fully understand the endowment’s objectives, restrictions, and financial nuances to make informed decisions and provide accurate reporting to stakeholders. This level of internal oversight is essential for maintaining the trust of donors, board members, and the community.
Fairlight has seen nonprofits use endowments in a variety of ways that contribute to the organization’s financial resilience.
- An education nonprofit received a $1 million contribution into the organization’s endowment shortly after the board established a formal board-advised fund and seeded it with its own assets.
- A health care advocacy organization used a $9 million unrestricted gift to not only build capacity but to establish an endowment fund to grant back to nonprofit partners.
- A nonprofit involved providing services for seniors established an endowment of $1 million with excess cash to smooth income.
Key Advantages of Endowments
As controversial as they might sound, the right endowment for the right organization can go extremely far. Any endowment that an organization accepts should be strategic and within its capacity. It might seem as though rejecting a less-than-satisfactory endowment is like looking a gift horse in the mouth, but it’s actually an indicator that your organization is reliable and has specific, achievable goals. Gaining the right endowment at the right time could help fund your organization for years to come without relying on individual donors’ unpredictability.
Not only does an endowment have the potential to fund important projects and operating costs, but it also has the ability to attract additional funds and engage donors. It may seem somewhat counterintuitive to think that a large endowment would attract additional endowment funds, but they serve as a testament to someone’s belief in the organization and offer it a lasting legacy. This vote of confidence can encourage other donors to contribute, creating a ripple effect that strengthens the organization’s financial future.
Of course, the main benefit of an endowment is the annual income it can provide. Depending on market performance, the endowment investment’s annual growth could potentially reach 5-7%, which can cover seasonal dips in cash flow from grants and donations. Think of it as a perpetual retirement account. It can be held in reserves or spent when you need it. Having some form of reserve is like a safety net that can buy time between unexpected lulls in donations and give organizations the ability to stay flexible during changing times.
Potential Reservations
As a result, the topic of endowments can sometimes generate controversy. For example, some critics argue that multi-billion dollar endowments, particularly those managed by elite, private universities, could be better utilized in other ways.
Unfortunately, sometimes endowments are overly restrictive. For example, a small nonprofit that is presented with the opportunity for a $2 million endowment gift may jump to accept it immediately. $2 million can do a lot of good; however, the terms of the endowment can dictate how that money is spent and doesn’t always cover the organization’s immediate needs. On the other hand, in some cases, the donors or nonprofit leaders lose sight of the organization’s mission by creating an endowment that puts the funds to use immediately rather than being invested long-term.
One additional potential challenge for endowments is their dependence on investment returns. Donors give money to an endowment knowing the corpus (main body) of the endowment will stay invested while the gains can be withdrawn yearly. This money has to be used carefully to avoid compliance issues or an investigation from the State Attorney General.
The right endowment can bring an organization long-term sustainability and growth, allowing the pursuit of more ambitious projects–and endowments. With proper planning and strategic implementation, an endowment can become a valuable asset that makes a difference for years to come. Asking foundational questions lays the groundwork for a successful endowment, ensuring it serves the nonprofit’s mission and financial needs effectively. An endowment is not just about having funds in reserve; it’s about creating a legacy and a stable financial future for the organization.
In the next chapter, we’ll explore how a nonprofit can spend endowment funds.
Other Resources
Endowments | National Council of Nonprofits
1 Lo, A. W., Matveyev, E., Zeume, S., MIT Sloan, NBER, & UIUC. (2021). The risk, reward, and asset allocation of nonprofit endowment funds (pp. 1–48). The Risk, Reward, and Asset Allocation of Nonprofit Endowment Funds by Andrew W. Lo, Egor Matveyev, Stefan Zeume :: SSRN
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