jaa -endowment fundraising july 2010 (jpd1542)

Responding to the scars and

the scares of the recession?

Bentz Whaley Flessner 1

Today’s discussion is about the

future of endowment fundraising:

What happened 10/08 to 3/09 and why?

What is its impact on endowment fundraising?

How do we make the case for endowment?

This is an opportunity to think together about where we

go from here…

Ag

en

da


1990 the Dow sat at 2,700.

On October 10, 2007 the Dow peaked at 14,000

This represents

an increase of

more than

five-fold.

There were

problems, like

the rupture of

the Tech

Bubble.

But optimism

abounded.

The Decades of 1990 through 2008

were breathtaking!


These were also times of unprecedented

growth in philanthropy! Giving TRIPLED!

$ in billions

Giving USA 2010

$123 billion

$315 billion

2008 total adjusted from

5.7% loss to 1.5% gain.


We often called this the ―golden age‖ of

philanthropy.

Collegiate enrollments grew 36%

13.1m in 1990 to 17.9m in 2008.

Collegiate budgets grew 276%

$143b in 1990 to $394b in 2008.

The pressures are mounting:

- Tuition is outpacing inflation.

- Discounting (especially unfunded) is

rising at most private institutions.

But endowment growth was

phenomenal. Intergenerational

equity was “no worry”…

0

5

10

15

20

F…

F…

F…

F…

F…

F…

F…

F…

F…

F…

F…

F…

F…

F…

F…

F…

F…

F…

F…

Enrollment

$0

$100

$200

$300

$400

$500

FY

90

FY

91

FY

92

FY

93

FY

94

FY

95

FY

96

FY

97

FY

98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

Expenditures

Data from CAE – VSE Data Miner Reports


Several elements collaborated to build the endowment case:

The convertion from defined-benefit to defined-contribution retirement

accounts got ―everyone‖ into the stock market.

The ―high tech‖ economy created enormous, sudden wealth and with it

extraordinary philanthropy.

Planned giving technology, marketing, consulting, specialization—growth of

―vehicles‖ created demand.

―Comprehensive‖ campaigns created new emphasis and new outlets for

―leveraging‖ higher giving.

Campaign reporting and ―size competition‖ created new approaches to

deferred counting.

The national rankings games made endowment holdings an enrollment

market vector and called it to much wider attention.

The elements of the endowment ―revolution…‖


By 2008 the endowment thing seemed like a

guarantee. Everything hinged on endowment.

Statistics illustrating how much of endowment growth was due to new gifts

are a little uncertain . During this period average annual endowment giving quadrupled from $2 billion

per year to $8 billion per year.

By 2008 endowments received 26¢ of every gift dollar to higher education.

BUT, the real static in the system is accounting evolution. Do we count deferred? How about revocable? What discount factor do we use? When is an

estate pledge a pledge? Etc.?.

In Billions $

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08

Endowment Gifts

In Billions

Data from CAE – VSE Data Miner Reports

But, market growth was a much more important driver than giving.


Institution FY1990 Value FY2008

Value

Increase

Harvard $4.6 Billion $36.5 Billion 790%

Yale $2.6 Billion $22.8 Billion 870%

Stanford $2.5 Billion $17.2 Billion 688%

Princeton $2.5 Billion $16.3 Billion 652%

University of

Texas

$3.7 Billion $16.1 Billion 435%

MIT $1.4 Billion $10.1 Billion 721%

University of

Michigan

$0.4 Billion $7.3 Billion 1,825%

Columbia $1.4 Billion $7.3 Billion 521%

Northwestern $0.9 Billion $7.2 Billion 800%

University of Penn $0.8 Billion $6.2 Billion 775%

1990–2008:

the decades of ―BIG‖ endowment...

The big endowments

became enormous.

Their growth

outpaced the general

markets.

There was

fundraising —billion-

dollar campaigns

proliferated…

…but the real growth

from management,

models, expertise,

was the real key.


The ―Endowment Model‖ trap was set …

Several elements conspired change the case:

Portfolio models drove the idea of diversification to the level of enormous complication.(The growth of ―alternative investments‖ from 28% to 51% is indicative.)

The competition to maximize return inflates the level of acceptable risk.(Calibrating new risk/return ratios becomes more and more esoteric.)

Maximal return thinking can foster greater willingness to accept illiquidity – especially if it seems ―calculated.‖(―Intergenerational equity,‖ etc., helped to re-think the timelines.)

Management complexity encouraged more reliance on external managers, consultants, and different professional skills from staff.(Proximity to mission, engagement, ―ownership-distance‖ creates different relation to risk/reward.)


During golden years asset allocations

changed…

According to NACUBO the asset allocations changed radically during the decade:

Alternative Investments took the place of the traditional equity. Much of the alternatives were not only illiquid but could not be liquidated.

Liquidity and Fixed Income had declined.

The only source of cash was to sell into huge losses the traditional equities markets.

Type of Asset Equities Fixed

Income

Liquidity

and Cash

Alternative

Strategies

FY2003 Average Allocation 49% 21% 2% 28%

FY2009 Average Allocation 32% 13% 4% 51%

Percent of Change: -17% -8% +2% +23%

Data from Jeffrey Larson, Larson/Kelleher Capital , former Harvard Endowment Mgr., Principle of Sowood Capital


The Great Recession

The deepest, most sudden, most comprehensive

financial crisis since the Great Depression struck.

Caught us ALL seemingly unaware.


What really happened in 2008?

The Dow plunged from 14,000 to 6,500 in a matter of months

(a 54% loss).

Financial markets collapsed led by housing.

The national presidential campaigns stopped (almost).

The credit markets froze.

Lehman Brothers went bankrupt and failed. AIG and other teetered

on the edge.

GM and Chrysler teetered at bankruptcy.

Global liquidity markets evaporated.


Deregulation had:

Taken down the barriers to investment banks entering the demand deposit market.

Acceptable leverage rates in demand deposit rose quickly from 1:6 to 1:33 and going higher.

Storefront mortgage brokers, sub-prime mortgages, collateralization—mortgage makers no longer retained any interest in the mortgages they made.

Credit default swaps (insurance against losses) mitigated ―acceptable‖ risk formulas.

The real estate market suddenly locked up:

The mortgage industry and real estate values were overheated.

The derivatives market had taken over mortgages.

Real estate values fell, construction faulted, home owners went underwater.

Investment banks holding securitize mortgages went into a tail-spin.

They and others holding credit default swaps got pulled into the vacuum.

The financial markets ALL collapsed:

Credit default swaps turned on themselves (the insurance against large losses began to cause large losses—see AIG, Lehman Brothers, etc.).

Major investment banks built on swaps and other derivatives went illiquid and took down all liquidity.

Major endowments holding ―alternatives‖ were illiquid and unable to liquidate.

All financial markets froze both in the US and across the globe.

What happened in 2008 had its origins in the

1980s…


Institution FY1990

Value

FY2008

Value

Increase FY2009

Value

Decline

Harvard $4.6 Billion $36.5 Billion 790% $25.6 Billion -29.8%

Yale $2.6 Billion $22.8 Billion 870% $16.3 Billion -28.6%

Stanford $2.5 Billion $17.2 Billion 688% $12.6 Billion -26.7%

Princeton $2.5 Billion $16.3 Billion 652% $12.6 Billion -22.8%

University of Texas $3.7 Billion $16.1 Billion 435% $12.1 Billion -24.8%

MIT $1.4 Billion $10.1 Billion 721% $7.9 Billion -20.7%

University of

Michigan

$0.4 Billion $7.3 Billion 1,825% $6.0 Billion -20.7%

Columbia $1.4 Billion $7.3 Billion 521% $5.8 Billion -19.8%

Northwestern $0.9 Billion $7.2 Billion 800% $5.4 Billion -24.8%

University of Penn $0.8 Billion $6.2 Billion 775% $5.1 Billion -16.8%

The ―BIG‖ endowments … tanked – in weeks!


The endowment disasters were exacerbated

by illiquidity; the need to sell into the bear…

Suddenly there was no cash…

- Endowments were holding almost no cash to begin with.

- Many were leveraged and investing on margins that others were calling.

More than half of assets (51%) were held in ―non-traditional‖ assets:

- Hedge funds, Real Estate Trusts, Futures Contracts, etc.

Cash is only available by selling traditional assets–at the worst possible time into horrible markets.

- The tendency was to sell the assets that were most worthy of retention

because they were the only ones for which there was a market.

- The best markets were in assets least affected and most likely to appreciate in

the up-turn.

Hence, the losses were worse than they might have been and the

prognosis for recovery was also worse than it might have been…


The FY2009 was really more than a market

collapse, it became a huge cash-flow problem.


New York Times 1/27/09 Headline:


Wall Street Journal 1/27/09

Headline: ―College Endowments Plunge‖

NACUBO FY09 Report

listed that in top 100

endowments:

19 reported losses of more

than 25%.

52 reported losses between

20% and 25%.

Only 28 reported losses of

less than 20%

Only 1 report a single

digit loss.

The average loss was

22.5% for the fiscal year.


Lately, the big endowments have gone from

being victims to being co-conspirators…


The Perfect Storm: public scrutiny of college

endowments gains strength…

Attention to endowment

declines exacerbated

another old issue:

Why do colleges have

these big ―savings

accounts?‖

Higher Ed inflation is

nearly double general

inflation.

The middle class

squeeze is reflected in

the FAFSA rules.

Is intergenerational

equity really equitable?


Where do we go from here?


Campaigns are coming back…

and, they‘re focusing on endowment.

What do the campaigns under

way or under consideration at

your institutions look like?


Point one:

Philanthropy is extraordinarily resilient!

$ in billions

Giving was thought

to have dropped by

5.7% in 2008; the

second decline in

50 years (since

1960).

Final report for

2009 just out

Showed that giving

was NOT down in

2008 as expected.

Instead it was UP

1.5%

But it showed that

2009 giving was off

by 3.2%.

Corrected from 5.7% decline

to a 1.5% increase.

Giving USA 2010


23.1%

Campaigns are (almost) all about major gifts.

GOAL: 300,000,000$

Prospects # Gifts Size Totals Cumulative

3 1 50,000,000$ 50,000,000$ 50,000,000$

6 2 25,000,000$ 50,000,000$ 100,000,000$

21 7 10,000,000$ 70,000,000$ 170,000,000$

24 8 5,000,000$ 40,000,000$ 210,000,000$

48 16 2,000,000$ 32,000,000$ 242,000,000$

60 20 1,000,000$ 20,000,000$ 262,000,000$

90 30 500,000$ 15,000,000$ 277,000,000$

120 40 250,000$ 10,000,000$ 287,000,000$

180 60 100,000$ 6,000,000$ 293,000,000$

210 70 50,000$ 3,500,000$ 296,500,000$

270 90 25,000$ 2,250,000$ 298,750,000$

375 125 10,000$ 1,250,000$ 300,000,000$

1407 469 300,000,000$

Wealth (and

income) in America

are distributed very

unevenly.

Campaign giving

must also be

spread unevenly –

more unevenly

than in the past.

Wealthiest 1%

Next 9%

Bottom 90%

Ownership of

Publicly Traded

Stock. Data from: Edward N. Wolff

New York University 2004

33.5%

43.4%


The real campaigning questions are about our

wealthy Alumni.

In 1982 Dan Ludwig topped the Forbes

400 list at $2 billion.

- There were 13 American billionaires

In 2006 all Forbes 400 were

billionaires.

In 2006 there were 11 million

millionaires in the US.

- 10% had inherited fortunes

- 10% ―earned‖ it in films, etc.

- 80% ―built‖ it in business.

In 2004 the richest 1% earned $1.35

trillion in income. (What ASSETS are

needed to earn that much?)

The relevant issues in our campaigns

are about entrepreneurs.


Entrepreneurs and Endowments

1. ―You folks simply don‘t know how to make money work. I can make a much better return on the capital if I keep it in my portfolio.‖

2. ―Endowment is to an institution what tenure is to a professor—license not to work.‖

3. ―The stability you talk about is just insulation from the real world. It disconnects you from the market.—it‘s not healthy—it‘s like inherited wealth.‖


Endowment legends of yesteryear:

Endowments came from bequests.

Endowments were largely sourced from real estate.

Only the very wealthy ―gambled‖ with publicly

traded stock.

Acceptable investments were treasury bills and

real estate.

Endowment gifts frequently came with more investment

restrictions than spending restrictions.

The traditional case for endowment had

evolved slowly…


Endowments were the essence of “stability.”

They grew slowly, if at all. Income rarely fluctuated. - (Little preoccupation with inflation. Perpetuity was a very complex thought.)

Asset value was not necessarily a factor in income.- (Fixed income vehicles – principally Government Bonds – were very common.)

In the ‗50s the Ford Foundation and others began making

endowment grants as encouragement.

But, the ‗60s and the baby boom pushed colleges back

into bricks and mortar expansion.

In the ‗80s Foundations redoubled by funding planned

giving consulting through grants…

The traditional case for endowment had

evolved slowly…the legends.


The new perpetual bull markets began to compete with

the kind of growth that the entrepreneur could produce –

they took us more seriously.

We became much more savvy in our own market-speak.

Our management practices adapted to the new realities.

Our accounting policies began count differently making

―deferred‖ gifts more palatable to those wishing to

leverage their giving.

Endowments really did look like the ―game changer‖ we

talked about it our campaign marketing.

The last two decades changed

endowment fundraising (we hit the easy button):


We can no longer inspire prospects with the idea that our endowment

should be as large as the competition‘s—the rankings discussion has

largely gone mute.

We can no longer rely on simply telling prospects that endowment is

key to ―stability.‖

The new pressure for increased spending from endowment conjures

the old misunderstanding that its simply a ―savings account.‖

We must push the discussion back from dollars to real values

– it‘s not about the endowment, but what the endowment will fund…

Endowments, like campaigns, are not about what the community can do

for the institution, but about what the institution does for the community.

The case for endowment must evolve:


1. We have to understand our policies and practices to speak coherently. How have your policies changed?

- Who sets the policies about investment strategy? What are they?

- Who sets the policies about payout? What are they?

2. We need to be conversant with our own recent endowment history. What happened at your institution?

- How did your endowment fare in the recent market?

- What happened to the programs that were depending on endowments?

- What messages did you carry to the donors who had a stake in your funds?

3. We must formulate tight talking points about:

- The fiscal conservatism that is appropriate to our fiduciary responsibility.

- Intergenerational equity – an aspect of perpetuity (forever, but also now).

- We need a new conversation about the role of endowment at our institutions?

Building the case will require us to

be better informed.


Endowments frequently look more like budget relief than

strategic ventures – because of how we use them.

Endowed chairs, about ―attracting and retaining,‖ have

frequently been disconnected from strategy.

We‘ve used them to reward existing faculty and real outcomes are no

where to be seen.

Endowed scholarships are, unfortunately, ―scalable.‖

What is the right number for a scholarship?

―Scholarships‖ now often raise the bigger issue: cost containment.

Is your new scholarship really ―new,‖ or does it simply fund the discount?

Help your prospect think about how the fund ripples through the institution.

Idiosyncrasies and conundrums:

jaa -endowment fundraising july 2010 (jpd1542)

Education

endowment growth

endowment case

endowment holdings

endowment thing

decades of big endowment

market growth

real growth

endowment model trap