The Endowment Wears No Clothes – September 2021


We are pleased to read about more and more foundations declaring their intention to invest increasing portions of their endowments in alignment with their missions. The vast majority however do nothing of the sort. In 2020, only 16% of “small” foundations (<100m) like SK2 reported engaging in mission-related investing or impact investing. The biggest reason given for not considering impact investment was the belief that this approach will not earn the same level of returns.

Some progressive and outspoken foundations with 100% mission-aligned endowments, like Nathan Cummings Foundation, try to persuade peers to join them by arguing that market rate returns are in fact totally possible with a 100% impact investment strategy (which should demand greater scrutiny of how they define impact).

Closer to SK2’s orientation, Diane Isenberg of Ceniarth Family Office said, “If your objective is growing richer, an impact-first strategy will be unappealing…if however, maximizing impact while preserving your money seems a worthy goal, this is very much a viable strategy.”

Why the preoccupation with market rate returns? The answer may reveal a dirty little secret about many foundations—namely, that they are not actually serving as society’s designated risk capital, fearlessly taking on issues inadequately addressed by both free market forces and governments. Rather, they are tax-sheltered wealth preservation vehicles operating more like investment firms with well-intentioned, but comparatively small CSR programs on the side. The unspoken purpose of foundation endowments in many cases appears to be prioritizing growth of endowment assets to pass on inherited privilege and tax-advantaged family wealth to future generations.

Ford Foundation provides an interesting recent example. One of the largest and most respected US foundations, Ford has refocused its efforts on combating entrenched economic and racial inequalities under the visionary leadership of E.D. Darren Walker. Ford was celebrated for increasing its grant payout by 1 billion in response to Covid-19, and rightly so. Many more people were helped as a result.

But a deeper look reveals just how sacrosanct preserving endowment wealth is. Ford sits on an estimated $10 billion endowment, with $1 billion of that allocated to mission-aligned impact investment. What is the other $9 billion doing? We don’t know, but have to assume most of it is placed in conventional market-rate investments.

Rather than shrink its endowment value temporarily to come up with the extra billion for the boost in Covid-related grantmaking, Ford issued bonds to finance that increased grantmaking. And paying off those bonds will require conventional market-rate investments. Some praise Ford’s strategy as innovative, and in a financial sense perhaps it is, but it also reveals the dogma most foundations still adhere to when it comes to placing endowment preservation & asset growth above impact.

At the end of the day, actually reducing inequality will mean those with resources giving up something to empower those without them. For foundations, that means much higher grant payouts, concessionary terms for impact investments, more forms of patient, capital, and gasp! perhaps even gradual decapitalization of endowments.

For the record, we don’t believe foundations should exist forever. SK2 Fund will spend down the entirety of our endowment by 2045 to maximize our impact in reducing inequality and increasing sustainability. That doesn’t make our approach superior, but it does help us sleep better knowing we are in fact giving it everything we’ve got during our lifetime.