Wealthy Colleges See Double-Digit Returns in FY2021
The wealthiest colleges and universities in the United States saw their endowment returns take off in fiscal 2021 after dismal average returns the year before.
Bowdoin College returned 57.4% in fiscal 2021, which ended June 30. Its endowment is now valued at $ 2.72 billion. The University of Minnesota returned 49.2% in the previous fiscal year, and the Brown University endowment gained more than 50%, The Wall Street Journal reported. The combined endowment of the University of Illinois system and the University of Illinois Foundation, the system’s non-profit fundraising organization, is now valued at $ 3.82 billion after a return of 34% in fiscal year 2021.
The driving force behind this peak in yields? Alternative investments, said Christopher Good, director of RBC Capital Markets, which works with higher education institutions.
Venture capital, a type of alternative investment, had a record year in fiscal 2021, according to the Newspaper. The average valuation of early stage US startups – which are typically funded by venture capital – increased by more than 50% in the first half of 2021, reaching $ 96 million.
As a result, wealthier colleges and universities have received a boost. Endowments valued at over $ 1 billion, of which there are relatively few, are more likely to invest in alternative asset classes like venture capital and private equity, recent data from the National Association of College and University Business Officers.
“Where you’re going to see higher performance is the people who have an endowment of over a billion,” Good said. “If you look at the breakdown of where they’re invested, they have a lot more alternative investments – private equity, venture capital. And these asset classes have performed very well. These classes outperformed the equity market.
Duke University, which has an endowment of $ 12.7 billion, posted a 56% return in fiscal 2021. Washington University in St. Louis posted even higher returns, reaching 65% and bringing its endowment to $ 15.3 billion. The University of California system, which holds $ 168 billion in investment, jumped 29% in fiscal 2021 – the biggest gain in a year in the system’s history.
Endowments without significant private equity or venture capital investments have always performed well in fiscal 2021. As the world emerged from the pandemic and the country began to reopen, the stock market performed well said Jessica Wood, credit analyst at rating agency S&P Global. .
“When the stock market is doing well, so do university endowments,” Wood wrote in an email. “Since fiscal 2021 spanning fall 2020 and spring 2021, we’ve seen economies open up and bounce back. “
Most endowments worth $ 500 million or less invested a large chunk of their money in domestic stocks and bonds in FY2020, according to NACUBO data. Part of the reason is that alternative investments have a high start-up point that most institutions cannot reach, according to Good.
“You have to have a large enough endowment to be able to invest in this type of asset class,” he said. “If you have an endowment of $ 50 million, you just don’t have enough money to be able to buy these investments, which is why you won’t see big gains from the alternatives in these small institutions.”
The first figures for August showed that in fiscal 2021, colleges and universities recorded the highest returns since 1986, with a median return of 27%. In comparison, institutions recorded a median return of 2.6% in fiscal 2020 and a median return of 6% in fiscal 2019.
Colleges and universities have associated the good news with information about how they typically spend their investment income. Duke, for example, said he uses the investment income for student financial aid, faculty salaries, facilities and research. Bowdoin spends its investment income on financial aid, faculty positions, teaching, museums, its library, and technology.
“While the performance of the past year has been nothing short of extraordinary, the long-term record of outstanding performance of our investment team and our investment committee is even more impressive,” said Clayton Rose, chairman of Bowdoin, in a statement. “I cannot stress enough the importance of this success for the generations of students and academics who will follow us and who will benefit from it in the future. “
Most institutions spend a set percentage of their endowment income each year. While an institution is unlikely to increase that rate after a good year, total revenue increases with the size of the endowment, Good said.
“It will definitely help over the next four years. I think you would expect to see the amount of investment income that colleges and universities need to increase, ”Good said. “But most colleges wouldn’t approach that by saying, ‘Well, next year we’re going to triple the amount of investment income we’re spending.’ It would be very unusual.
Most colleges haven’t seen a 50% or 60% return in FY2021. Alternative asset classes that are probably behind the Duke and University of Washington boom.
“When people hear that Duke has a huge outside gain in staffing, the industry as a whole tends to be characterized by the performance of the top performers,” Good said.
For colleges that posted strong returns in the past fiscal year, how long will the good news last?
“I don’t have a crystal ball, but looking back on several years of previous staffing returns, another year with these types of major returns is unlikely,” said Wood. “Most economists expect more moderate returns this year given the Delta variant and the associated uncertainties.”