Topic: Market Outlook

Anne Duggan of TIFF Investment Management tells Chief Investment Officer that proposed changes to the foundation tax could have varied effects depending on asset size. While the impact on returns is minimal for most, Duggan notes that larger foundations may reconsider their investment strategies or turn to donor-advised funds to help manage the added tax burden.

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The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.

Yale’s Potential $6B Secondary Sale and its FY26 “Constrained” Budget – Could They Be Related?

News broke this week that Yale University is seeking a secondary sale of up to $6B of private equity interests from its $41.4B endowment.1

While this action is historic, it is part of a broader narrative about the challenges higher education faces and the strategies institutions employ to manage uncertain budgets. As noted in a previous article, in the face of lower revenue due to federal funding cuts or endowment taxes, these institutions must carefully balance supporting their mission while maintaining the endowment in perpetuity. Yale’s drafting of a “constrained” FY2026 budget in response to funding cuts highlights the reality that there is no easy, single answer to managing these uncertain times. Institutions must look at their budget as well as at the endowment to come up with a solution. TIFF anticipates that other schools may need to adjust their budgets, and Yale’s secondary sale is likely not the last.

TIFF reminds its clients that having a liquidity profile and Strategic Asset Allocation that meets an institution’s unique circumstances is key during periods of uncertainty. Misalignment between an institution’s endowment strategy and its overall goals often leads to actions such as this.

Why this sale is historic for Yale

Yale literally wrote the book on endowment model, with late Yale CIO legend David Swensen’s “Pioneering Portfolio Management” becoming the penultimate guide to utilizing alternatives in portfolio construction. Yale is one of the largest private equity investors in the world, with over $20B in private equity and venture capital, and an additional $5B in real assets2. This sale represents a significant transaction for Yale, potentially involving more than 20% of its private equity holdings and nearly 15% of its entire portfolio. Finally, this is reported to be Yale’s first time selling any of its private assets.3

Why could Yale be doing this?

Secondaries Investor notes Yale is attributing the sale to its portfolio management needs. TIFF estimates this move is aimed at adjusting asset allocations and potentially creating liquidity.

1. Asset allocation shifts: Yale’s 3-year performance is a modest 2.7%, which is 5.5% below its long-term target of 8.25% (spend rate target + inflation). Similar to many other large endowments with substantial private allocations, Yale has underperformed due to its significant private markets allocation. While Yale’s 10-year return remains above target at 9.5% due to those same private asset classes, recent underperformance may be pushing Yale to reconsider its asset allocation weights or the expected returns of existing investments. Yale explicitly stated it continues to believe in private equity: “We remain committed to private equity investment as a major part of our investment program and continue to make new commitments to funds.”4 Yale may believe the outlook is better for new capital deployed (in private equity or elsewhere) vs. the existing assets, despite the costs of transacting a secondary.

   Yale has shown its willingness to shift its target allocation year to year. The last time Yale shared its asset class targets in FY2020, privates were 55%, up from FY2019, with allocations shifting towards buyouts and venture capital and away from real assets.

   

2. Increase liquidity to provide optionality for Yale budget support: Yale may want to increase the liquidity in its portfolio to support potential budgetary needs, despite stating that this sale is for portfolio management purposes. If executed at $6B, this sale would increase liquidity dramatically. TIFF estimates Yale’s current level of illiquidity at c. 50%, which is the lowest level of privates in six years. Post-sale, illiquidity would decrease to an estimated 36%.

Yale Endowment Private Allocation Over Time

What it says about challenges higher ed face and how this impacts endowments

Despite the comment that this sale is for portfolio management needs and has been underway for months, recent federal policy proposals and actions could also be influencing the need to increase liquidity.

Yale is already planning for lower funding and will be drafting a “constrained” budget for FY2026. In a letter to the larger Yale community, the Yale administration noted the budget would include reductions in spending on faculty raises, faculty and staff hiring, campus construction, and general non-salary expenditures.5

Federal funding cuts: In FY24, Yale received $899 million from the federal government for academic research and training.6 While Yale has not yet received any letters from the Department of Education, its Ivy League peers Columbia, Harvard, and Cornell have, setting the likely stage that Yale is close behind.

Increased endowment tax: Yale relies heavily on its endowment, which was the single largest source of revenue at 34% in FY24.7 Yale is already subject to the existing 1.4% endowment tax. An increase to the endowment rate would decrease the dollar amount available to support the budget.

Other federal proposals that would impact funding: Harvard has been threatened with the loss of its tax-exempt status and ability to enroll foreign students, both which would tremendously impact revenue. Yale could potentially encounter similar challenges.

Conclusion: Yale – A Canary for More Budget Cuts & LP Secondary Sales?

Higher education is facing a multitude of challenges in a changing federal policy landscape, prompting institutions to adapt through budget and endowment adjustments. TIFF anticipates that other impacted higher education institutions may need to adjust their budgets to address these evolving financial pressures.

TIFF also believes Yale won’t be the last to clean up its endowment, shoring up liquidity and rightsizing asset allocation, through secondary sales. Following the Global Financial Crisis, we saw a large increase in LP secondary sales as many nonprofits were overallocated to private investments. We haven’t seen the same phenomenon post-COVID, as many institutions learned their lesson and better managed their portfolios to avoid significant overallocation. However, current federal policy pressures on budgets may force overallocated nonprofits to finally take action and enter the secondary market.

All this being said, TIFF reminds investors that Yale may not represent the average endowment. It is crucial for institutions to have a liquidity profile and Strategic Asset Allocation that meets their unique circumstances, especially during periods of uncertainty. Misalignment between an institution’s endowment strategy and its overall goals often leads to actions such as this. The average private higher education institution has 41% in illiquids, with smaller endowments having even less (average 17%)8, far below Yale’s 50-60%. These institutions generally have more liquidity to navigate changes without restoring drastic actions like Yale’s. TIFF emphasizes the importance of each institution adhering to its own Strategic Asset Allocation, as overallocation is a primary reason for secondary sales.

The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.

Introduction

The recent actions taken by the Trump Administration against Harvard University have sent shockwaves through the higher education community. With investigations into Antisemitic discrimination, demands for sweeping reforms, and threats to revoke tax-exempt status, the federal government is challenging the autonomy and operational frameworks of one of the nation’s most prestigious institutions. This brief article explores the unfolding situation, the positions of both Harvard and the federal government, and the broader implications for non-profit universities across the United States.

What is happening with Harvard and the Trump Administration

• The Department of Education (DOE) sent 60 universities notice that they were under investigation for Antisemitic discrimination and harassment.1 It was noted federal funding would be revoked for those that don’t accept required steps to protect Jewish students.2 Columbia University was the first target, which currently negotiating with the federal government after $400M of funding was frozen.3
• The Department of Education sent Harvard a list of refined requirements on April 11, which included eliminating diversity and inclusion programs and enacting merit-based hiring and admission reforms, banning masks on campus, and reducing power of faculty and administrators.4
• Harvard responded on April 14 that it will not comply with the request, arguing that the changes requested by the government exceed its lawful authority and infringe on both the University’s independence and its constitutional rights.5 6
• The Federal government has retaliated by blocking $2.2B in funding slated for Harvard.
• The IRS investigation into revoking Harvard’s tax-exempt status7 and the Department of Homeland Security review of Harvard’s ability to enroll foreign students were announced this week.8
• Non-profits face significant risks including a potential larger role of government at U.S. universities, potential loss of tax-exempt status, the financial impacts of losing Federal funding or revenue tied to foreign student enrollment, and becoming a tax-paying entities.

The Two Sides

What is at Stake

The outcome, if in the Federal government’s favor, will change the rules of engagement for U.S. education and have long lasting impacts on U.S. higher education on the involvement and control.

Precedent for Loss of Tax-Exempt Status: This would set a precedent for U.S. higher education losing tax-exempt status if they do not align with views of being apolitical and for the public good. One would imagine those definitions are qualitative at times and any potential loss of status will be left to the courts.

Loss of Tax-Exempt Status Financial Impact: Harvard would become a for-profit entity, meaning the entire institution would now be subject to taxation. This would be broader taxation than its current endowment tax, which is restricted to endowment net investment income. Corporate taxes are charged at the entity level. In addition, Harvard would now be subject to state and local taxes.

Bloomberg estimated Harvard’s property taxes alone at $465M, with assessed property at $4 billion in Boston and $8.7 billion in Cambridge.9

Where are those taxes coming from?

• Federal Corporate Rate: 21% on corporate profit
• State Corporate Rate (MA): 8% on corporate profit
• Local (Boston, Cambridge): As one of the largest land-owners in the area, Harvard would now be subject to property tax in Cambridge and Allston. For example, Cambridge charges corporations $11.52 per $1,000 of assessed property value.10

Other impacts would be donations are no longer tax-deductible, likely leading to a decline in funding through donations.

All of these would require a structural change in how Harvard is structured and thinks about its financials.

Conclusion

The conflict between Harvard and the Trump Administration highlights the risks nonprofit universities face from increased government influence. If the government wins, it could set a precedent affecting tax-exempt status, funding, and institutional independence. Nonprofits should stay informed and be prepared for changes in regulations and resulting impact on finances. The outcome could impact not only Harvard but also the broader higher education sector, requiring a reassessment of the balance between educational autonomy and government oversight.

The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.

The NACUBO-Commonfund Study of Endowments FY24 average 1-year performance for all institutions is 11.2%, bringing the 10-year average return to 6.8%.

1. For the second year in a row, the biggest performance driver was the allocation to private equity and venture vs. public equities. Private equity returned 5.8%, and venture returned 1.7%, while the S&P 500 returned 24.6%, a spread of 19-23%.
2. High allocations to public equities, and in particular the “Magnificent 7” outperformed. Portfolios with more S&P 500-like investments (passive or US Large Cap active managers with low tracking error). Many active managers underperformed as they were underweight the Mag 7.
3. Real estate exposure continued to hurt larger endowments, which tend to have larger allocations. Private real estate returned -1.3%, as the industry continues to reconcile with higher interest rates and the reduction in office demand post-Covid.
4. Hedge funds continued to outperform fixed income and bonds. Diversifying Strategies such as hedge funds (+8.7%) continued to outperform both traditional fixed income as well as the broader investment grade bonds.
5. For the second year in a row, smaller endowments outperformed larger endowments, on average. Because private market allocation (private equity, venture, and real estate) tends to be positively correlated with endowment size, larger endowments with larger private allocations underperformed smaller endowments with lower private allocations and higher public allocations. The largest endowments returned 9.1%, while the smallest endowments returned 13.0%.

FY24 Asset Class Returns

Past performance is no guarantee of future results, and the opinions presented cannot be viewed as an indicator of future performance. There is no guarantee that any particular asset allocation or mix of strategies will meet your investment objectives.

These materials are provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.