Endowment Fund 101 – 5 things to consider before establishing your endowment fund
An Endowment Fund is a certain amount of funds that are invested to generate income that can sustain the current and future operational budget, for the purpose it is created for. The principal remains invested, only the profits generated can be used for spending.
Endowment funds are commonly established by educational institutions and NGOs to ensure long-term financial sustainability of the organization. For instance, an NGO can set up an Endowment Fund to solicit donations to be used only for educational purposes. The donations received (say US$ 1 million) are invested in different asset classes (such as bonds, fixed deposits, securities, etc.) to generate income or profit. The income or profit generated is used to meet the annual income needs of the NGO, while the donations raised remain invested. The largest academic endowment in the world is the Harvard University Endowment valued at US$ 40.9 bn as of 2019.
Source: Falak Research
Here are some things you should consider before creating an endowment fund for your organization:
#1: Establish a purpose for the fund
Before setting up an Endowment Fund it is imperative to establish a purpose for the fund. Donors want to know what they are donating towards and the use of funds. Having a purpose can also help create an emotional connect with donors. For instance, if an NGO is engaged in multiple social initiatives, they can set up an endowment fund for educational purpose – the money raised will only be used to finance its educational projects.
The purpose can differ from organization to organization but should be linked closely to the organization’s mission, vision and objectives.
#2: Determine the investment goals and objectives
Once you have defined the purpose of the endowment fund, it is important to establish the investment goals and objectives of the fund. To put it simply, you should answer the following questions:
1. Will the endowment fund address our short-term or long-term financial needs?
2. How much money do we need the endowment fund to generate to meet our annual operating costs and expenses?
3. Do we have any significant capital expenditure in the foreseeable future where we may have to withdraw principal?
4. How much risk are we willing to take on the investment?
Once you answer the above questions, you will be able to create an investment policy statement, identify suitable asset classes (such as term deposits, bonds or equity shares) depending on your time horizon, risk tolerance, income and liquidity needs.
#3: Consider a fund manager
Depending on how large the Endowment Fund is expected to be, you may consider:
1. Managing the funds in-house through the expertise of existing team members and employees
2. Hire an in-house full-time investment manager
3. Approach a third-party asset management company or advisor to manage the funds on your behalf
Each of the above options have different cost implications on your organization. For instance, for a small NGO raising US$ 5 million, it may not make sense to have a professional fund manager, given asset management fees. Rather, the Board of Trustees can create investment guidelines and manage the funds.
#4: Document guidelines for the administration of the fund
Once the above decisions are made, it is important to document the general guidelines for the administration and supervision of the fund such as:
1. Who is responsible and accountable for the day-to-day administration of the fund?
2. Who is the technical team in charge of the investments?
3. What is the investment policy?
4. What is the spending policy?
5. What are the legal regulations that we must comply with?
#5: Formulate an appropriate fund-raising strategy
The first step is to identify suitable donors for your endowment fund. The second step is to have a detailed document in place to solicit donations from potential donors – this should cover highlights about the Institutions, its mission and goals, benefits of donating towards the fund and track record of the Institution. Donors are more likely to date towards organizations with sound financial acumen while catering to an immediate need in the community. The final step to remember is establish a marketing budget and initiatives. Remember, it takes money to raise money.
Endowments can be used strategically by Institutions of all sizes (small or large NGOs, hospitals, colleges and Universities) to grow and achieve their mission, vision and objectives through careful planning.
At Falak, we can help you assess your need for an endowment fund and design and formulate an appropriate strategy for you to establish a fund in order to achieve your goals and obtain financial sustainability.