It’s never too late—or too early—to start your endowment fund

The world today has more billionaires than ever before. As an ageing generation prepares to transmit trillions of dollars to family and/or causes over the next 20 to 30 years—in what has been dubbed the “great wealth transfer”—charities are looking for new ways to attract their support. 

An effective but underutilised vehicle to channel this wealth is an endowment. Endowments are donations made to non-profit organisations with the intention of investing to earn income. This allows the donations to keep giving long into the future.  

Within the non-profit sector, this can be very powerful. A well-managed endowment fund makes a charity much more sustainable. 

The income of the endowment, if significantly large, can fund the ongoing operating costs of the organisation. This frees up a much higher percentage of funds raised by other means to be directed exclusively to the charity’s mission.

An endowment can help organisations plan for the future, moving them from “survival mode” to long-term strategy. It also gives donors greater reassurance that the organisation is in a strong financial position. 

Put simply, the benefits of an endowment for charities are huge. 

However, in my experience—having worked with many not-for-profits of different scales, and in a variety of sectors internationally—charities find it difficult, or have not even considered, asking for an endowment.

Let’s break down the barriers! 

Some simple facts: how endowment funds work

An endowment is usually a donation of money or other financial assets.  

Endowment funds are often established as legacies from deceased estates, but this is not always the case. They can be started at any time, and multiple donors can provide gifts to the fund. 

There are two types of endowment: expendable and permanent

Permanent endowments include more restrictions around their use. This usually means none of the capital can be spent as income. 

Expendable endowments, also known as “unrestricted endowments”, give trustees the freedom to spend the endowment as they wish.

The business case for endowment funds 

Although endowments are usually associated with US colleges and universities—Harvard University has a fund worth $40.9 billion—they are growing in popularity and scope around the world. For example, Birmingham Royal Ballet is able to give 40 dancers teaching, training and mentoring every year out of its £2.5 million endowment. 

Endowments enable charity leadership to make longer term decisions. They also allow for more flexibility and innovation through the certainty of a stable, recurring income. 

Other donors may also feel reassured and attracted to the idea of supporting an organisation with an endowment, due to its strong underlying financial position. A well-managed endowment can show that the charity is taking a long-term, sustainable view of its work and is smart at handling its investments. 

Some charities worry that an endowment on their balance sheet makes them appear more lucrative than they are and could put off other donors. But the opposite is often true. By boosting donor confidence, an endowment may mean that you end up attracting larger gifts with greater donor engagement. 

Many charities might be surprised to realise that, from the philanthropist’s perspective, the long-term, sustained impact produced by an endowment is highly desirable.  

Philanthropists increasingly understand the power of an endowment and the legacy that it creates. Charities must catch up with this thinking and start to offer these long-term approaches for the donor community. 

The misconception of “locked” vs available funds 

Charities may also see endowments as “locking up” funds from donors that could be spent directly, with immediate impact on the cause. However, this is a short-term view. 

If your organisation receives a gift of £1 million and you choose not to endow it, then yes, you can make a big impact over three to four years. Yet, if it was treated as an endowment, the same gift might make a much more significant impact, over 100 years. That’s not only a difference in the efficiency of your expenditure, it’s more than three generations’ worth of additional impact. This could, in some cases, actually achieve (or even exceed) your charity’s mission.

The world’s oldest known endowment, bequeathed by William of Durham in 1249, has continued to support students at Oxford University for over 750 years. This is, quite literally, the gift that goes on giving.

Charities may also believe they can’t touch the capital. This is one of the biggest misunderstandings around endowments. 

While some endowments are relatively restricted, this doesn’t have to be the case. A smart charity will be able to negotiate an endowment with terms better suited to its mission. 

In fact, expendable endowments, if structured correctly, can be used as a valuable reserve: a large “fuel tank” that can be run down and topped up, flexibly, according to the charity’s needs. As long as you respect the wishes of the donor, it is appropriate to use your expendable endowment as a buffer to meet exigencies. 

There is also much more flexibility in permanent endowments than one might expect. For instance, a charity can still apply to the Charity Commission, which regulates the non-profit sector in the UK, for permission to spend part of the capital, if the trustees can make the case that this is in the best interests of the organisation.  

The total returns approach is another option that provides greater flexibility for using a permanent endowment, without necessarily eroding its capital. This considers the overall return from the invested funds—both the interest and capital gains—as income that can be reinvested or spent. Charities need to apply for a special power to do this, but the extra latitude this affords may make it worthwhile. 

Finally, many charities assume that only long-standing, large institutions such as universities attract or merit endowments. But this is simply not the case. All charities can—and should—be actively pursuing endowments as part of their long-term strategy. 

Setting up, managing and attracting endowments  

In embarking on your own endowment fundraising strategy, these are some of the elements you will need to consider:

   1. Think carefully about the endowment fund(s) you want to create—what will it be used for? How will it be invested and managed?
Setting up an separate endowment trust is a good idea, as it gives donors a greater sense of your reliability. Note: It is important to have all of this in place before approaching prospective donors.

   2. How will you develop your Case for Support to frame this longer-term investment proposition?
An endowment is a sophisticated ask and a long-term play. While the rewards are profound, they are also more distant, and therefore require a different “sell” to regular ongoing fundraising. Why is the endowment important to your charity and what role will it play? Your vision must be bold, inspiring and compelling.

   3. Will a permanent or expendable endowment best suit the needs of both the organisation and your donor?
The role this will play is also an important aspect of your Case for Support and the value proposition.

   4. What is the right ask amount for your prospective donor?
Remember that asking for an endowment gets you to big numbers quite quickly. Do your research and come to the table with both a realistic and appropriately ambitious expectation of your donor.

   5. After successfully securing your gift, how will you ongoingly steward your donor?
A lifetime gift of this magnitude means a lifetime relationship, ensuring the donor continues to feel they made the right investment.

These stages are where an external perspective can be beneficial. At Global Philanthropic, we provide a strategic perspective. We look at how an endowment might fit into your organisation, what it could do, how you can ask for endowment gifts and how the endowment can be positioned.  

If you would like to discuss how your organisation can access the long-term benefits of an endowment fund, we’re here to help.

Ben Morton Wright is President and Group CEO of Global Philanthropic. As well as providing comprehensive consultancy on endowment fundraising, Global Philanthropic works with specialist banking partners to advise on structuring and managing funds.