How America’s Wealthiest Colleges Are Getting Richer Faster Than Schools With Small Endowments

The booming stock market of late 2020 and early 2021 produced an exceptional year for college endowments of all sizes, but much like the rest of America, the gap between the rich and the poor in higher education is getting larger.

The average college endowment returned 30.6% for the fiscal year ending June 30, 2021, according to an annual survey conducted by the National Association of College and University Business Officers (Nacubo). For institutions with endowments of at least $1 billion, the average return was 37.3%, compared with a 23.9% average for schools in the smallest category of less than $25 million. The S&P 500 soared by 38% during that time frame.

The 720 insitutitions surveyed have an average endowment of $1.1 billion, up 35% from the 2020 report, though that number is skewed by gains for the most elite schools with endowments worth as much as Harvard’s $53 billion. While 19% of the schools boasted endowments of at least $1 billion, that subset owns 84% of the cumulative $821 billion endowment value. The median endowment in the survey was $197 million.

“There’s more wealth concentrated at the top now – that’s a fact both for universities and for many other nonprofits and for individuals,” says Ken Redd, director of research and policy analysis at Nacubo. “Our results really reflect what’s going on in society writ large.”

Returns reported last fall for some of America’s most well-known universities were astonishing: 65% for Washington University in St. Louis, 57% for Vanderbilt, 56% for Duke and M.I.T. Every Ivy League school but Harvard and Columbia returned more than 40%.

Those wealthy schools were able to outperform the stock market thanks largely to their private market portfolios. The 136 billion-dollar schools invested an average of 30% of their endowments in private equity and venture capital funds, almost double the allocation to those two asset classes by the next largest category of endowments between $501 million and $1 billion. 

Large endowments reported average returns of about 50% in fiscal 2021 for their private equity and venture capital investments, fueling that group’s overall outperformance. Schools with endowments worth less than $250 million, representing the majority of the sample, allocated less than 9% of their portfolios to those categories. That cohort of small endowments on average invested at least half of their portfolios in basic U.S. stocks and fixed-income funds, while those categories accounted for less than 20% of large endowments.

“Small schools don’t have the money to hire enough staff to do really deep dives on private market opportunities,” says Charles Skorina, a consultant specializing in helping endowments hire investment officers. “If you’re a $500 million or $750 million endowment, your staff size is probably just a couple of people, a CIO and one or two analysts.”

For smaller schools, finding lucrative private market opportunities isn’t just a matter of manpower. Liquidity and access are also concerns when they need to be able to access their endowment funds to support their operating budgets. Limited partners in funds at top-performing venture firms like Sequoia Capital often have to write nine-figure checks without seeing rewards for years, an impossibility for most institutions. 

Those liquidity restrictions also make it more difficult for elite schools to spend some of their paper windfalls, which can be revised downward before they’re ever realized. The beginning of the 2022 fiscal year has been much more subdued for both public and private markets, with stocks up just 1% since last July.

“My takeaway is these returns are deceptive because they’re so exceptional and they’re non recurring,” Skorina says. “Those are once-in-a-lifetime returns, but you can expect a stock market crash probably every 10 years. So don’t spend the money.” 

The average spending rate remained virtually flat at 4.5% for the entire sample, with little correlation to the size of the endowment. Nearly half of the expenses went to student financial aid. The largest endowments spent 4.7% of their funds last year, though a constant rate from a growing pool of cash still translates to billions of dollars more to benefit students at those prestigious institutions.