Glossary · Allocator type
Endowment
An endowment is a pool of assets held by a nonprofit institution, most often a university, school, hospital or cultural body, and invested for the long term so that a regular withdrawal under a spending policy supports the institution's mission.
Donors give an institution money on condition that it be invested and only part of it spent each year; the institution may also set aside its own surpluses to be managed the same way. The endowment's job is to fund the institution indefinitely, so it aims to earn more than it spends plus inflation. Because spending continues in bad markets, it needs liquidity even though its horizon is long.
Kinds of endowment money
Institutions usually distinguish three pools. Permanent (true) endowment comes from gifts the donor restricted so that the principal is kept and only a portion is spent. Term endowment may be spent after a period or event. Board-designated funds (quasi-endowment) are the institution's own unrestricted money that its board chose to invest like an endowment; the board can release it. The distinction matters for liquidity: donor restrictions bind, board designations do not. In the US, spending from donor-restricted endowment funds is governed by the gift instrument and state law. Delaware's Uniform Prudent Management of Institutional Funds Act, for example, lets an institution appropriate for expenditure so much of an endowment fund as it determines is prudent, subject to donor intent expressed in the gift instrument, and does not treat assets the institution designates for itself as an endowment fund (12 Del. C. sections 4702(2), 4704(a)).
Spending policy
A spending policy is the board's rule for how much the endowment pays out each year. Common policies withdraw a set percentage of a trailing average of market values, or blend that with an inflation-adjusted prior-year amount. The rule smooths the budget and links spending to long-run, not current, market values.
In the fiscal year 2025 study by the National Association of College and University Business Officers (NACUBO) and Commonfund (years ending 30 June 2025), 657 US colleges, universities and affiliated foundations reported an average effective spending rate of 4.9% (4.8% in FY2024). They withdrew $33.4 billion, and 47.4% of that spending supported student financial aid. The rate is a cross-institution average; individual policies differ.
How endowments invest
The same FY2025 study covers $944.3 billion of endowment assets. On a dollar-weighted basis the largest allocations were private equity 16.8%, marketable alternatives 15.4%, US equities 13.7%, venture capital 12.2% and fixed income 10.7%. Average one-year net return was 10.9% (11.2% in FY2024) and the ten-year average annual net return 7.7%.
Allocation depends heavily on size. Institutions with more than $5 billion held 62.5% in alternative strategies, those with $251 million to $500 million 32.3%, and those under $50 million 12.5%. Dollar-weighted averages are dominated by the largest endowments, so the "typical" endowment is far less illiquid than the headline figures suggest. The heavily diversified, alternatives-led approach of the largest endowments is described in endowment model.
Large endowments usually run internal investment offices with their own manager research and direct LP relationships; smaller ones more often work through an OCIO or an investment consultant. Private-markets commitments are paced so that capital calls and spending can both be met without forced sales of illiquid assets.
Tax treatment (US)
Endowments of US nonprofits are generally tax-exempt, but two taxes matter. First, UBTI: debt-financed income from leveraged funds is taxable unless an exception applies; section 514(c)(9) gives educational organisations an exception for certain real property investments if its conditions are met.
Second, Internal Revenue Code (IRC) section 4968 taxes the net investment income of certain private colleges and universities. For taxable years beginning after 31 December 2025, as amended by Pub. L. 119-21, it applies to institutions that had at least 3,000 tuition-paying students in the preceding year, more than half of them in the US, and a student adjusted endowment of at least $500,000; state colleges and universities are excluded. Student adjusted endowment is the fair market value of assets not used directly for the exempt purpose, divided by the number of students, counted as the daily average of full-time students with part-time students on a full-time-equivalent basis. The rate is 1.4% for $500,000 to $750,000 per student, 4% above $750,000 up to $2 million, and 8% above $2 million. The section contains no inflation indexing of these amounts.
Endowments and foundations are different allocators
Universities, schools and hospitals are generally public charities, not private foundations: IRC section 509(a)(1) excludes from private-foundation status organisations described in section 170(b)(1)(A), which include educational organisations with a regular faculty, curriculum and enrolled student body (clause (ii)) and hospitals (clause (iii)). The 5% minimum distribution rule of section 4942 therefore does not apply to their endowments: their spending is set by board policy within state law and gift terms. A foundation, by contrast, is itself the grant-maker, and a US private non-operating foundation that does not make its minimum qualifying distributions by the end of the following year is taxed under section 4942.
Worked example
Illustrative excise tax for a private university
A private university with 4,000 students, all full-time and tuition-paying and most of them in the US, holds $4.4bn of non-exempt-use assets at the end of the prior year. Its student adjusted endowment is $4.4bn / 4,000 = $1.1m per student, which falls in the 4% band (above $750,000, up to $2m). On net investment income of $300m the section 4968 tax would be 4% × $300m = $12m. With fewer than 3,000 tuition-paying students the institution would be outside the tax altogether.
Examples are illustrative; figures are not market data.
Not the same as
- Foundation (Charitable Foundation): A foundation's own purpose is grant-making from its assets and, if a US private non-operating foundation, it faces a 5% minimum distribution under IRC section 4942; an endowment funds an operating institution under a spending policy.
- Endowment Model: The endowment model is a portfolio approach associated with the largest endowments; most endowments, especially small ones, do not follow it.
How it is classified
- Classify as an endowment when the pool belongs to, or is held for, an operating nonprofit and funds it under a spending policy.
- Classify as a foundation when the entity's own purpose is grant-making or charitable programmes funded from its invested assets.
- Record the endowment entity or investment office as the LP and relate it to the institution it supports; do not merge an affiliated foundation into the university.
Common mistakes
- Applying the private-foundation 5% payout rule to a university endowment. Section 4942 applies to private foundations; university endowments spend under board policy.
- Quoting endowment allocation or return figures without the fiscal year and the weighting. NACUBO-Commonfund data are for years ending 30 June and headline allocations are dollar-weighted.
- Treating the endowment model as what every endowment does. In FY2025, alternatives were 62.5% for institutions over $5 billion but 12.5% for those under $50 million.
- Assuming a perpetual horizon removes liquidity needs. Spending, capital calls and operating support continue through drawdowns.
- Treating board-designated funds as permanently restricted. The board can release them; donor restrictions bind.
- Describing the section 4968 excise tax as a flat 1.4%. For taxable years beginning after 2025 it is tiered at 1.4%, 4% or 8%.
Edge cases
- A public university's endowment is often held by a separate affiliated foundation; NACUBO counts such foundations with the institutions, and their tax status depends on their own structure.
- Health-system endowments may be counted in liquidity measures under the system's bond agreements, which limits how much can be illiquid.
- An institution near the 3,000 tuition-paying student threshold can move in or out of the section 4968 tax from one year to the next.
Questions
How much do endowments spend each year?
In the NACUBO-Commonfund FY2025 study the average effective spending rate across 657 US institutions was 4.9%. Each institution sets its own policy, often a percentage of a trailing average of market values.
Do university endowments pay tax?
They are generally tax-exempt, but they pay tax on unrelated business income, and certain private universities pay the section 4968 excise tax on net investment income, at 1.4%, 4% or 8% for taxable years beginning after 2025.
Sources
- 2025 NACUBO-Commonfund Study of Endowments (FY2025). NACUBO and Commonfund Institute, NACUBO, FY2025 (1 July 2024 - 30 June 2025); released 12 February 2026. Status: Latest edition (checked 2026-10-01). FY2025 study press release, 2026-02-12 — supports: 657 institutions, $944.3bn, effective spending rate 4.9%, $33.4bn spending, 47.4% financial aid, returns, dollar-weighted allocations and size-cohort alternatives shares
- 26 U.S.C. 4968 - Excise tax based on investment income of private colleges and universities. U.S. Congress (Internal Revenue Code; LII mirror), Current text including amendments by Pub. L. 119-21 (2025), effective for taxable years beginning after 2025-12-31. Status: in force (as amended 2025) (checked 2026-10-01). IRC sec. 4968(a)-(e) (as amended by Pub. L. 119-21; taxable years beginning after 2025-12-31) — supports: Tiered excise tax, applicable educational institution conditions, student adjusted endowment, daily-average FTE student count (4968(e))
- 26 U.S.C. 509 - Private foundation defined. U.S. Congress (Internal Revenue Code; LII mirror), Current US Code text as published by LII (accessed 2026-10-01). Status: in force (checked 2026-10-01). IRC sec. 509(a)(1) — supports: Organisations described in 170(b)(1)(A) are not private foundations
- 26 U.S.C. 4942 - Taxes on failure to distribute income (private foundation minimum distribution). U.S. Congress (Internal Revenue Code; LII mirror), Current US Code text as published by LII (accessed 2026-10-01). Status: in force (checked 2026-10-01). IRC sec. 4942(a), (e)(1) — supports: Minimum distribution and initial tax apply to private non-operating foundations
- 26 U.S.C. 512 - Unrelated business taxable income. U.S. Congress (Internal Revenue Code; LII mirror), Current US Code text as published by LII (accessed 2026-10-01). Status: in force (checked 2026-10-01). IRC sec. 512(a)(1), (b)(4) — supports: UBTI; debt-financed income included
- 26 U.S.C. 514 - Unrelated debt-financed income. U.S. Congress (Internal Revenue Code; LII mirror), Current US Code text as published by LII (accessed 2026-10-01). Status: in force (checked 2026-10-01). IRC sec. 514(a)(1), 514(c)(9)(A), (C)(i) — supports: Debt-financed income in UBTI; real property exception for qualified organisations including 170(b)(1)(A)(ii) educational organisations
- 26 U.S.C. 170 - Charitable, etc., contributions and gifts (incl. 170(b)(1)(A) organization types). U.S. Congress (Internal Revenue Code; LII mirror), Current US Code text as published by LII (accessed 2026-10-02). Status: in force (checked 2026-10-02). IRC sec. 170(b)(1)(A)(ii)-(iii) — supports: Educational organisations and hospitals described in 170(b)(1)(A)
- Delaware Uniform Prudent Management of Institutional Funds Act (12 Del. C. ch. 47). State of Delaware (Delaware Code Online), Delaware Code Online, accessed 2026-10-02. Status: in force (checked 2026-10-02). 12 Del. C. sec. 4702(2), 4704(a) — supports: Example of US state law: endowment fund definition (excludes institution-designated funds); prudent appropriation subject to donor intent
- 26 U.S.C. 511 - Imposition of tax on unrelated business income of charitable, etc., organizations. U.S. Congress (Internal Revenue Code; LII mirror), Current US Code text as published by LII (accessed 2026-10-02). Status: in force (checked 2026-10-02). IRC sec. 511(a)(1)-(2) — supports: Tax on UBTI of exempt organisations, including state colleges and universities