Endowment Fund Activities and Investment
By David Winder
David Winder is Director, Global Philanthropy & Foundation Building, The Synergos Institute.
In my brief talk today, I would like to:
- Present some basic information about endowments and sources of endowment financing;
- Present two case studies on endowment raising and investment from Puerto Rico and the Philippines;
- Provide information about the status of CSRO endowments in Indonesia; and
- Raise a number of discussion questions about endowments and share with you some findings of Synergos' research on endowment development in Africa, Asia and Latin America.
Endowments are permanent assets -- money, securities, or property -- that are invested to earn income that is used to support an organization's activities. There are numerous reasons why an organization would wish to create an endowment. These include:
Sustainability -- An endowment can enhance the ability to plan for the long-term and to meet the future needs of constituents.
Autonomy -- An endowment can increase an organization's independence from funding trends outside its control.
Leveraging -- An endowment can be used as a basis for acquiring additional funding.
Sources of Funding for Endowments
There are multiple places where organizations can turn in order to raise funds for an endowment. At the local level, there is potential for raising endowment funds from:
- government or public sources
- the private sector
- wealthy individuals
- membership fees
- the general public
- earned income
At the international level, endowment funding can come from:
- bilateral/multilateral overseas development assistance
- international foundations in Australia, North America or Europe
- NGOs from Australia, North America, or Europe
- multinational corporations
- wealthy individuals
Raising an Endowment
In some cases, endowments are created by the contribution of a single corporation, government agency, ODA agency, individual, family, or foundation. For example, as many of you may know, Kehati's endowment was created by a single, large contribution provided by the US Agency for International Development. In other cases, endowments are created through contributions from a wide number of donors.
We also find contrasts in the timing of when organizations create an endowment. In some cases, foundations are created with a major endowment grant. The Manila-based Foundation for the Philippine Environment, for example, was created as an endowed institution resulting from a $20 million debt-for-nature swap between the U.S. and Philippine Governments. Many other foundations and CSROs, however, embark on an endowment creation process only after the organization has been operational for some time.
To learn something more about what an endowment-raising project might entail, I would like to speak for a few moments about the experience of the Puerto Rico Community Foundation -- or PRCF -- which is located on the Caribbean Island of Puerto Rico.
The founders of the Puerto Rico Community Foundation saw the establishment of an endowment as essential to sustainability. Although the leaders of PRCF will tell you that endowment building can be a long and painstaking process, they have largely been successful at this task. PRCF's endowment grew from zero in 1984, when the foundation was created, to over $20 million today. The foundation raised these funds from a large number of donors that included international foundations, multinational corporations, local business, and wealthy individuals. Here are some of the steps the Foundation took in order to build its foundation.
- The seeds of PRCF's endowment were in fact planted before the Foundation was even operational. One of the first steps taken to create the foundation itself was a feasibility study. Ford Foundation funding for the study enabled a noted researcher to hold over thirty in depth interviews with leading individuals from the non-profit sector, business, and government.
- The feasibility study had more than just research value. It began a process of building relationships with respected community leaders. This consultative process was an important first step in building a constituency base and creating a strong network of potential donors.
- Based on the positive results of the feasibility study, the PRCF was officially launched in 1984. Soon afterwards, foundation leaders embarked on a formal endowment building campaign. It is important to note that they were able to set aside a separate budget for the endowment campaign.
- PRCF's endowment raising process gained early support from the Ford Foundation and a large pharmaceutical company named Schering-Plough. This came about because PRCF leaders had been able to develop strong personal relationships with key individuals at both organizations.
- These relationships turned out to be critically important to PRCF's endowment efforts, since they gave PRCF credibility and visibility with PRCF with a number of other potential donors.
- As a result, PRCF was able to receive commitments totaling $4 million from four major U.S. grant making institutions including: the Ford, Rockefeller, Carnegie, and MacArthur foundations. Most of these funds were in the form of challenge grants -- which meant that PRCF had to raise matching funds from other sources.
- I should mention that this is what we could call a 'starting big' approach. The PRCF board believed that raising significant funds early on would increase the foundation's visibility and encourage both donations and inquiries about grants.
- In order to raise endowment funds to match the foundation pledges, PRCF turned to large corporations and wealthy individuals. Thanks in part to the efforts of the foundations' contact at the Schering-Plough Corporation, PRCF was able to raise funds from eleven large corporations, two local banks and several smaller companies on Puerto Rico.
- To supplement corporate funding, PRCF leaders developed an innovate strategy to mobilize endowment resources from local individuals. It established donor-designated funds. In this type of arrangement, donors offer endowment support that is used only for certain activities. PRCF established two types of donor-designed funds called Family Funds and Star Funds.
- Family funds are one time or recurring contributions that are managed together with the PRCF general endowment. Typically, family fund contributions are made to honor a family member who has died. Income from the contribution is used to support programs that reflect the person the fund intends to honor. PRCF now manages over 20 family funds.
- Star Funds are similar to Family Funds. The difference is that Star Funds are targeted towards high-profile celebrities, often sports players. PRCF currently manages one star fund of $100,000.
Let me draw attention to several lessons we can learn from the Puerto Rico Community Foundation's endowment raising experience. To raise an endowment, PRCF:
- Engaged a wide number of stakeholders in a consultative process.
- Used a consultant to identify potential funding sources.
- Emphasized relationship building with people who were locally credible and respectable.
- Used key relationships with high-level foundation and corporate people to gain access to other foundations and corporations.
- Mobilized resources from local people through donor-designated funds.
- Started big to gain visibility.
- Used initial endowment funding to leverage additional resources.
- Designated a budget for endowment-raising.
Investing an Endowment
If creating an endowment entails many special challenges, so does managing and investing it. Foundation boards and staff face many difficult questions about endowment financial oversight such as who should manage endowment funds, how to preserve principle while still gaining the highest rate of return, and how to use income from the endowment.
One particularly tough issue for endowed organizations is how much investment strategies should reflect an organization's mission. If a foundation is investing in stocks, should it screen out companies that are environmentally or socially irresponsible or should it only seek the highest return? Is there perhaps some way that endowment investment could reinforce a foundation's mission?
The Foundation for a Sustainable Society Incorporated, or FSSI, in the Philippines has developed a unique response to these questions.
- FSSI was created in 1995 as a result of a debt swap agreement between the Philippine and Swiss governments. Under the agreement, the Swiss government agreed to cancel one half of the Philippine's commercial debt to Switzerland, which was then about $34 million dollars. The Swiss offered this arrangement provided that the Philippine government endowed a social development foundation with the equivalent to US$17 million in Philippine pesos and treasury securities.
- To manage this fund, the Philippine government agreed to the creation of FSSI as a private foundation. FSSI was designed after extensive consultations involving the Philippine and Swiss NGO communities.
- FSSI was tasked with using income from the endowment to support initiatives of local NGOS, people's organizations, cooperatives and other community based groups -- particularly in the area of sustainable economic production efforts.
- The staff and board of FSSI found themselves with two main challenges:
- to make sure that the main body of the endowment was safe and well invested; and
- to use income from the endowment for maximum impact.
- In investing the endowment, FSSI relies on professional fund managers to manage most of the endowment. A small but growing percentage of the endowment is managed internally by a team of FSSI staff and board members; these funds are invested in community-based enterprises which I will describe in a moment.
- FSSI selects outside fund managers through a competitive bidding process. To spread out risk, FSSI typically has three different managers handle commercial investments. In picking fund managers, FSSI looks at the following criteria:
- Income yields offered
- Credibility and track record
- Size of total investment portfolio managed
- Reputation of top management
- Overall investment policy
- The performance of each fund manager is reviewed monthly. Clear targets for performance are set, and if these are not achieved, FSSI switches to other fund managers.
- Today, about 70% of FSSI's endowment is invested in fixed income securities and about 30% is in large, stable corporations. FSSI maintains a list of companies that it considers to be socially or environmentally irresponsible and will not invest in these companies.
- FSSI has developed a distinctive approach to using income from the endowment. Rather than just giving grants, FSSI invests in local sustainable production enterprises by offering:
- Interest bearing loans
- Venture capital to enterprises in exchange for equity
- Special deposits in credit making institutions and
- Loan guarantees
- By investing in local development enterprise, FSSI is able to advance its social mission while also gaining income that can be used for future investments. These investments are different than grants because they are recoverable. Although these investments are of greater risk than conventional investments, they pay a relatively higher rate of return and have the added benefit of directly aiding local beneficiaries.
- FSSI typically offers between $25,000 and $125, 000 in project funding. Applicants are required to match 20% of project costs in cash or in kind. FSSI has six basic criteria in selecting enterprises to support. These include:
- The social and economic impact on beneficiaries
- Economic viability
- Environmental soundness
- Positive impact on women
- Availability of applicants equity
- Clear and viable project plan
- Recent projects have been in the area of solid waste management, seaweed production, and sustainable agro forestry. In addition to financial assistance, FSSI also offers a package of technical support to project implementers including assistance with feasibility studies, marketing research, and management.
- In addition to loans and other income generating investments, FSSI also maintains a small grant program, which offers micro-grants of $1,000 or less to non-income generating projects.
- Since 1996, FSSI has supported more than 39 projects that have benefited more than 5,000 households.
- In summing up about the Foundation for Sustainable Society, let me point out several issues that I think are important. FSSI:
- Seeks to harmonize its endowment investment strategy and mission by offering loans and other financial support to sustainable production enterprises.
- Invests the body of its endowment conservatively, using three professional fund managers chosen through a competitive process.
- Does not invest in companies it believes are socially irresponsible.
- Offers technical assistance to enterprises to make sure that investments will bear fruit.
Let's now turn briefly to the status of CSRO endowments in Indonesia. Of the 25 CSROs surveyed by my colleague Rustam Ibrahim, only eight had endowments. The size of endowments ranged from 300million Rupiah (Formasi) to about 190 billion Rupiah (Kehati).
At present, endowment income accounts for only a small percentage of the total domestic revenue of CSROs in Indonesia. About seventeen percent of total domestic revenue sources comes from endowment income.
Creating an Endowment
- What is our vision on how an endowment will be used and managed?
- What resources do we have for an endowment raising effort? What funds or staffing can we dedicate to endowment building and how will this affect current programs? Will we need outside consulting services?
- What funding sources should we target? Domestic or international? Government or private? Individuals or organizations?
- Given that donors typically prefer to fund projects rather than endowments, how will we persuade donors that an endowment is necessary? What types of arguments should be developed to persuade different types of donors?
- What are possible ways of developing sources of earned income for an endowment?
- Do we want to develop 'donor-advised' or 'donor-designated' funds?
- What arguments can we develop to respond to critics of endowments who believe that:
- endowments shield organizations from competitive forces, thereby reducing their responsiveness to constituents; and that
- resources should not be set aside for future use when so many needs exist in the present.
- What are the pros and cons of managing the endowment in-house as opposed to turning it over to professional fund managers?
- If fund managers are used, how can the foundation ensure responsible, high performance fund management? How do we monitor the performance of portfolios of the fund managers?
- Should a foundation's endowment investment strategy be linked to its mission? Should endowment funds be invested in companies that are considered to be socially or environmentally irresponsible?
- What is the appropriate mix of investments? What factors affect the decisions on the portfolio? Should the foundation invest in local or international stock markets?
- What role should the Board play in endowment investment decisions?
- What guidelines should we establish for the use of income from the endowment? How much of the income from the endowment should be allocated to existing programs? How much to new endeavors? How much to core costs? And how much to we plow back into the endowment so that it grows over time?
- How could we leverage a small endowment to make it grow?
Before moving on to a discussion of these critical questions, I wanted to share with you some of our findings about good practices in endowment building from CSROs in Asia, Latin America and Africa. I pose these not as definitive answers to the challenges of endowment building, but rather as points of departure for our later discussions.
Our research points out that many foundations have found that:
- Investing time and energy to consult with a wide range of stakeholders can build support for an endowment fundraising effort. Consultation helps potential donors and partners feel a sense of ownership and inclusion. However, consultation may also require compromises.
- Having sufficient financial resources for a fundraising effort can be a critical element of its success. In other words, 'you need money to raise money.'
- Establishing a track record as an effective grantmaker will raise credibility for an endowment building effort.
- A good plan on how the endowment will be invested can convince potential donors to contribute. When possible, board members with investment experience should be involved in the investment management process.
- The ability to restrict endowment funds for specific activities can be attractive to donors.
- One or two significant contributions to an endowment fund demonstrate the feasibility of the effort and can be a basis for leveraging additional funding.
For some of you who are building an endowment, this may appear a formidable task. As we may see from later discussions, this may not be the case. Despite the challenges involved, organizations here in Indonesia and around the world are successfully taking steps towards creating endowments to serve as a key element of long-range financial sustainability. I look forward to an enriching discussion today.