Building Endowments (Foundation Building Best Practice Study Excerpt)

This section looks at the cases of several foundations that have built endowments by taking advantages of opportunities within their national contexts.

Example 1: Local Philanthropy and Debt-for-Development
Foundation For Community Development (Mozambique)
Example 2: The Capital Campaign
Puerto Rico Community Foundation
Example 3: Debt-for-Nature
Foundation For The Philippine Environment

What is an Endowment?

Summary Points

Investing time and energy in consultation can build support for an endowment fundraising effort. People are more likely to give to something in which they have a vested interest. The FDC and the PRCF both planned to create local philanthropy over the long term and viewed consultation as a crucial element in launching their efforts. Consultation also may require significant compromise. In the case of the FPE, Philippine nonprofit leaders pressed for greater ownership and representation on the part of local civil society.
Raising financial support for the fundraising effort itself can be a crucial element of its eventual success. In all three cases, financial support enabled founders to pursue a strategic effort to raise an endowment. It was also an important leverage for additional funding. The PRCF and the FDC received this support from other foundations. The FPE effort was funded as part of a government assistance program.
Building a track record as a grantmaker will raise understanding and credibility for the effort. In Mozambique and Puerto Rico, where there were no other grantmaking foundations or very few, the FDC and the PRCF are pioneers in the field. They have succeeded in raising endowment contributions but believe that they must show what they can do and that they can be successful in order to convince many new donors to contribute. Both foundations have focused on raising program funding that will help them to make this impact.
A good plan and strategy on how the endowment will be invested can convince potential donors to contribute. Investment advice and expertise can be very expensive. All three foundations have sought out board members who bring this expertise to the foundation. These board members have helped to craft an investment strategy. In the case of the FPE, that strategy includes having a staff investment manager in charge of investing a portion of the endowment and who must compete with external companies that invest other portions of the endowment.
Some foundations develop restricted funds as a service to donors who are concerned about a particular cause. The community foundation approach of offering services to donors by setting up restricted funds that can be employed for causes and purposes they care about is beginning to be tried in many countries. The PRCF has started to raise these restricted funds. Its Family Fund program sets up trust funds in the name of a family or individual that support particular fields of interest.
One or two significant contributions to the endowment fund demonstrate the feasibility of the effort and can leverage more funding. The commitment of resources, both contributions and the energy and time of the founders, demonstrate the likelihood of successfully establishing an endowment. In the case of PRCF, having the support of a well-known US foundation and a pharmaceutical company encouraged other foundations and companies to become a part of such a successful effort.

Endowments are permanent assets (money, securities, property) that are invested to earn income. Trust funds, memorial trusts, patrimony and capital or asset base are other terms used to refer to endowment funds. Depending on the cultural and legal context, one or more of these terms may be in common use.

An endowment may be created by the contribution of a single donor or the collective contributions of any number of donors.

Some common types of funds that may describe all or part of an endowment are:

Unrestricted funds Interest earned or capital from these funds may be used at the discretion of the board of the foundation towards its charitable mission.
Restricted funds These funds must be used for a particular purpose or beneficiary at the discretion of the foundation; examples include the family funds of the Puerto Rico Community Foundation (PRCF). Some of the various terms used for restricted funds are:
- Donor advised or designated - The original contributor to the restricted fund has given some degree of guidance as to how the proceeds of the fund are to be spent.
- Field of interest - The fund focuses on some aspect of the foundations mission.

Occasionally, a donor will create a fund that is designed not to be permanent or an organization will decide that it will spend out its endowment over a specified amount of time. As endowments are very difficult to raise and the funds are difficult to replace, this practice is rare.

How Are Endowments Raised?

Some grantmaking foundations have been established by endowment contributions from a single corporation, government agency, official development assistance agency, individual, family or other foundation. The objective of this contribution is often to establish a sustainable source of funding for a particular cause or community. The foundation, because it does not come into existence until later, plays no role in raising these initial endowment funds. Its role is to invest the funds wisely and, in some cases, to raise additional funding.

The endowment of the Foundation for the Philippine Environment (FPE) rose from a contribution and debt-for-environment swap agreement with the US Agency for International Development (USAID). Foundations may be created by individuals or organizations with the mission of building an endowment by fundraising from multiple sources. The mission of building an endowment goes side-by-side with the foundations efforts to mobilize resources for the work of other organizations.

The Foundation for Community Development (FDC) of Mozambique raised an endowment from local business and individual contributions that partly enabled it to receive funding from a debt-for development swap.

A common way to raise an endowment is to solicit contributions from members of the community that the foundation intends to serve. The Foundation can be a vehicle for social change over the long term and a mechanism for disbursing, monitoring and evaluating contributions. Community foundations, like the PRCF discussed in this chapter, (a type of foundation that serves the interests of a defined community and manages donor designated funds) take this approach and have had considerable success in the United States and Canada.

The PRCF endowment began with a challenge grant from a group of American foundations (led to a large extent by the Ford Foundation) and the contributions of several corporations.

How is the Case for an Endowment Made?

Many nonprofit organizations are attracted to the idea of endowments because they offer financial sustainability and increased autonomy. Endowment contributions, however, must compete with other immediate needs. In raising contributions, the foundation must make the case for why a permanent source of income is necessary for it to have an impact against the issues it seeks to address. The ownership of an endowment gives an organization a degree of independence from funding trends that are outside of its control and increases its capacity to plan over a longer term because it can be assured of being able to fund its initiatives.

Critics of endowments point to two significant issues in endowing organizations. First, an endowment can shield an organization from competitive forces and reduce the pressure on it to be responsive to its constituents. Second, insofar as a foundation exists to eliminate a particular problem, why should resources be set aside indefinitely?