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KEY LESSONS FROM GRANTMAKERS
- An endowment makes sense for a select range of grantees: Organizations whose work has risen to a stage where it deserves some permanence and stability, and institutions with histories of outstanding performance and skilled management, strong leadership, a diversified base of financial support, an active and diverse board, and the commitment and ability to manage and invest an endowment fund. The benefits of a well-managed endowment — or other long-term "endowment-like" funds — are considerable. But the demands they place on an organization's leadership and management are also great. Another factor to consider carefully in advance: An endowment or endowment-like grant conveys an especially public "seal of approval" from the grant maker, and thus may call for particular confidence in the enduring quality of the grantee's program.
- The right size for an endowment is easy to under-estimate. The principal amount needs to be great enough not just to generate the amount of earnings that the grantee wishes to spend on year-to-year operations, but also to yield enough reinvestable money to preserve the value of the fund. Otherwise, the endowment's value is likely to be lost to inflation, market fluctuations, or other erosions over time.
- A single grant maker rarely provides the full amount of an endowment or endowment-like fund. Grant makers more often begin with endowment-related grants to help grantees plan, organize, and solicit endowment contributions. They may then make an endowment grant, sometimes with a matching requirement or other provisions to help grantees raise the amount needed. The fundraising challenge can be formidable, and often requires the grantee to reach out to completely new categories of potential contributors. Besides all the financial and management advice that a grantee is likely to need when getting started with an endowment, professional fundraising counsel can be essential as well — especially if the endowment is to be amassed in a single large capital campaign.
- Governance and oversight of an endowment is the responsibility of a grantee's board, in consultation with expert advisers. Before going very far with endowment discussions, grant makers often want to be sure that the board understands and embraces this responsibility, and that it has some knowledgeable members or can readily recruit some. Since many grant makers wish to place some restrictions on how endowment grants may be managed and used, they may want to make sure that the board understands and accepts these conditions.
- Endowment funds should be managed and invested within strict written guidelines, and probably conservatively, since they are usually intended to generate stable returns over many years. Choosing the right mix of investments, selecting the best managers, and determining how investment policy should be adjusted over time — all of these are complex, technical exercises on which both the grantee and the grant maker will want to get independent expert advice.
- Rules for how the earnings can be spent should be negotiated carefully between the grant maker and the grantee, according to the intended purpose of the fund, the length of time it is meant to last, and any foreseeable changes in the grantee's circumstances or needs during that time. On average, endowed organizations spend between 4.5 percent and 5.5 percent of the fund's asset value each year, but the spending target for any given endowment grant should be based on clear assumptions that are grounded in the fund's specific purposes and circumstances, with particular attention to preserving its real value. As in all other areas, grant makers strongly recommend getting professional advice early in the process, to ensure that expectations are realistic and that the grant agreement adequately addresses all foreseeable issues.
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