Rethinking Endowment Strategy: How Colleges Might Adapt to Spend More and Earn More
A Casual Thought Exercise for the Substack Crowd
A Tectonic Shift in Endowment Spending
There’s a bit of a shake-up happening in the world of college endowments. According to a Wall Street Journal piece from June 2025, universities are facing mounting pressure to crank up their annual endowment spending. Why? Because of a proposed tax hike that would penalize schools spending less than 7% of their endowments annually, a big jump from the long-standing 4 to 5% norm.
In response, schools are starting to say: “Fine, we’ll spend more.” But that raises a tough question: how do you keep your endowment growing while also meeting these higher cash demands?
This post is a thought experiment. It's not financial advice, just a framework for how endowments might rethink their portfolio strategies in this new environment. Spoiler: private equity secondaries might play a bigger role than you think.
The Endowment Model Is Being Stress-Tested
For decades, the "Yale Model" has been the gold standard. It’s all about heavy diversification and leaning into illiquid, long-term investments like private equity, real assets, and hedge funds. It’s worked incredibly well over the long haul. But with the new pressure to spend more every year, the model is being stress-tested.
A traditional endowment allocation might look like this:
30% Public Equities
15% Fixed Income
25% Private Equity
10% Real Assets
20% Hedge Funds / Absolute Return
That portfolio has served many institutions well, but it might not cut it anymore. With a 7% spending mandate, the math gets tricky. Either you eat into your principal, take on more risk, or find new sources of return.
So What Might a Re-Optimized Portfolio Look Like?
Here’s a purely illustrative take on what a modernized, higher-yield-seeking endowment portfolio might resemble. The goal: keep the portfolio sturdy, but squeeze out a little more return. We’re talking:
Target return: ~9% net of fees
Volatility cap: ~15%
Liquidity: a mix of near-term cash and long-term bets
Sample Asset Mix:
20% Global Public Equities (mix of U.S., emerging markets, and factor-tilted strategies)
10% Private Credit (including direct lending)
30% Private Equity (core funds, growth, co-investments)
15% PE Secondaries (more on this below)
10% Real Assets (renewables, infrastructure)
10% Hedge Funds & Opportunistic Strategies
5% Cash and liquid reserves
This version bumps up exposure to private markets while making room for secondaries, a part of the market that’s becoming more useful as endowments chase both yield and liquidity.
Secondaries: The Underrated Hero
Let’s zoom in on private equity secondaries. Once seen as niche, they’re now front and center in many institutional portfolios. Here’s why:
They Pay Out Faster: Because you’re buying into existing funds, secondaries often come with shorter time horizons and earlier distributions.
Discounts = Opportunity: You’re often getting these assets at a discount to their net asset value (NAV), especially in turbulent markets.
More Data, Less Guesswork: Unlike primary PE, you often know what you’re buying. There’s a track record, portfolio visibility, and less blind pool risk.
Better Vintage Mix: Secondaries offer exposure to multiple vintage years, reducing timing risk.
With elevated distribution needs and less appetite for long-duration risk, secondaries might become the Swiss Army knife of endowment portfolios.
The Trade-Offs to Keep in Mind
Of course, this shift isn’t without its challenges:
Liquidity Risk: Private investments are less liquid. You’ve got to plan for that.
Manager Quality Matters: The dispersion of returns in PE is wide. Picking the right managers is crucial.
Fees Can Bite: Alternatives come with layered fee structures. Transparency and negotiation are key.
Macro Risks: If interest rates spike or credit markets tighten, parts of the portfolio could suffer.
That’s why governance, pacing models, and solid scenario planning are all part of the toolkit here.
Where Do We Go from Here?
This is a moment of reckoning for college endowments. Spend more? Sure. But that comes with a responsibility to rethink what’s under the hood. Whether they tilt further into private markets or reshape their liquid portfolios, endowments are entering a phase where portfolio design needs to do more heavy lifting.
This isn’t a pitch for any specific strategy, but if you’re managing long-duration capital and your payout obligations just doubled, it’s probably time to rethink what “diversified” really means.
References
The Wall Street Journal. "Colleges Hope to Stave Off Big Tax Hike by Pledging to Spend More Endowment Cash." June 2025.
Yale Investments Office Reports
NACUBO-TIAA Study of Endowments
Cambridge Associates, Private Investment Benchmarks
Preqin, Global Alternatives Reports
This post is a conceptual exercise only, not investment advice.