The endowments of Historically Black Colleges and Universities in the U.S. are woefully underfunded and under resourced.
None have cracked the $1 billion mark, although Howard University, which manages its assets internally, is on pace to hit that milestone this year.
And while Ivy League university endowments annually rake in donations from billionaire alumni, HBCUs primarily rely on federal grants for revenue, according to recently-published research from PGIM and UNCF (the United Negro College Fund).
“Where we are with HBCUs is not for lack of interest, it’s really for lack of resources,” said Edward Smith-Lewis, vice president of strategic partnerships and institutional programs at UNCF. “That’s a byproduct of a long history of being undervalued, underfunded, and under-supported.”
UNCF and PGIM surveyed 22 private HBCU and 50 non-HBCU endowment professionals about their experiences with fundraising, investing, and resources. They found that pooling assets to invest could be one way for HBCU endowments to grow.
According to the survey, on average, HBCUs have less than one investment professional on staff, as compared to an average of six at non-HBCUs. The survey also showed that HBCU endowments tend to have conservative or moderate approaches to risk management, as they are typically more resource-constrained than their counterparts.
“The reality is that HBCUs need to be able to draw down on their capital very quickly,” said Sancia Dalley, managing director and head of PGIM’s DEI Portfolio and HBCU Investment Strategy. “That coupled with what the report elevated is the low risk tolerance, those two insights really go hand in hand.”
Ryan Bailey, chief investment officer for outsourced CIO provider Paradigm Institutional Investors, agreed. “The size of your endowment does affect your risk tolerance,” Bailey said in an interview. “Your short-term events can be catastrophic. You can’t pursue some of the same programs that some with larger endowments can.”
Investment managers, particularly the private investment firms driving high returns for endowments these days, typically require that limited partners allocate a minimum amount of capital to gain access to their funds. With such small endowment pools already, many HBCUs cannot meet those managers’ minimums. As a result, they miss out on the returns that could meaningfully grow their endowments.
This is where pooling assets — either via an existing outsourced CIO provider, or through a new program launched in January by UNCF — comes in.
“One of the biggest learnings we had from this work is the viability from the pooled endowment structure,” Smith-Lewis said. “A pooled endowment will give you access to more asset managers and ultimately higher returns.”
In January, UNCF received a $100 million grant from the Lilly Endowment, which it will use to set up a pooled endowment on behalf of its 37 members.
The goal is to use the new endowment pool to increase the assets for each member by $10 million. UNCF is raising its own capital and assisting each member institution to match the fundraise. The group will then invest that pool, essentially treating it as an OCIO provider might.
Other HBCUs have already tapped OCIO providers: Spelman College’s endowment (which just received a $100 million donation this month), has outsourced its assets to TIFF, while Disciplina manages assets on behalf of the Florida A&M University Foundation.
According to Bailey, HBCUs need to find OCIO providers that offer more than cookie-cutter portfolios to clients. Some providers drop endowment clients into model portfolios, but because some HBCUs have different risk tolerances and spend rates than their peers, this doesn’t work as well as it could.
For Bailey and his team at Paradigm, this issue is personal: His parents went to HBCUs, as did Paradigm president Quentin McCorvey, and his parents. “My parents grew up in segregation,” Bailey said. “They had no other option for schools they could go to. These schools have been there for them... You have to have an OCIO that’s passionate about it. You might have to do something outside of the normal offering.”
Bailey envisions a model in which an OCIO not only offers the benefits of a pooled endowment but also access to investment expertise and education. This means OCIO providers or even their investment managers may teach classes at client HBCUs or offer internships to students at those schools.
According to Smith-Lewis, managers could also lend expertise to an institution’s board. “There needs to be a little bit of grace from the fund managers to understand that these institutions are stuck between a rock and a hard place,” Smith-Lewis said. “I think there’s an opportunity outside of training. They can help with creating solid investment policy statements. It’s not a huge lift, but it would be a gigantic step forward.”