With the OCIO industry expected to see continued rapid expansion over the next few years, the bulk of the industry’s organic growth is projected to come from endowments and foundations.
New research from Cerulli Associates shows that endowments and foundations are expected to see 11.3 percent annual growth in assets managed by OCIO providers over the next five years; almost all OCIOs (91 percent) anticipate an increase in E&F clients and assets over the next two years.
“Endowments and foundations are leading all channels in terms of expected growth,” said Chris Swansey, associate director at Cerulli.
This is because nonprofits’ portfolios are allocating more to alternative investments like private equity and hedge funds.
“The nonprofit world has a proliferation of alternative investments and a lot of complexity,” said Brad Alford, founder of Alpha Capital. “Many nonprofits don’t have big staffs or the internal teams to handle this.”
Alford added that outsourcing is often more cost-effective, as “compensation for CIOs has gotten really high.”
Health and hospitals are also expected to drive growth for large OCIOs — if healthcare systems can find a provider with the right capabilities. Swansey told II that these relationships require a technical expertise that few boutique, nonprofit-focused OCIO providers possess.
“The healthcare and hospital channels require a specialty in handling those types of clients,” Swansey said. “It’s not just about investment performance — these clients want a strategic partner who understands how their capital pools interact.”
In addition to more nonprofits turning to outsourcing, consolidation within the OCIO industry (like Mercer buying Vanguard’s OCIO business) and wealth managers buying large institutional players (as exemplified by Hightower buying into NEPC) is also driving the growth. U.S. OCIO-managed assets are projected to grow at an annual rate of 7.9 percent over the next five years, with AUM expected to hit $4.2 trillion by 2028. By comparison, public defined benefit plans are expected to grow by 4.7 percent over the same period, while corporate DB plans are projected to rise by 2.2 percent.
Additionally, Swansey noted that OCIO advisory fees have come down, and with nonprofits seeing other institutions adopt the OCIO model, there’s a safety in numbers mindset developing.
“You don’t feel like you’re neglecting your fiduciary duties [by outsourcing],” Swansey added.
