University endowments under pressure are rethinking investment strategies, Cerulli says

University endowments across the US are reassessing their investment strategies in response to mounting regulatory and economic pressures, according to new research from Cerulli Associates.

The report highlights how looming increases in endowment taxes and potential cuts to federal funding are prompting institutions to prioritize both long-term growth and short-term liquidity.

Cerulli’s analysis reveals that liquidity concerns are now front and center for higher education institutions of all sizes. The proposed endowment tax, which could rise from the current 1.4% to as much as 21% for the wealthiest institutions, is expected to place a direct strain on portfolios as it forces additional spending. Simultaneously, a squeeze in federal funding is pushing universities to draw more heavily from their endowments to cover operational costs.

“Amidst an evolving landscape, universities may adopt more cautious liquidity management strategies, such as increasing cash reserves, cutting expenses, repositioning their endowment holdings, or participating in the secondary market,” said Agnes Ugoji, analyst at Cerulli Associates.

She noted that while large institutions may be able to weather these challenges, mid-sized and smaller endowments lacking scale and internal resources could fall behind.

The report finds that smaller endowments are increasingly turning to outsourced chief investment officers to help manage complexity and strengthen investment outcomes. OCIO use is most prevalent among institutions with $100 million to $500 million in assets under management, and many OCIO providers expect endowment clients to drive much of the industry’s growth over the next two years.

As regulatory changes loom, OCIO providers with expertise in complex tax situations may have an edge in attracting new clients. Services such as improving access to liquid investment vehicles, developing efficient cash flow management systems, and supporting board education are also becoming more important.

A search consultant interviewed by Cerulli commented, “The proposed taxes are an incredible game changer because the OCIOs and the trustees haven't had to make decisions based on the tax consequences...are you going to hire an OCIO? Or are you going to change your OCIO because they're better at handling taxes? I think that might be a component.”

The so-called “endowment model,” popularized by Yale University’s former chief investment officer David Swensen, has long emphasized diversification into alternative assets such as private equity and hedge funds.

While this approach has delivered strong returns for large institutions – Yale’s endowment achieved an annualized return of 9.9% over the past two decades – Cerulli’s research suggests the model is not one that smaller, tuition-dependent schools can replicate easily. These institutions often lack the scale and resources to invest in illiquid alternatives and are more reliant on public equities.

As the investment landscape shifts, some universities are exploring new avenues for liquidity, including the secondary market and evergreen private credit funds. These vehicles offer intermittent liquidity and may help institutions manage risk while maintaining exposure to private markets. However, Cerulli notes that illiquidity, high fees, and exit challenges remain significant barriers for many endowments.