As US colleges and universities brace for financial uncertainty, the resilience of their endowments is under scrutiny. Despite the perception that large endowments offer a financial safety net, rising allocations to private assets and the threat of funding cuts or tax changes are creating potential liquidity challenges for even the most well-capitalised institutions.
Ortec Finance, a provider of risk and return management solutions, recently delved into how US endowments can navigate liquidity in an uncertain market.
Harvard University, which holds the country’s largest endowment, has reportedly explored $1bn in secondary sales of private equity investments. The move suggests concerns over liquidity, possibly in response to new federal proposals that could impact funding and tax benefits, it explained. The question now facing many in the education sector is whether this signals a broader liquidity crunch among endowments.
Over the past decade, many U.S. endowments have embraced alternative investments in a bid for higher returns. Following the investment model popularised by Yale’s David Swensen, institutions like Harvard significantly reduced their public equity holdings in favour of private equity, private credit and hedge funds. From 2018 to 2024, Harvard’s public equity allocation fell from 31% to 14%, while private equity and hedge funds surged to 71%, according to Ortec Finance. In 2024, U.S. college endowments delivered a return of 11.2%, with total value reaching $873.7bn. Harvard’s endowment alone rose to nearly $53bn, up from $39bn in 2018.
However, with this shift has come reduced liquidity. Using the Illiquid Asset module of GLASS—Ortec Finance’s Asset and Liability Management software—analysts have tracked a steep decline in Harvard’s liquidity ratio. This metric, which compares liquid assets to the annual 5% payout from the endowment, illustrates the institution’s ability to meet its obligations. In 2018, Harvard’s liquid assets could cover nine years of payouts. By 2024, this figure had dropped to five, placing the university within a “critical” liquidity threshold, it said.
The issue becomes more pressing in the face of unplanned or increased expenditures. A key concern is that federal funding, which comprises a major share of university revenues, could be reduced. In 2024, Harvard received $686m in federal research grants, about 11% of its total operating revenue. Should this or other revenue streams like international student enrolments decline, the university could be forced to tap its endowment more aggressively.
As the funding landscape shifts, endowments may need to re-evaluate whether their strategies align with both long-term growth and immediate capital needs. Scenario modelling and active liquidity planning can help institutions like Harvard maintain resilience amid uncertainty.
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