Endowment funds provide a secure way of financing varsities

Our universities are facing a perfect storm; lower State funding, reduced enrollment of self-sponsored students and unresolved mismanagement issues that have now hit crisis levels. The result; the Ministry of Education reports that many are struggling to honour obligations such as payroll taxes, retirement schemes and insurance premiums for employees.

The Auditor General has even noted some are now relying on costly borrowings just to stay afloat. Looking forward, with the new administration calling for fiscal discipline, the future looks very tough for these institutions.

Search for alternative options cannot be delayed any longer. Raising tuition fees is one option. But to have a diversified revenue stream is even better. And this is where the endowment concept comes in.

For starters, an endowment fund is simply a pool of assets invested by a college or university to support its educational and research mission in perpetuity. Typically, it comprises hundreds or thousands of individual donations. These gifts (often from alumni, business sector and well-wishers) also allow the institution to make commitments far into the future, knowing that resources to meet those commitments will continue to be available.

A few notable endowments include Harvard University’s endowment fund, which has a Sh6 trillion endowment fund. Yale University and Columbia University follow closely with Sh5 trillion and Sh1.5 trillion endowment funds.

Why is this a great option? One is funding. Let's take the example of the world's biggest endowment fund - Harvard. In the fiscal year ending June 2022, its endowment fund distributed Sh250 billion back to the university as income - an amount which accounted for over a third of the university’s total operating revenue or 77 percent of the university’s salaries and wages. It is the single biggest source of revenue for the university. Education revenue accounted for only 21 percent. What's amazing is that, after expenses, the university still had a Sh48 billion surplus.

Two is that endowments create intergenerational equity. In other words, universities can only take a portion of the fund every year to support their annual operations. Harvard targets an annual endowment payout rate of five percent to 5.5 percent of market value.

All this is to ensure that future generations get to enjoy the benefits just as much as the current one. Therefore, as a matter of structure, endowments are designed to last forever. A crucial point for institutions intended to serve generations of students and pursue research on questions that cannot be answered in one lifetime.

Three is that these funds provide the alumni (plus other well-wishers) a channel to give back. As an example; Harvard’s aggregate endowment is made up of more than 14,000 individual endowments. More than 75 percent of gifts it received last year averaged Sh18,600 per donor. Giving back to the current and future generations of students, faculty and researchers is a fantastic show of gratitude.

Why do these top universities excel in teaching, scholarship, research and generous financial aid? There’s no magic, they’ve figured out a way to fund themselves sustainably. In this case, endowment funds. It does not hurt to copy a great concept. Struggling local institutions can follow the same path.

The writer is the MD Canaan Capital.