Endowment Management: Distribution Basics

Endowment Management Distribution Basics Jeff Sobers Senior Product Marketing Manager

Introduction to Endowments

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Pop Quiz, Hot Shot Please Answer True or False • A university or other charity cannot spend from an endowment fund that is “underwater” (i.e. with a value below the value of the original gift(s))

• UMIFA was created to protect money in endowment funds; UPMIFA allows charities to spend whatever they want

• UPMIFA changes donor intent • These statutes apply only when a university and donor have not reached some other agreement about the “rules” that will govern endowment spending

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Common Endowment Myths • The university can only spend interest and dividends

• Any capital gains (net of losses) must be maintained so that the endowment keeps pace with inflation

• The money the donor gave, plus the capital gains, is restricted in perpetuity – the university can never spend it

• The interest and dividends that the university can spend may be spent for any purpose within the tax-exempt mission of the university

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Goals of the Endowment •Create an ongoing source of income •Enhance stability and prestige •Relieve pressure on the annual fund •Allow for program expansion •Provide independence •Offer flexibility for management •Build pipeline of future gifts •Encourage outright gifts Blackbaud Confidential 6

Benefits to the Donor •Perpetuate the donor’s values and priorities •Create a sense of immortality •Make significant investment in the future •Endow annual gifts •Provide incremental funding •Provide lifetime income •Alleviate management burden •Add-as-you-go Blackbaud Confidential 7

The Endowment Process

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The Endowment Process

Endowed Fund

Create

Fund

Invest

Earn

Distribute

Spend

Asset Allocation of Endowments Level One • Stocks • Bonds • Mutual Funds • Interest-bearing Accounts

Level Two • Commodities Level Three • Private equity • Venture capital • Limited partnerships • Hedge funds

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Revenue Generated •Interest •Dividends •Royalties •Realized Gains •Unrealized Gains

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Income Distribution Methods

•Proportional •Unitized

Proportional Distribution Example $5,000 investment earnings

A; 22,500; 23%

B; 29,250; 29%

C; 38,250; 38%

D; 10,000;

10%

Endowment Balance

A; $1,125.00;

23%

B; $1,475.00;

29%

C; $1,912.50;

38%

D $500.00

10%

Earnings

Using Excel?

Other Considerations?

•Investment Fees •Where is the Income Going?

Scenario

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Balances

9300: $11,104,879.22 9301: $1,609,466.86 9302: $2,629,287.44

Balance held in short-term and long-term investment accounts

Income

Interest: Dividends: Realized Gains: Unrealized Gains TOTAL INCOME

$10,000 $20,000 $50,000

$150,000

$230,000

Fees

Investment Manager • Fee varies based on ending balance

of assets invested • At the current endowment balance,

0.027% of invested amount is charged as the investment fee

Donor Intent

9300 Earnings are unrestricted 9301 Earnings are used to provide scholarship for gifted students 9302 Earnings are used to fund overseas scholars program

Demonstration

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Speaker Follow-up Slide

Jeffrey.Sobers@Blackbaud 843.654.3088 (optional) @jeffsobers For more information, resources, and conversations, visit: blackbaud.com/research npEngage.com

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Save the Date!

October 6 – 8, 2014, Gaylord Nashville, TN

About Blackbaud, Inc. Serving the nonprofit and education sectors for 30 years, Blackbaud (NASDAQ: BLKB) combines technology and expertise to help organizations achieve their missions. Blackbaud works with more than 28,000 customers in over 60 countries that support higher education, healthcare, human services, arts and culture, faith, the environment, independent K-12 education, animal welfare, and other charitable causes. The company offers a full spectrum of cloud-based and on-premise software solutions and related services for organizations of all sizes including: fundraising, eMarketing, social media, advocacy, constituent relationship management (CRM), analytics, financial management, and vertical-specific solutions. Using Blackbaud technology, these organizations raise more than $100 billion each year. Recognized as a top company by Forbes, InformationWeek, and Software Magazine and honored by Best Places to Work, Blackbaud is headquartered in Charleston, South Carolina, and has operations in the United States, Australia, Canada, Mexico, the Netherlands, and the United Kingdom.

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