Today, we’re thrilled to sit down with Camille Faivre, a renowned expert in education management with a deep focus on higher education finance. With her extensive experience guiding institutions through complex financial landscapes, including the development of innovative learning programs in the post-pandemic era, Camille offers invaluable insights into the evolving world of university endowments. In this conversation, we explore the remarkable growth of endowment funds, the impact of innovative investment strategies, and the looming challenges posed by new tax policies set to reshape the financial future of many institutions.
Can you start by explaining what a university endowment is and why it plays such a critical role in higher education?
A university endowment is essentially a financial safety net and growth engine for an institution. It’s a pool of funds, often built from donations and investments, that universities use to support their long-term goals—think scholarships, faculty salaries, research initiatives, and campus improvements. Endowments are crucial because they provide a steady stream of income, especially during economic downturns when other funding sources like tuition or state support might falter. They’re not just savings; they’re actively invested to grow over time, ensuring a university’s mission can be sustained for generations.
What factors do you think have contributed to the impressive 11.5% return for endowments over $1 billion in the latest fiscal year?
I believe several elements came together to drive these strong returns. First, the markets have been surprisingly resilient despite volatility, rewarding institutions that took calculated risks. Many endowments have benefited from a strategic shift toward alternative investments, which have outperformed expectations. Additionally, there’s been a favorable environment for both equities and bonds, which isn’t always the case. This combination of smart asset allocation and a bit of market luck created a perfect storm for double-digit gains in fiscal 2025.
How have private investments, such as private equity and venture capital, influenced these endowment earnings?
Private investments have been game-changers for many endowments. Unlike traditional stocks or bonds, private equity and venture capital offer exposure to high-growth opportunities—think startups or companies on the brink of going public. These investments often yield higher returns, albeit with more risk, because they tap into innovation and emerging markets. For endowments with the resources to navigate this space, allocating a significant portion to these assets has turbocharged their portfolios, helping them outpace more conservative strategies.
When it comes to specific investments like growth companies or pre-IPO firms, how do they stack up against more conventional options?
Growth companies and pre-IPO firms are often the heavy hitters in an endowment’s portfolio right now. These investments can deliver outsized returns compared to, say, blue-chip stocks or government bonds, because you’re getting in on the ground floor of something with huge potential. However, they’re not without pitfalls—there’s a higher chance of failure or market shifts that can wipe out gains. Traditional investments, while steadier, often can’t match that explosive growth, so endowments are increasingly willing to take the gamble for the payoff.
There’s talk of this being an ‘unusual year’ for markets, with both equities and bonds performing well. What do you think made this year stand out?
This year was unusual because typically, when equities do well, bonds tend to lag, and vice versa—they often move in opposite directions as investors balance risk. But in fiscal 2025, we saw a rare alignment where both asset classes delivered solid returns. I think this reflects a unique economic moment: lingering uncertainty kept bond yields attractive, while optimism in certain sectors, like technology, boosted equities. It’s not often you get this kind of dual strength, and endowments with balanced portfolios reaped the benefits.
Could you share some insights on how specific investments, like international equities or AI-driven stocks, have boosted endowment growth?
Absolutely. International equities have provided a hedge against domestic market fluctuations, allowing endowments to tap into growth in emerging economies or stable foreign markets. Meanwhile, AI-driven stocks, particularly in companies leading the tech revolution, have been a goldmine. These stocks often see rapid appreciation as the world leans more on artificial intelligence, and endowments that got in early on these trends have seen significant gains. It’s a clear example of how staying ahead of technological curves can pay off for university funds.
Diversification into assets like gold has also been mentioned as a factor. How do you see this impacting endowment performance?
Gold and other non-traditional assets act as a buffer for endowments. In times of economic uncertainty or inflation, gold tends to hold or increase its value when other investments might stumble. While it’s not a primary driver of growth—returns on gold won’t match high-flying equities—it helps stabilize a portfolio. For endowments, this diversification means they’re less vulnerable to market swings, which has likely contributed to their overall resilience and steady returns this year.
Shifting gears, can you explain the current endowment tax and which institutions it impacts?
The current endowment tax, implemented in 2017, is a flat 1.4% rate on net investment income, but it only applies to a small group of the wealthiest private universities—those with significant assets per student. We’re talking about a few dozen elite institutions with massive endowments, often in the billions. It was designed to generate revenue from schools perceived as having vast resources, but it’s been a relatively light burden compared to what’s coming down the pipeline.
Speaking of what’s coming, can you walk us through the new tiered tax system set to start in 2026 and how it’s based on endowment value per student?
The new tax system, part of a recent spending bill, moves away from the flat rate to a tiered structure, targeting private universities with at least 3,000 tuition-paying students. It starts at 1.4% for endowments valued between $500,000 and $749,999 per student. Then it ramps up significantly: 4% for those in the next bracket, and a steep 8% for the highest tier based on per-student value. This means the larger the endowment relative to student count, the heavier the tax bite, which will hit the biggest players hardest.
With top institutions facing massive tax bills—like a projected $300 million annually for some—how do you think this will affect their support for financial aid and research?
These tax bills are a major blow to operational budgets. When you’re losing hundreds of millions annually, that’s money directly pulled from priorities like financial aid, which helps make education accessible, and research, which drives innovation. Institutions may have to tighten belts, redirect funds, or ramp up fundraising to cover the gap. It could mean fewer scholarships or scaled-back projects, which ultimately impacts students and the broader academic community.
Even smaller universities are bracing for significant tax increases, with some facing additional costs in the tens of millions. How are they adapting to this pressure?
Smaller universities, despite not facing the same scale of tax bills as the giants, are still feeling the squeeze. Many are looking at cost-cutting measures—reducing staff, freezing hires, or trimming programs. Some are also reevaluating their budgets to prioritize core functions while seeking alternative revenue streams, like boosting alumni donations. It’s a tough balancing act, as they can’t always absorb these costs without impacting the quality of education or campus services.
Given these financial challenges, do you think other institutions might resort to layoffs or position cuts to manage the new tax burden?
Unfortunately, yes, I think it’s a real possibility. When you’re hit with unexpected costs in the millions, labor is often one of the first areas to take a hit because it’s a large, adjustable expense. We’ve already seen some universities eliminate positions or scale back hiring plans. Others might follow if they can’t offset the taxes through investments or fundraising. It’s a painful decision, as it affects livelihoods and campus morale, but it may be inevitable for some.
Looking at the bigger picture, what do you see as the broader impact of these tax hikes on higher education in the U.S.?
These tax hikes could reshape higher education significantly. They risk widening the gap between well-resourced institutions that can weather the storm through robust fundraising or reserves and smaller schools that might struggle to keep up. There’s also a potential chilling effect on innovation—less money for research or new programs could slow academic progress. Ultimately, it might force a reckoning about how universities fund their missions and whether access and equity take a backseat to financial survival.
Do you believe universities will adjust their investment strategies in response to these tax changes, and if so, how?
I think many will have to rethink their approach. Some might pull back from high-return, high-risk investments to minimize taxable income, focusing instead on assets with steadier, less taxable gains. Others could double down on fundraising to build cash reserves or lobby for tax relief. There’s also a chance we’ll see more creative financial engineering—structuring endowments to fall below certain tax thresholds. It’s a complex puzzle, but adaptation will be key to mitigating the impact.
What is your forecast for the future of university endowments given these evolving tax policies and market conditions?
Looking ahead, I think endowments will face a period of uncertainty. The tax policies will undoubtedly strain budgets, especially for the largest funds, and could force a more conservative approach to investments. At the same time, market conditions remain unpredictable—while recent returns have been strong, volatility could challenge growth. My forecast is that universities will need to innovate, both in how they manage their funds and how they advocate for their financial needs. Those that can balance risk, adapt to policy shifts, and rally stakeholder support will likely emerge stronger, but it won’t be an easy road.
