In a broad sense, an endowment is a financial vehicle or an investment fund which is donated to a not-for-profit organisation that provides much-needed liquidity to aid in ongoing operations. In other words, it can be viewed as a source of income that can be "tapped" on a regular basis. Although these instruments are extremely useful, not all endowment funds are created alike. In fact, there are three basic factors which need to be considered when choosing the best type of fund.
Which Types of Investments?
An endowment fund manager will invest a portion of the overall money in order to achieve a projected return (much like any normal investment). As an endowment tends to be a more conservative form of long-term liquidity, there are generally some very stringent rules in regards to the types of investments that can be made. As these regulations will have an overall impact upon the return of the fund, the investment categories and the projected return on investment should be made clear.
When Can the Money Be Withdrawn?
By its very definition, an endowment is used to provide a source of predictable capital for a not-for-profit organisation. Withdrawal guidelines are normally determined by the needs of the company in question and the amount of money left in the original fund. Naturally, some funds will be more flexible than others. Determining this before committing to a specific plan is important; there is always a slight risk that liquidity may not be available when it is required.
Transparency and Usage
Another considerable variable is exactly HOW the money is to be used. In other words, where are the funds being funneled and is this in accordance with the contractual agreement associated with the original plan? Some funds are obviously more stringent than others. Although one scheme will only permit the money to be sent towards ongoing physical operations (such as purchasing new machinery), others could enable the organisation to use the capital for intangible purposes such as marketing or hiring new staff.
So, the three areas that need to be addressed are:
- The types of investments that the fund manager will make.
- When the funds can be withdrawn.
- Where the money can be internally directed.
Endowments are powerful tools which will offer much-needed liquidity to any not-for-profit organisation. Appreciating these three areas will provide the clarity necessary to select the most appropriate provider.