What do we understand by an endowment? An endowment is a long-term capital, under transparent and professional management, whose returns guarantee the stable financing of a project in the future.

One of the most common problems faced by foundations and nonprofits is the variability of their cash flows from year to year. Whether due to a drop in donor contributions, changes in government support programs or other unexpected events, cash flow varies and the administrators of these entities suffer the stress of covering current project expenses.

One solution found by organizations such as foundations and universities in the U.S. was to set aside part of the contributions received, usually contributions such as large donations or extraordinary non-recurring contributions from any source, and create a fund that was not used in the current operation. This fund guarantees long-term self-sufficiency and intergenerational solidarity. They are usually a supplementary source of financing to the irregular flow of donations and contributions from the State.

What characterizes an Endowment?

The fund is invested with an infinite horizon, which allows taking greater risks and accepting less liquidity. This is rewarded with better returns, which in turn generates greater resources in the long term. The difference in returns between a 1-year term investment and a 30-year term investment can be as much as 6% per annum. An endowment that has $100 of assets, in the first case has $1 to spend and in the other case has $7 to spend annually.

The fund delivers the expected long-term return to the beneficiary entity. In other words, it is insulated from the ups and downs of financial assets. This return is estimated from year to year, depending on market conditions. The important thing is that these adjustments are much smoother than the changes in returns observed year to year in the markets.

This model has also been adopted by families who want their wealth to be preserved for several generations.

In short, a non-profit entity that wants to remain in the long term needs to have stability in its cash flows. The endowment model is an excellent tool to achieve this objective.

Tomás Espinosa, Multifamily Office Manager at FYNSA