Jun 262015


Photo Credit: Harvard Business School

Ever wonder who’s in the “college billionaires club” and why they stay so wealthy? How colleges invest as institutions matters most. Equally as much, how donors plan to give their gifts matters too. Just as important is how long do the college’s cash reserves hold up too under an endowment payout typically between 3-5%, as a rule, among this elite institutional billionaires cohort.

“Cash is king” inside the “college billionaires club”. So with that said, we discuss with you in this piece the key hidden secrets behind keeping the club’s balance sheets so healthy.

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Photo Credit: Harvard University

A report from Moody’s Investors Service entitled,”Financially Leading Universities Poised to Further Widen Balance Sheet Advantage,” measured in the second quarter of this year, the total wealth of 503 public and private institutions in terms of cash and investments in 2014. The report found that America’s ten (10) richest universities holds nearly a third (33%) of the total institutional investor wealth of the sector. Whereas, the sector’s top 40 colleges hold almost two-thirds of the total wealth.

“This group of financially leading universities is differentiated from the rest of the sector by long-term highly diversified investment strategies, exceptionally strong philanthropic support, and healthy cash flows. Combined, these will contribute to ongoing wealth concentration in the higher education sector,” says Moody’s Analyst, Pranav Sharma.

America’s 50 richest colleges, as ultra-high net-worth (UHNW) institutional investors (which is described here as the “college billionaires club”), generally invest for “other people”, looking forward globally using not only “other people’s money”, but also their own.

These institutional investments are achieved through balanced portfolios of mutual funds, insurance and re-insurance capital, private and public equities, treasuries and municipal bonds, and alternative investments (e.g., structured finance, interest and various risk options, and/or warrants and derivatives), and REITs – real estate investment trusts – considering the old adage that sometimes “the best investment on earth is earth.”

Like across much of the U.S. population, the gap between the richest universities and the “rest of the pack” in the higher education sector is widening, with leading schools attracting a steady stream of investments, alongside generous donations.

Duke Univ Campus 8

Photo Credit: Duke University

Shaping the “Rule of 3” institutional investor wealth list among the academy, as of fiscal year 2014 in terms of cash and investments are: Harvard in first place by a wide margin with US$42.8 billion, alongside Stanford, as runner-up second with US$31.6 billion, and Yale rounding off the top three with US$25.4 billion.

In contrast, Howard University in Washington, DC, which tops the U.S. historically black colleges and universities wealth sector, comprising about 4 percent of the U.S. higher education market, holds about US$538 million in cash and investments.

Rounding out the top 10 list inside the “college billionaires club”, encompassing the 50 wealthiest U.S. universities as institutional investors in 2014, are:

#4 Princeton University at US$21.3 billion;

#5 Massachusetts Institute of Technology at US$15.2 billion;

#6 University of Pennsylvania at US$11.9 billion;

#7 Duke University at US$11.4 billion;

#8 Northwestern University at $US10.4 billion;

#9 Columbia University at $US9.9 billion;

#10 University of Notre Dame at $US9.5 billion.

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How Do These Ten Riches U.S. College Institutional Investors Maintain Their Capital Reserves?

Moody’s says the ten riches U.S. colleges’ “diverse investment strategies and access to the best performing managers have played a pivotal role in a quick recovery since the financial crisis. By investing in less-liquid, higher-yielding assets, the group has stronger long-term investment returns. With very strong financial reserves relative to debt and operations, these universities can manage the volatility associated with these strategies. Based on FY 2014, the top 40 universities had a median cash and investments of $6.3 billion compared with $272 million for the remainder of the sector.”

These ultra-high net worth (UHNW) billionaire institutional investors tend to have huge capital reserves, which creates high-cash yield investments through structured financial instruments, such as interest-rate swaps, credit default swaps or foreign exchange rate derivatives, according to Simon Smiles, Chief Investment Officer of UBS Wealth Management.

In his discussions with UHNW billionaire institutional and individual clients across the world, Smiles says three questions are on the minds of billionaire college institutional investors and the trustees of their wealth trusts, “They want to know what they should do with their cash balances in a zero rate world of — apparently, after many false starts — rising inflation; what investment themes they should focus on over the longer term; and how they can generate investment returns less correlated to movements in global equity markets.”

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Photo Credit: Massachusetts Institute of Technology

Smiles says UHNW billionaire college institutional investors are constantly on the lookout for high-yield alternative exotic investment strategies that not only protect, but also, substantially grow their wealth. Such wealth-creation means, known as “alpha” strategies, especially attractive to UHNW billionaire college institutional investors, involve investments that create cash out of risk advantages by selling derivatives and “exotic” financial instruments to structure low risk, higher cash yields, and greater returns on investments.

UHNW billionaire college institutional investors are also interested in stakeholder management issues across global communities, involving what is termed as “secular” investments, involving rising standards of living, urbanization, and population growth, and their impact on heightened protein consumption, not only in developed countries, but especially in under-developed countries and emerging economies across Asia, writes Smiles.

“As a result, the investment opportunities offered by this long-term secular investment trend are varied: public equities, private equity, and direct investments, such as agricultural land and fisheries,” Smiles typically advises his global high-net billionaire institutional and individual clients.

This presents a compelling case about how UHNW billionaire college institutional investors do make a difference along many institutional threads across our social fabric.

“These financially strong universities benefit from diverse revenue sources, which underpin greater operating stability and cash flow generation. Despite revenue diversity, financial performance of public universities is expected to moderate as state governments reduce operating appropriations, while placing constraints on tuition growth,” Moody’s finds. 

These findings shed a more favorable light on how a third of total institutional investments are remarkably held by these ten U.S. colleges, as an institutional investor cohort, when viewed through a more rational prism of data and information to gain deeper knowledge and insights about what it takes to be a UHNW billionaire college institutional investor nowadays in terms of demographics, education, business and finance, and investments.

Free Tuition to Students Attending the College Billionaires Club

As reported by Economic Policy Editor, Bryce Covert for Thinking Progress: In April 2015, “Stanford University announced that more accepted students won’t have to pay anything for tuition, which normally runs nearly $46,000 a year.

Students whose families make less than $125,000 a year and have assets worth $300,000 or less, including home equity but excluding anything that they have saved in retirement accounts, won’t have to pay tuition. Students whose families make less than $65,000 also won’t have to pay for room and board, which can run about another $14,100. Scholarships or grants will cover the costs instead, and the school has a $21 billion endowment. The thresholds were previously $100,000 for free tuition and $60,000 for free room and board.

Students will still have to contribute at least $5,000 a year from part-time work during the school year, working during the summer, and/or savings.

“Our highest priority is that Stanford remain affordable and accessible to the most talented students, regardless of their financial circumstances,” said Provost John Etchemendy in a press release. “Our generous financial aid program accomplishes that, and these enhancements will help even more families, including those in the middle class, afford Stanford without going into debt.” The school says that 77 percent of undergraduates leave without student debt.

That makes Stanford graduates somewhat unique, as about 70 percent graduate with debt, owing an average of $29,000 at the end of last year. Student loan debt has tripled over the last decade. Meanwhile, nearly a third of those who have started to pay back the loans are more than three months behind on payments.

But Stanford isn’t the only place offering free tuition. Princeton offers free tuition to parents who make less than $120,000 and free room and board to those who make under $60,000. Harvard and Yale make tuition free for families who make less than $65,000, while Harvard asks those who make between that level and $150,000 to contribute between 0 and 10 percent of their income.”

Here’s a nice idea proposed by Bryce Covert for finally addressing affordability and access to public land-grant higher education in America:

“Tuition at public colleges came to $62.6 billion in 2012, according to the latest government data. That’s less than what the government already spends to subsidize the cost of college through grants, tax breaks, and work-study funds, which comes to about $69 billion. It spends another $107.4 billion on student loans.”

“The federal government could take the $69 billion it currently spends helping students cover the cost of college through grants, tax breaks, and work-study funds and instead simply cover tuition at those schools for anyone who wanted to attend. That would give all students of all income backgrounds an affordable option, and it could also put pressure on private schools like Stanford and Harvard to reduce their tuition to compete, which has risen 13 percent over the last five years.”

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Photo Credit: Lilly Family School of Philanthropy, Indiana University

Where is charitable giving taking place around the world as of 2014?

Wealthy individuals amount to 72% of total charitable giving of US$358.38 billion in 2014 (compared to US$335.17 billion in 2013), up 7.1% overall (at US$23.21 billion), according to the 2015 Giving USA report. High net worth individuals are becoming more confident in giving to the secular causes they especially care about, as the mean net worth of charitable billionaires at US$3.1 billion and mean high cash balances on-hand at US$600 million continue to grow.

Total giving as a percentage of the nation’s gross domestic product (GDP) – an indication of the economy’s health – was 2.1% in 2014. Between 2013 and 2014, GDP increased in inflation-adjusted dollars at 2.2%, compared to inflation-adjusted total charitable giving at 5.4%.

According to Giving USA, total contributions by sources (as percentages of all charitable giving at US$358.38 billion in 2014, including in parenthesis percent increases (decreases) from 2013 giving levels) carves out as follows:

  • Individuals at 72% (totaling US$258.03 billion, up 5.7%, compared to up 4.2% from 2012 giving levels). This amounted to an additional US$13.88 billion given to others in need, the greatest contributing increase. This also amounted to about 58 percent of the US$23.21 billion increase between the 2013 and 2014 total charitable giving levels;
  • Foundations at 15% (totaling US$53.76 billion, up 8.2%, compared to up 5.7% from 2012 giving levels);
  • Bequests at 8% (totaling US$28.67 billion, up 15.5%, compared to up 8.7% from 2012 giving levels);
  • Corporations at 5% (totaling US$17.92 billion, up 13.7%, compared to down1.9% from 2012 giving levels).

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Photo Credit: Stanford University

Three charitable sectors have surpassed in 2014 giving levels realized in 2013 prior to the heart of the recession: (1) Religion, (2) Gifts to Foundations, and (3) Gifts to Individuals.

Education and Health sectors saw in 2014 a slight drop in giving levels seen in 2013, mainly due to uncertainties inside university teaching hospitals and medical research initiatives, surrounding the federal government’s larger role in population-based care – known as The Affordable Care Act – coming in full-force in 2016.

Whereas, five charitable sectors remained steady in 2014 with 2013 giving levels: (1) Human Resources, (2) Public-Safety Benefits, (3) Arts, Culture and Humanities, (4) International Affairs, and (5) Environment and Animals

Here’s the Giving USA breakdown of 2014 contributions in parenthesis to recipient organization (by percentages of total charitable giving at US$358.38 billion in 2014):

  • Religion (32%, compared to 31% in 2013);
  • Education, particularly to higher education and K-12 (15%, compared to 16% in 2013);
  • Human Resources (12%, the same as 2013);
  • Gifts to Foundations (12%, compared to 11% in 2013);
  • Health (8%, compared to 10% in 2013);
  • Public-Safety Benefit (7%, the same as 2013);
  • Arts, Culture and Humanities (5%, the same as 2013);
  • International Affairs (4%, the same as 2013);
  • Environment and Animals (3%, the same as 2013);
  • Gifts to Individuals (2%, compared to 1% in 2013).

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Photo Credit: Northwestern University President Morton Schapiro and World-Renowned, Distinguished Ballet Artist, Mikhail Baryshnikov

“All key economic factors associated with charitable giving grew in 2014 — such as the S&P 500 Index, U.S. Gross Domestic Product, and corporate profits — were generally stronger as compared with 2013,” the 2015 Giving USA analysis reveals.

The analysis adds: the rise in corporate giving in 2014 at 13.7% was largely due to higher growth in pre-tax corporate earnings at 8.3%. Corporate giving as a percentage of these pre-tax corporate earnings was just 0.7 percent in 2014.

Donations of extremely large gifts to colleges’ and universities’ capital campaigns and medical research initiatives boosted giving to higher education. 

Charitable giving to religion reached a record high in 2014, says Giving USA, in spite of largely continuing 2013 trends of “declining religious affiliation and attendance and increased giving to religious-oriented charitable organizations” within other recipient sectors categorized above.

A 9.2% boost in giving to the arts, culture and humanities was the largest across all sectors in 2014, followed by a 7% growth in charitable contributions to environmental and animal organizations.

In addition, charitable giving to international affairs remained steady in 2014, mainly because of continuing 2013 trends of “fewer disaster-relief contributions compared with prior years, and changes in donor giving preferences,” reports Giving USA

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Photo Credit: University of Pennsylvania

How Do Donors Plan Their Gifts to Wealthy Colleges?

The majority of these financially leading colleges inside the billionaires club also “attract a disproportionate share of philanthropic support, contributing to their ongoing outperformance,” says Moody’s Investors Service. “Gift revenue can be used to further their strong brand recognition by funding investments in academics, research, and facilities – widening their competitive gains.”

Flexibility in giving gifts to colleges’ going concern and adaptability in planning gifts to colleges going forward is achieved by increasing donor’s future income at the same time.

As an institutional wealth investor, college philanthropy rests on two popular deferred giving methods – charitable gift annuities (CGAs) and charitable remainder trusts (CRTs). In each method, the donor transfers low-yield or high-yield assets to the colleges in exchange for quarterly income-producing payments. The donor receives a tax deduction and other potential tax savings (including tax benefits on capital gains). The remaining funds transfer to the colleges upon the death of the final income beneficiary of the gift or trust.

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Photo Credit: University of California Berkeley

Charitable Remainder Trust (CRT). A donor, who may be concerned primarily with certainty of income available to the beneficiary of the charitable remains of a gift transaction, will perhaps elect to receive a predictable amount during the term of the trust in the form of a CRT.

CRTs provide variable payments to income beneficiaries (who receive distributions from a CRT), but can offer a greater return with income for a lifetime, a term of years, or a combination of the two. The amount of required annual distribution as a partner with the college can be predetermined by the donor. CRT variable rates are negotiated between the college and the donor. Rates are generally established at 5 percent with payments varying with the annual value of the CRT.

To minimally fund a CRT, a donor generally gifts about $100,000, either using cash or equitable securities (such as closely-held stocks and mutual funds), and real-estate. CRTs funded with bonds, particularly municipal bonds, can be advantageous for donors, mainly because it is possible to establish immediately through current bond interest rates, the tax-free annual payments to the income beneficiary. Donors may add assets to a CRT at any time.

Provisos can be established for income beneficiaries to realize some tax benefits through capital gain, rather than tax penalties through all ordinary income. From the annual distributions, a donor may transfer low-yield assets to the CRT with the expectation that the CRT will be required to convert some of the assets to cash to make the required payments. This is provided the donor does not permit the charitable remainder beneficiary to receive the original principal of the propertied-value funded trust or estate trust intact, as distinct from its income or interest. 

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Photo Credit: 100 Years of Harvard-Yale Football

Charitable Gift Annuities (CGA). Donors like this deferred gift offer to colleges, mainly because of the security of fixed payments to one or two annuitants – individual(s) who receives payments from a CGA for the duration of his or her lifetime – guaranteed by the college.

In other words, under this extended partnership between the donor and the college, a CGA transfer of cash or other property is made to the college in exchange for a commitment by the college to pay the donor’s annuitants a specified amount each year during the remainder of the donor’s life.

CGA payment rates by the college are determined by the annuitant’s age, and the payouts are usually fixed at the time of the donation to the college.

Income payouts are generally received by the donor, when they turn 55 years of age or older. In other ways, income payments may be given to the donor’s beneficiary (being a spouse, children or grandchildren). Or, income distributions could be transferred to another charitable reason inside the college (such as an affiliated medical research initiative).

All of these income distributions are usually made on a quarterly basis once the CGA or CRT has been established inside the college. “Payments from a deferred CGA can be delayed until a future date, such as retirement, which can result in a large tax deduction and a higher payout rate — paid on a CGA, as suggested by the American Council on Gift Annuities,” according to the University of Chicago’s Office of Gift Planning.

One essential proviso of a CGA is the cash or value of the property (like equitable stocks, bonds, mutual funds, real estate, and so forth) gifted to the college must exceed the value of the annuity guaranteed by the college, counsels the University of Chicago’s Office of Gift Planning. The donor’s gift transaction is categorized as “a purchase of an annuity and a charitable contribution” to the college. Typically, a minimum gift of $10,000 funds a CGA, and repeat CGAs to colleges over time are easy to offer and execute.

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What is the College Billionaires Club’s Future Outlook: World’s Wealthiest Will Transfer Trillions by 2050

The world’s ultra-high net-worth wealthiest will transferred about US$16 trillion to the next generation over the next three decades, according to the Wealth-X and NFP International’s ‘Family Wealth Transfers’ report here.

This report concurs with a previous study released several years ago on May 7, 2012 that says ultra-high-net-worth investors are estimated to transfer an even greater amount of US$27 trillion from one generation to the next by 2050, according to a report by Morgan Stanley Private Wealth Management and Campden Wealth.

Altogether amounting to one and a half times the United States economy, the world’s wealthiest will engage in the largest wealth transfer in world history, producing a whole new cohort of ultra-wealthy individuals.

Broader more general findings in the Wealth-X and NFP report reveal the full spectrum of ultra-high net-worth (UHNW) family wealth transfer costs, and when such wealth transfers will occur, how much of this wealth will be passed on, and what various wealth transfer planning techniques will be employed.

The report highlights the benefits of asset protection and estate planning. Moreover, the study identifies by global regions and countries trends in UHNW succession planning of assets and values from wealthy benefactors to designated beneficiaries (including “secular investment” causes and charities, like religion education, and the “college billionaires club” discussed herein).

More specific narrower findings inside the Morgan Stanley Private Wealth Management and Campden Wealth’s report, “Next-Generation Wealth: The New Face of Affluence,” surveyed 53 families, 73% of which had a net-worth of more than $100 million. The “next-generation,” those between ages 20 and 49, represented 45% of respondents to the Morgan Stanley-Campden Wealth study.

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Photo Credit: Columbia University Graduation

Were half the power that fills the world with terror; Were half the wealth bestowed on camps and courts; Given to redeem the human mind from error; There were no need of arsenals nor forts.” – Henry Wadsworth Longfellow (1807-1882), American poet, “The Arsenal at Springfield.”


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Photo Credit: University of Notre Dame

Appendix A. Wealth-X and NFP International’s ‘Family Wealth Transfers’ Report. 

Below are key highlights of the Wealth-X and NFP International’s ‘Family Wealth Transfers’ report here:

  • The majority of those passing on their wealth are self-made individuals.
  • The United States will see the greatest amount of wealth transfers, with US$6 trillion set to change hands in the next 30 years — amounting to nearly 40 percent of the global total.
  • Forty-three percent of Asia’s UHNW wealth (US$3 trillion) will be transferred.
  • Nearly US$5 trillion in liquid assets will change hands.
  • Philanthropic bequests will also form part of this upcoming wealth transfer, with US$300 billion in charitable donations expected.
  • Private holdings form the largest component of the net worth of UHNW individuals set to transfer their wealth, with US$6 trillion of UHNW wealth currently held in private companies.
  • Wealth rises with age, and UHNW individuals who are 80 years old or above are on average five times wealthier than those under 40.

Wealth-X President David Friedman commented: “The Wealth-X and NFP Family Wealth Transfers Report highlights what will be the largest wealth transfer in history from one generation to the next. Expert commentary from NFP on how to leverage structures like life insurance to optimize such transfers complements Wealth-X’s global intelligence on the world’s UHNW population, most of which is privately held, producing a study that is unique, valuable and essential to those who would like to understand and engage this momentous transfer of ultra affluent wealth.”

Bryan Schick, President of NFP International, added: “With US$16 trillion passing to the next generation over the next 30 years, the enduring legacies of many families will soon be defined. Expert guidance from qualified global advisers will be paramount in assisting the ultra high net worth in navigating complex planning challenges and executing an efficient transfer of wealth and values.”

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Photo Credit: The Ohio State University Main Library

Appendix B. Morgan Stanley Private Wealth Management and Campden Wealth Report.

By comparison, below are key highlights of Morgan Stanley Private Wealth Management and Campden Wealth’s report, “Next-Generation Wealth: The New Face of Affluence,”

  • Thirty percent have “significant wealth of their own” and 17% are involved in entrepreneurial ventures.
  • Twenty-nine percent of older respondents said they built their wealth on family wealth. In fact, 60% said they planned to leave “substantially all of their wealth” to their children.
  • By comparison, just 44% of the next generation said they planned to do the same. Less than half of the next generation said wealth re-creation was very important to them and 28% said it was of little importance.
  • Nineteen percent of parents from the next-generation group and 18% from the older generation agree that wealth management should be left to the experts.
  • Wealthy families frequently use a primary adviser as a “quarterback” to execute plans and coordinate efforts between other advisers.
  • Seventy-three percent of next-generation parents and 56% of older-generation parents use philanthropy to teach about wealth.

“For ultra-affluent families, wealth transfer can be a complicated process, both emotionally and practically. A goal of the research is to provide unique insights into the needs and concerns of the next generation and those of their elders as they face the challenges of wealth transition,” Douglas Ketterer, head of Morgan Stanley Private Wealth Management in the United States, said in a statement. One implication of the findings for advisers, Ketterer said, is that “they need to think like family advisers in the fullest sense, attuned to the attitudes and psychological disconnects that may exist between generations.” 

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Photo Credit: Nassau Hall, Princeton University



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