Endowments and foundations want more access to private investments than ever before, and they’re using outsourced chief investment officers to get there.
According to a July Cerulli Associates’ report, the firm’s non-retirement nonprofit clients — mainly endowments and foundations — are recruiting the services of OCIOs at increasingly higher rates. The market research firm attributed this jump in OCIO demand to the barriers to entry that smaller asset owners face when pursuing private investments. Overall, the OCIO channel has been growing quickly for a number of reasons, including increased investment complexity.
One large challenge for these types of institutions is that most endowments and foundations in the U.S. are working with relatively small pools of capital. Smaller nonprofits, which may not be able to meet the high minimums for private investments, are often shut out of the asset class. This is where OCIOs come into the picture.
“A lot of [these organizations] are moving to OCIOs for that reason — assets can be pooled with other nonprofit clients that are also looking to access those private investments,” Laura Levesque, associate director of Cerulli’s institutional group, told Institutional Investor.
Levesque said that the demand for private investments is the result of the high yield they can generate, along with the fact that nonprofits have long-term time frames. These characteristics allow them to take on the additional risk inherent in private investments. “With their long-term investment horizons, nonprofits are also keen to include illiquid asset classes to increase overall returns,” the report said.
Endowments and foundations need OCIOs just as much as OCIOs need these institutions. In fact, endowments and foundations are critical to the growth of OCIO assets. According to the report, 91 percent of OCIO providers that Cerulli surveyed said that endowments would be very important to their growth in assets under management over the next two years. Eighty-seven percent of OCIOs said the same about foundations.
Cerulli expects OCIO mandates from endowments and foundations to increase “by double digits” every year through the end of 2025, the report said.
According to Cerulli, the rise of environmental, social, and governance investing is also contributing to growing OCIO use among endowments and foundations. These organizations want strong ESG policies, but Levesque said that many don’t know exactly how to define what that means for their institutions.
“A large portion of [asset owners] only started [looking at ESG as part of their investment policy] sometime in the last five years,” Levesque said. “They need help defining what their ESG philosophy is, how to approach it, [and] how to invest in [it]. They turn to OCIOs to help them with that.”
OCIOs have the kind of expertise in ESG that some allocators are lacking. In a 2021 survey of OCIOs, Cerulli found that all respondents were considering ESG factors when conducting manager due diligence. “One of the many benefits of adopting the OCIO model for these clients is that they receive support in developing their ESG plan and can find the best-in-class investments that match their organization’s ESG philosophy,” the report said.
In the future, Cerulli expects the demand for ESG evaluations and private investments to push more allocators to adopt the OCIO model.