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Portfolio > Alternative Investments > Private Equity

Foundations’ Investment Returns Rose to 4-Year High in 2017

By Michael S. Fischer

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Private foundations reported a 15% investment return for fiscal 2017 (ended Dec. 31), compared with 6.4% for  fiscal 2016, according to the Council on Foundations and Commonfund’s annual study, released Thursday.

Community foundations that participated in the study reported an average return of 15.1% for 2017, up from 7.3% in 2016.

Last year’s performance was the best in four years, and a considerable improvement on 2015, when private foundations’ average return was 0%, and that of community foundations -1.8%.

With the economy and stock market performing well throughout 2017, 49% of participating community foundations reported an increase in gifts and donations last year, up from 34% reporting higher gifts the previous year.

Only 22% of community foundations experienced a decline in gifts, well down from the 40% reporting a decline in 2016.

A joint statement from the Council on Foundations and Commonfund noted concern that gifts and donations to nonprofit groups could be at risk following enactment of the tax overhaul, which places limits on itemized deductions. However, this concern did not affect 2017 as the legislation was not signed into law until Dec. 22.

“We are gratified with stronger investment performance in FY2017, but perhaps most reassuring is the increase in trailing 10-year average annual returns,” Gene Cochrane, interim president and chief executive of the Council on Foundations, and Mark Anson, chief executive and chief investment officer of Commonfund, said in the statement.

“For private foundations, the good return this year boosted trailing 10-year returns to an annual average of 5.5% compared to last year’s 4.7%. For community foundations, the 10-year average annual return rose to 5.3% from 4.6% in FY2016.”

The two leaders noted that private foundations’ effective spending rate was much higher than their annual 10-year return, while community foundations’ 10-year return and spending were more closely aligned.

“We must hope for continued good results from the global financial markets for foundations of both types to support their operations and fulfill their missions over the long term,” Cochrane and Anson said.

The study gathered data during the first half of this year through online questionnaires and field interviews from 143 private foundations and 81 community foundations.

Investment Returns

The study found that private foundations consistently secured higher returns than their community counterparts from the five primary asset allocations and strategies included in the research:

  • Non-U.S. equities — 26.4% vs. 26.1%
  • U.S. equities — 20.5% vs. 18.7%
  • Fixed income — 4.1% for both
  • Alternative strategies — 9.7% vs. 8.6%
  • Short-term securities/cash — 0.6% vs. 0.5%

Within the broad category of alternative assets, private equity (leveraged buyouts, mezzanine, M&A funds and non-U.S. private equity) provided the strongest return — 11.1% for community foundations and 10.0% for private ones.

After private equity, this year’s next-highest return for private foundations came from private real estate at 9.2%, and for community foundations from marketable alternative strategies (hedge funds, absolute return, market neutral, long/short, 130/30, event-driven and derivatives) at 6.7%.

Last year’s leader, energy and natural resources, declined to 6.7% for private foundations and 1.9% for community foundations, down from 12.9% and 10.4% in FY2016.

In a historically low volatility market environment, asset allocations for both types of foundations showed little year-to-year change at the level of the five major allocation categories, according to the study.

Both private and community foundations reported 2 percentage-point increases for non-U.S. equities. Community foundations increased their allocation to alternatives by a similar two percentage points, while private ones made an equally sized decrease in their alternatives allocation.

Tiger 21, the peer-to-peer learning network of rich individuals, reported earlier this year that members allocated 30% of their investment portfolios to real estate in the first quarter, 23% to public equities and 21% to private equity.

Michael S. Fischer

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