University endowments could lean further into relying on outsourced CIO providers, according to a report from Cerulli Associates, due to liquidity concerns, federal funding cuts and a new federal tax on realized investment gains.
The One Big Beautiful Budget Act, signed by President Donald Trump in July, includes graduated taxes on certain private, post-secondary institutions based on the value of their “net investment income”—which includes endowment funds—on a per-student basis. The law sets graduated tax levels between 1.4% and 8% on all institutions that hold at least $500,000 per student and have at least 3,000 students, according to an analysis by lawyers at Faegre Drinker.
In addition, the law includes “federally subsidized royalty income” and other income sources in its formula for calculating tax liabilities for affected institutions. It also imposes new reporting requirements and directs the Department of the Treasury to publish regulations designed to “prevent avoidance of such tax through the restructuring of endowment funds or other arrangements,” the law firm wrote.
Additionally, federal grants to many large research universities have been cut or frozen.
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OCIO Opportunity
Under the act, set to go into effect on January 1, 2026, dozens of institutions will be subject to the tax—fewer than the amount subject to an endowment tax under 2017 Tax Cuts and Jobs Act, but larger endowments will face a higher levy.
In the “Cerulli Edge?U.S. Institutional Edition, 3Q 2025,” the firm noted that the tax law forces endowments to reevaluate their investment strategies to achieve long-term growth while maintaining short-term liquidity.
“Amidst an evolving landscape, universities may adopt more cautious liquidity management strategies, such as increasing cash reserves, cutting expenses, repositioning their endowment holdings or participating in the secondary market,” said Agnes Ugoji, a Cerulli analyst, in the report.
Cerulli, in the report, noted that OCIO providers with expertise in complex tax situations could have a competitive advantage in attracting endowment business, especially those that have experience navigating tax planning with ultra-high-net-worth investors and family-office clients.
“The … taxes are an incredible game changer because the OCIOs and the trustees haven’t had to make decisions based on the tax consequences,” one OCIO search consultant told Cerulli. “Are you going to hire an OCIO? Or are you going to change your OCIO because they’re better at handling taxes? I think that might be a component.”
Cerulli noted that OCIO providers with appropriate expertise should emphasize and highlight these services to attract clients. Anna Tabke, president at OCIO firm Leita Advisory, says OCIO providers are better equipped to adapt to evolving regulation, in part because endowment investment staff have scarce resources.
“This new tax environment requires operational capabilities many endowments haven’t historically needed, like tracking cost basis and incorporating tax impact into investment decisions,” Tabke says. “OCIOs who can’t support tax considerations leave their institutional clients exposed when tax policy changes. It could be a good opportunity for OCIOs with a broader skill set in managing tax-aware portfolios to build up an [endowment and foundation] client base.”
Small, Midsize Endowments Present Best OCIO Opportunities
Tim Yates, the president and CEO of Commonfund OCIO, notes that the endowments subject to the highest tax rates do not have OCIOs and would prefer to rely on their internal investment staffs.
“They all have internal CIOs and investment offices, and I wouldn’t expect, because of the tax, those institutions which have multi-billion-dollar endowments to really consider OCIO as opposed to the internal office that they have,” Yates says. “I think [we] will continue to see broader adoption of OCIO across colleges and universities, but I don’t think the tax alone [will drive] wealthier, bigger institutions [to] look to an OCIO model to solve that.”
According to Cerulli, larger institutions are likely to adapt to the challenges, while small and midsize endowments—those with $100 million to $500 million in assets under management—which traditionally have been among the largest users of OCIOs, will continue to look outside for investment help. Cerulli also noted that providers expect endowments to be drivers of most of the OCIO industry’s growth over the next two years.
“Typically, those organizations have limited internal resources,” says Michael Chase, head of endowments and foundations and OCIO at Fiducient Advisors.
Does the Endowment Model Hold Up?
Many large endowments and foundations have historically had high allocations to illiquid assets like private equity and venture capital, focusing on higher returns over long periods of time.
This model, referred to as the Yale Model and popularized by the late Yale CIO Dave Swensen, has become the standard for many of the largest endowments. But spending cuts and increased taxes could put pressure on what was considered the hallmark of institutional investing.
“The Yale Model worked because endowments could generally predict the spending needs and manage the portfolio liquidity accordingly,” Tabke says. “Now, surprise cuts to federal funding have led endowed institutions to [increase] short-term endowment spending to help cover the shortfall. Endowments have to spend more than anticipated, and they need more liquidity than expected in the portfolio to do so. Combine this with tax implications when repositioning the portfolio, and endowment liquidity models need to be reworked.”
According to Cerulli, the most common investment challenge reported by endowments was illiquidity (60%), followed by high fees (44%) and managers not being able to exit their investments (often in private markets) profitably (40%).
Universities draw endowment funds for their operating activities: According to the National Association of College and University Business Officers and Commonfund, endowments provided an average of 14% of their institutions’ operating budget in the 2024 fiscal year.
“That can be anywhere between low single-digit percentage of the operating budgets,” Yates says. “[But] in the case of the Ivies and the big ones, it can be in the 30% to 40% range.”
The Cerulli report stated, “while an endowment tax places a direct liquidity strain on the portfolio by requiring spending, a reduction in federal funding creates another, indirect strain as sponsoring institutions likely will need to use a larger portion of their endowments to cover the funding shortfall.”
Cerulli noted that educational institutions should reassess their adherence to the endowment model and create unique asset allocation strategies that reflect their risk tolerance, missions and governance structures.
“While the pursuit of higher returns remains central, many endowments are reassessing their exposure to illiquid assets,” says Michael Hughes, managing director of portfolio management at Verus. “The new tax structure has prompted a shift toward more liquid, tax-efficient strategies. That said, private markets still offer long-term value, and OCIOs are helping institutions recalibrate allocations, rather than abandon them entirely.”
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Tags: Cerulli Associates, OCIO, Outsourced CIO
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