Northwestern University Endowment: Navigating Financial Landscapes and Strategic Realignment

Northwestern University, like other higher education institutions, relies significantly on its endowment to support its educational and research missions. College endowments, comprising tax-exempt donations and investments, play a vital role in advancing an institution's goals. These endowments vary considerably across institutions, with the top-ranked schools often possessing the largest endowments, enabling them to offer substantial financial aid packages and invest in faculty and facilities.

Overview of University Endowments

University endowments are collections of tax-exempt donations and investments that institutions use to support their missions. The size of these endowments can vary significantly, with top-ranked schools often possessing the largest. For example, Harvard University maintained its position as the higher education institution with the largest endowment, with a FY 2024 market value of almost $52 billion. Twenty-one institutions reported endowments valued at more than $10 billion, and another 29 had endowments between $5 billion and $10 billion. Among all surveyed institutions, 144 reported endowments over $1 billion.

As of 2023, the average endowment at the top 20 colleges with the biggest endowments is nearly $18.6 billion. The average endowment size is about $560.9 million among the colleges featured in the most recent IPEDS data set. However, multibillion-dollar endowments are not common in higher education.

Endowment Performance

College and university endowments saw an average 11.2% net return for fiscal year 2024, according to the 2024 NACUBO-Commonfund Study of Endowments. That gain was an improvement over the 7.7% net return in FY 2023 and the dismal negative return of -8.0% for FY 2022. The overall 10-year return averaged 6.8%. The largest FY 24 return averaged 13.0% at institutions with endowments under $50 million. The lowest return was for institutions with endowments over $5 billion, which averaged 9.1%. According to the report, smaller endowments placed more of their endowment in public equity markets, which generated stronger investment returns than alternative asset categories.

Northwestern University's Endowment in FY 2025

In Fiscal Year 2025 (FY 2025), Northwestern University experienced a complex financial environment marked by modest revenue growth and rising costs. These rising costs were attributed to benefits expenses, litigation, new labor contracts, and rapidly unfolding federal actions, including Executive Orders and agency policy changes. A significant challenge arose when the majority of federal research funding was frozen in April until an agreement with the federal government was reached in November. To safeguard its research enterprise during this period, Northwestern leadership, with the approval of the Board of Trustees, allocated internal funding to ensure the continuation of projects affected by stop-work orders and the federal funding freeze. By the end of the freeze, the accrued cost of this internal support had reached approximately $350 million.

Despite these challenges, Northwestern’s overall net assets increased by 4% to $16.2 billion, driven by strong investment performance. The University also saw a record number of major gift commitments of $100,000 or more, marking a strong year for philanthropic support. In fact, FY 2025 was the second-highest fundraising year in total new gifts and commitments.

However, these financial challenges led to difficult decisions that impacted the University community, particularly faculty and staff. As Northwestern engaged in financial planning for FY 2027, its top priority was to increase faculty and staff salaries, effective from the start of the fiscal year in September. The University also addressed concerns regarding changes to the enhanced employee tuition benefit, reinstating the previous benefit for employees hired before January 1, 2026. This benefit provides a discount of 90% off tuition for undergraduate or graduate courses taken at Northwestern for employees making less than $100,000 during the calendar year and who have three years of service at the University, with no limit on the annual discount.

Strategic Asset Allocation

As of 2025, Northwestern University has been strategically recalibrating its endowment management approach in response to the evolving financial dynamics and institutional priorities, prioritizing liquidity, diversification, and adaptability in its investment strategy. This shift, marked by increased cash reserves, reduced private equity exposure, and a pivot toward secondary markets and real assets, offers critical insights into how institutions can balance short-term operational needs with long-term sustainability amid economic uncertainty.

A Strategic Pivot Toward Liquidity

Northwestern's decision to raise its cash allocation of the portfolio underscores a defensive posture in response to macroeconomic headwinds. According to Bloomberg, the university's Chief Investment Officer (CIO), emphasized the need for enhanced liquidity to navigate potential tax increases on endowments and market volatility. University endowments , driven largely by public equities and private investments. However, as financial pressures mount-exacerbated by regulatory uncertainties-Northwestern's focus on cash reserves signals a pragmatic prioritization of flexibility over aggressive growth.

Trimming Private Equity Exposure

The university's reduction of private equity holdings is a pivotal component of its strategy. While private equity has historically delivered strong returns, its illiquidity and high fees have become liabilities in an environment of rising interest rates and regulatory scrutiny. As stated by the Financial Times in a March 2025 article, Northwestern is trimming to ensure liquidity amid growing uncertainty. This reallocation not only mitigates risk but also frees capital for more immediate institutional needs. The shift also reflects a broader industry trend, as institutions increasingly seek to balance private and public market exposures.

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Alternative Assets and Secondary Market Opportunities

Northwestern's 2025 strategy also highlights a deliberate pivot toward alternative asset allocations, particularly in real assets and secondary markets. The endowment's $14.3 billion valuation as of August 2024 has enabled it to explore innovative avenues for diversification. For instance, the university has turned to secondary markets-where private assets are bought and sold-to access liquidity typically absent in traditional private equity. According to Bloomberg, Falls noted that secondary markets have become more liquid due to the influx of retail investors and the presence of large evergreen funds.

By selling a portion of its private equity holdings in these markets, Northwestern is proactively managing its portfolio while capitalizing on emerging opportunities. Additionally, the endowment is diversifying its private equity focus toward smaller and mid-market funds, which often offer higher growth potential and lower competition compared to megafunds as noted in Bloomberg reports. Such strategies not only enhance resilience against market shocks but also align with Northwestern's commitment to supporting innovation and community development through targeted investments.

How Endowments Are Used

Institutions spent $30 billion from their endowments during FY 2024, compared to $28.4 billion in the prior year. The largest share of endowment spending - 48.1% - went to student financial aid, up slightly from the prior year. Other spending categories included endowed faculty positions (10.8%), operation and maintenance of campus facilities (6.7%), and all other purposes (16.6%). On average, institutions participating in this year’s study used their endowments to fund 14% of their annual operating expenses. Schools in the two largest endowments groups - those over $5 billion and those from $1 billion to $5 billion - used their endowments to fund a bit more than 17.6% and 18.9%, respectively, of their annual operating budgets. Colleges in the smaller endowment groups relied on endowments to fund between 11.2% to 15.6% of their budgets.

The average endowment spending rate in FY 2024 was 4.8%, up slightly from 4.6% the previous year. In general, colleges with smaller endowments reported somewhat larger spending rates than those with larger endowments. Private institutions reported an average spending rate of 5.2%, while public institutions reported a 4.2% spending average. The actual dollars that an endowment spends can increase even when the spending rate does not because spending is based on a moving average of the endowment’s value over several years.

Challenges and Future Outlook

Moving forward through FY 2026 and toward FY 2027, colleges and universities will continue to navigate unknowns. The University was additionally constrained when the majority of federal research funding was frozen in April until the agreement with the federal government was reached in November.

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Challenges may be piling up for university endowments, but you wouldn’t know it from looking at their investment returns. In the face of the Trump administration’s federal funding cuts to university research and its implementation of a higher federal excise tax that hit a handful of elite universities, most of the largest university endowments in the US saw higher returns in FY 2025 than in FY 2024. Driven in large part by the strong rebound in public equities, top university endowments such as Harvard, Stanford and Yale saw their performance jump from single to double digits year-over-year. It’s a welcome relief for these institutions, many of which have increased the amount they pay out to fund university operations in areas where federal funding was cut.

Implications for Institutional Portfolios

Northwestern's strategic shift offers a blueprint for institutional investors seeking to navigate a complex financial landscape. By prioritizing liquidity, the university is better positioned to fund its academic and operational priorities without overreliance on volatile markets. Simultaneously, its embrace of secondary markets and real assets demonstrates a forward-thinking approach to diversification, reducing exposure to concentrated risks while tapping into underpenetrated opportunities.

However, the strategy also raises questions about the trade-offs between short-term stability and long-term growth. While cash reserves provide a buffer against downturns, they may underperform in low-interest-rate environments. For institutions like Northwestern, the challenge lies in striking a balance-leveraging alternative assets for growth while maintaining sufficient liquidity to meet immediate obligations.

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