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Dec 02, 2008

Revisiting the Idea of Perpetuity

It may seem strange to advocate a major shift in foundation payouts at a time when foundation endowments, like all of our investment funds, are being punished by the global downturn. Already major foundations like the Hewlett Foundation and the Bill and Melinda Gates Foundation have stated that the downturn will have a negative impact on their future grantmaking. It is exactly the current scenario that defenders of the 5% payout point to when suggesting that the status quo is wise public policy. There was a time when this argument made sense, but it no longer holds water. Since 1987, the value of foundation endowments (in inflation adjusted dollars) has grown more than 500%. Excluding the creation of new foundations, the value of well-managed foundation endowments roughly doubled over that span. Even more importantly, the (again, inflation adjusted) value of foundation endowments per capita has grown more than 400%. Despite the current downturn, given the history, the expected increase in assets transferred generationally (even if far less than predicted), and the increase in wealth of the richest, foundation endowments per capita will likely double again within 10 years. So why don’t we consider some changes?