- President Trump’s tax increases on endowment funds will have a devastating impact, with Harvard University’s endowment set to decrease from $53 billion to potentially $43 billion by 2040
- Ortec Finance’s analysis reveals how research funding cuts, tax changes and changes on the status of international students will impact Harvard’s endowment fund’s overall asset value through changes in the long-term investment strategy and payout rates
- Full analysis in Ortec Finance’s whitepaper ‘https://www.ortecfinance.com/en/insights/whitepaper-and-report/endowments-under-pressure.’
New policies proposed by the US administration and regulatory changes are set to have a devasting impact on endowment funds. New analysis and scenario mapping carried out by Ortec Finance reveals that the size of Harvard University’s endowment fund – currently the largest endowment in the United States – could plummet as much as 40% by 2040, from $72 billion to $43 billion. Furthermore, the analysis by Ortec Finance, a leading global provider of risk and return management solutions for insurers, pensions funds and asset management companies, reveals that this could decrease to just $29 billion when inflation is also taken into account.
This fall in assets under management coupled with its financial commitments will create huge liquidity pressures on Harvard’s endowment fund as Ortec Finance’s analysis reveals the top 10 US endowments hold 72% of their investments in illiquid assets, with roughly 36% of total investments sitting in private equity. Comparatively, only 20% of their total investments sit in public equity.
With the announcement of Trump’s ‘one big beautiful bill act’ the longstanding model of US endowments, which have been a staple of the investment landscape for decades, is facing unprecedented challenges. Ortec Finance has carried out in-depth financial modeling creating both a ‘full policy scenario’ (a worst-case scenario) and ‘limited policy scenario’ to reveal the long-term impact over the next 15 years of these policy and regulatory changes on Harvard University’s endowment - but Ortec Finance warns that all US endowment funds must urgently face up to the very difficult challenges that now lie ahead.
A summary of Ortec Finance’s analysis of Harvard University’s endowment fund: transformational changes to the current investing landscape
Over the last 10 years, Harvard’s endowment has paid out between 4.2% and 5.3% of its assets to the University, therefore it has had to seek out high returns to maintain long-term sustainability and been driven to invest heavily in private markets. However, three new policy and regulatory changes now coming into force will require Harvard’s endowment fund to have more liquidity and will increase payout rates and taxes:
- Frozen federal funds and loss of research funding: a total of $9 billion has been put under review by the federal government - the US administration also paused $2.2 billion in multi-year grants, $60 million in multi-year contracts and has announced that it will no longer award grants to Harvard.
- Loss of tax-exempt status and higher endowment taxes: as of 1 July 2025, the endowment tax rate increased from 1.4% to 8% for the wealthiest private colleges and universities. In addition, if Harvard loses its tax-exempt status, this could affect both the earnings from the endowment investments and the flow of initial capital that comes from donations.
- Loss of revenue from international students: new US administration policies to restrict international students’ enrolment in US universities, including a separate order to ban new international students at Harvard with F, M and J visas, is likely to significantly impact enrolment numbers. Last year approximately 27% of Harvard’s total enrolment were international students, bringing in an estimated revenue of $1.4 billion.
The table below outlines Ortec Finance’s worst-case scenario mapping for Harvard – called a ‘full policy scenario*’, which assumes it loses federal research funding, faces increased taxes, loses its tax-exempt status, and loses the enrolment of all international students. It also models a ‘limited policy scenario**’, which assumes limited implementation of the policy and regulatory changes proposed by the US administration. It compares both of these scenarios to how the endowment would have developed under no policy and regulatory change, where the investment strategy and payouts of the Harvard endowment would have remained with their 2024 circumstances.
This full policy scenario requires Harvard’s investment strategy to significantly increase its liquidity, along with an increased payout ratio and higher taxes.
Table to show the impacts of policy and regulatory changes on the Harvard endowment fund over the long-term
Ortec Finance’s ‘worst-case’ or full policy scenario predicts that Harvard’s endowment fund will drop from $53 billion to $43 billion, or to $29 billion when taking inflation into account
Using scenario analysis provided by the Economic Scenario Generator in the Ortec Finance software GLASS, a 'worst-case' scenario of policy and regulatory changes leads Harvard’s endowment to decline in nominal asset value from $53 billion to just $43 billion in 2040, due to a substantially high payout rate. At a rate of 8.1%, Harvard’s endowment would need to reach at least the same rate in returns – not including inflation – to sustain its current value in nominal terms. A consistent return of 8.1% over a 15-year period seems challenging to achieve under most economic scenarios. This is further hampered by strong liquidity needs, which limits investing in private equity.
When taking inflation into account, the expected real asset value decline is substantially greater. This 'worst-case' scenario leads Harvard’s endowment to decline in real asset value from $53 billion to just $29 billion in 2040. The purchasing power of the Harvard endowment is steadily being exhausted.
Even when modeling the limited policy scenario, the future looks bleak. This leads to Harvard’s endowment declining in nominal asset value from $53 billion to $50 billion in 2040. When accounting for inflation, the expected real asset value in the limited policy scenario will decline from $53 billion to $34 billion.
Richard Boyce – Managing Director, North America, Ortec Finance said: “Given the increased liability from payouts and tax hikes and lower private equity investments, we see both scenarios leaving lasting impacts on the viability of Harvard’s endowment, with its size declining roughly 30% to 40% compared to a scenario with no policy and regulatory change. The only certainty ahead for Harvard and other US endowment funds is that there are big decisions to make – not without major risks and downsides.
“While there is no hard and fast path to managing unfolding scenarios, scenario analysis can help to manage the complexity of policy and investment decision-making. For all US endowments trying to navigate what the new policy and regulatory changes could mean, scenario analysis and stress testing provide the means to become better prepared, no matter what scenario ultimately comes into effect, as well as answering important decision-making questions.”
Ortec Finance supports insurers and asset managers by providing advanced scenario analysis, balance sheet simulation, and portfolio optimization tools that take account of dynamic asset/liability interactions, liquidity and solvency constraints and help navigate market uncertainty to help make data-driven, resilient investment decisions.
For further information visit https://www.ortecfinance.com/en/industries/insurance-companies
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Notes to editors:
*The full policy scenario is driven largely by the loss of tax-exempt status of the endowment – changing the tax rate from 1.4% to 8% – and the loss of revenue of all international students. We assume the increased payout rate under this scenario requires the endowment to have more liquidity on hand, such that it ends up with only 50% of its investments in private markets and 50% in public. We assume Harvard’s allocations in private equity and hedge funds decline and their allocations in public equity and cash increase. Moreover, in this scenario, the loss of federal funding is consistent with our second scenario with limited policy action, or +1.3% on the payout. For the sake of simplicity, we model the change of tax status by increasing the payout by +0.5%. The loss of all international students leads to an additional +1.1% in the payout to support the loss in revenue. This brings the overall annual payout to 8.1% of assets under management.
** The limited policy scenario assumes a limited implementation of the policy and regulatory changes proposed by the U.S. administration. It includes actions taken through June 15th, 2025. This scenario incorporates research funding cuts, private equity fire sales, a tax hike, a shift in the allocation from private to public markets to 60% and 40%, respectively, and a structural loss of some international students due to the sentiment impacts. These changes lead to a payout ratio of 7.3% – all else being equal.
The limited-policy scenario is kickstarted by the short-term federal cuts to research funding. These cuts bring on a liquidity shock which leads Harvard to sell $1B of their private equity investments in a fire sale with a 20% haircut—only receiving 80 cents to the dollar. This fire sale lowers the existing assets under management while also kickstarting a structural change in the university’s allocations out of the more illiquid private assets. For the sake of simplicity, we model the change of tax rate by increasing the payout by +0.5%. Moreover, we assume that the funding cuts are a structural change, which the endowment is asked to fulfill, and thus increase the overall payout by +1.3%. The fearmongering around international student visas, we assume, decreases the enrollment of 25% of foreign students and thus causes a loss of revenue which translates to an additional +0.3%. In total, this brings the annual payout rate to 7.3%.
With the renewed fear of a liquidity crisis and increased payout levels, we assume the long-term investment strategy to begin shifting away from such high allocations in private equity and hedge funds, and more into public equity, with some relatively minor increases in cash and bonds for additional liquidity.
*** In the analysis, taxes are modelled as a payout to represent the annual liability to the fund. Payouts represent the increased money flowing out of the endowment fund on an annual basis.
For more information, contact:
Phil Anderson, Perception A.
phil@perceptiona.com / +44 7767 491 519
About Ortec Finance
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