Endowment Liquidity, Unfunded Commitments, and a New Private Fund
An $800 million endowment has a 5% annual spending policy ($40 million). Its private equity and private debt portfolio has $200 million NAV and $100 million unfunded commitments. Liquid assets are $600 million: $60 million cash, $150 million investment-grade bonds, and $390 million equities. Over the next 12 months, the endowment expects $60 million of capital calls and $20 million of distributions. The investment policy limits illiquid alternatives to 35% of total assets, measured as NAV plus unfunded commitments. The board wants to add two new private funds requiring $50 million of commitments. A revolving credit line equal to 10% of total assets is available but has a 1.5% undrawn fee and covenants tied to a 25% illiquidity cap.
1. Calculate the endowment's current illiquid-alternatives exposure and assess whether the proposed $50 million of new commitments is permitted by policy.
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Current illiquid exposure = private NAV $200M + unfunded commitments $100M = $300M. As a percentage of total assets, $300M / $800M = 37.5%. The policy limit is 35% x $800M = $280M. The endowment is already $20M over the limit. Adding $50M of new commitments would raise exposure to $350M, or 43.75%, far above both the 35% policy limit and the credit line's 25% covenant. Therefore the new commitments are not permitted without a policy change, additional asset growth, or reduction of existing unfunded commitments. The board should not treat the credit line as capacity for new commitments because the covenant is tighter than the policy.
2. Assess the next 12 months of liquidity needs and recommend practical actions to avoid a forced sale.
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Expected cash outflows are spending of $40M plus capital calls of $60M = $100M. Expected inflows are distributions of $20M. Net cash need is $80M. Available cash is $60M, so after using cash and distributions the endowment has a zero buffer before touching bonds or equities. That is fragile: a modest increase in calls or a delay in distributions would force sales. Recommended actions: (1) set a minimum cash reserve, for example 3-5% of assets ($24M-$40M); (2) use the credit line only for timing mismatches, not to fund permanent spending; (3) pre-fund the next 12 months of calls by moving some bonds to cash; (4) slow new commitments and consider secondary sales of older fund interests; (5) rebalance equities if the policy allows. The key judgment is that the endowment can meet the base case but has no margin for stress.