Paper returns are not cash. That single fact sits at the center of the risk many university endowments now carry.
For two decades boards followed the Yale Model and poured large shares of their endowments into private equity, venture capital, real estate, and other illiquid assets. The reported numbers looked excellent. Campaign announcements grew more ambitious. The strategy appeared to work. Then private markets slowed. Distributions fell. Capital calls kept arriving on schedule. Payroll, financial aid, and debt service still came due every month. The difference between what the endowment reported and what it could actually spend is the illiquidity illusion.
Harvard’s experience in 2008 remains the clearest case study. The endowment fell more than 27 percent and lost roughly $10 billion. Unfunded private-equity commitments stood near $11 billion. Distributions stopped while the calls continued. The university borrowed $2.5 billion, sold public equities into a collapsing market, and paid about $500 million simply to exit interest-rate swaps. Peer institutions faced the same pressure. At several of them, illiquid holdings plus unfunded commitments exceeded the entire value of the endowment.
The pattern has returned. Private-equity distributions have fallen to multi-year lows. Harvard’s unfunded commitments climbed from $4.6 billion in 2017 to nearly $8 billion by 2025 while cash levels stayed thin. The university issued multiple rounds of taxable bonds and began selling private-equity stakes on the secondary market. Yale has explored sales measured in the billions. Institutions with younger private-equity vintages face the harshest version of the mismatch: the obligations keep coming while the cash from older funds has largely dried up.
This is not a problem boards can assign to an external CIO and then ignore. Liquidity is a governance responsibility. Three disciplines separate institutions that will manage the next downturn from those that will be forced into reactive decisions.
First, boards must replace percentage targets with a genuine liquidity framework. Universities have long mission horizons. They do not have infinite time to meet the next payroll. A serious structure requires three clear tiers. Tier 1 holds high-quality short-term instruments sufficient to cover 12 to 18 months of projected net draws. Tier 2 holds liquid, lower-volatility fixed income that can answer capital calls without forcing equity sales at the bottom of the market. Tier 3 holds the longer-duration private investments, sized with realistic assumptions about when capital will be called and when it will return. Without the first two tiers in place, the only remaining options are selling public equities at depressed prices or borrowing at higher rates. Both damage the institution.
If the cash is not available from managers, the payout is fiction.
Second, the artificial separation between Investment and Finance committees must end. Investment committees optimize for risk-adjusted returns and often assume that debt capacity or cash reserves will bridge any gap. Finance committees set budgets around a 4.5 to 5 percent payout on a rolling average. In a serious downturn those two sets of assumptions collide. A rolling average can smooth the accounting number, but if the cash is not available from managers, the payout is fiction. Board chairs should require joint liquidity stress tests at least twice a year. The question is not theoretical. If private-fund distributions drop 75 percent for three years and public markets fall 20 percent, how does the university meet its operating commitments, protect core academic programs, and remain inside its debt covenants? The two committees must answer that question together, on the record.
Third, philanthropy must be brought into alignment with actual cash needs rather than left to operate on a parallel track. In harder times major donors face their own constraints and campaigns slow. Boards should push for a deliberate balance between long-term illiquid gifts and current-use support. Real estate and private shares can strengthen the balance sheet over time, but they bring holding costs and limited flexibility when cash is tight. Donors should be encouraged to pair endowment commitments with immediate, spendable gifts that protect financial aid and faculty retention. Restricted funds that no longer match current needs should also be revisited. Significant dollars sit unused because restrictions written decades ago no longer fit operations. Living donors and estate representatives can often broaden those terms. Narrow programmatic restrictions can become flexible support for students or general operations when the conversation is handled with care and transparency.
An endowment exists to protect the academic mission across generations. It does not exist to climb rankings or maximize asset size on paper. The institutions that come through the next difficult cycle intact will not be those that posted the highest illiquid returns in the easy years. They will be the ones whose boards treated liquidity as a core duty, forced Investment and Finance to work from the same facts, and kept philanthropy tied to the real cash requirements of the institution.
Liquidity is not a market issue. It is a board responsibility.