How the “Big, Beautiful Bill” Could Reshape Endowment Strategy
With US House of Representatives having passed H.R.1, the One Big Beautiful Bill Act on May 22, 2025, colleges and universities are now bracing for a new era of taxation on the net investment income generated by their endowments.
While proposed tax hikes have the potential to reshape asset allocation, liquidity strategies, and tax-aware investing approaches, there are tangible steps institutions can take to mitigate the impact.
What If Endowments Change Nothing?
If endowments maintain their status quo, what might the impact be on their spending rate to cover the proposed taxes?
To answer this, we evaluated the 2023 and 2024 financials of two university clients. Figure 1 show the additional assets that would have needed to be appropriated from each endowment pool to cover the excise tax at various rates. At a 7% tax rate or higher, the endowment corpus becomes materially impacted.
Figure 1: Potential Impact on Endowment Corpus Is Significant at 7% Tax Rate or Higher
Tax Rate on Net Investment Income |
Fiscal Year 2024 |
Fiscal Year 2023 |
||
|---|---|---|---|---|
University A |
University B |
University A |
University B |
|
1.4% |
2.2% |
2.4% |
1.9% |
1.5% |
7.0% |
10.9% |
12.1% |
9.7% |
7.5% |
14.0% |
21.8% |
24.2% |
19.3% |
15.0% |
21.0% |
32.7% |
36.3% |
29.0% |
22.5% |
Source: SSGA, as of June 3, 2025. Calculated using publicly available client financial statements.
Rethinking Turnover: Is Less More?
Virtually all endowments have a long time horizon and typically favor long-term equity investments, both public and private. A number of public equity managers seek to outperform a particular benchmark, employing different valuation and trading strategies. But with realized gains now taxed as part of net investment income, high-turnover systematic and quantitative strategies may face headwinds relative to lower-turnover investment styles or indexed investments.
Figure 2 illustrates how much higher an endowment’s expected return on assets (EROA) would need to be to negate the tax impact from a single manager’s investment style and turnover.
Figure 2: Increase in EROA Required to Negate Tax Impact From a Single Manager Allocated 5% of Assets
Tax Rate on Net Investment Income |
Portfolio Turnover |
||
|---|---|---|---|
25% |
50% |
100% |
|
1.4% |
0.00% |
0.01% |
0.01% |
7.0% |
0.02% |
0.04% |
0.07% |
14.0% |
0.04% |
0.07% |
0.14% |
21.0% |
0.05% |
0.11% |
0.21% |
Source: SSGA. Assumes 20% of portfolio turnover results in realized gains.
Endowments have also allocated large sums of capital to idiosyncratic hedge fund strategies as a means to diversify their equity investments. Key among these are managed futures programs run by CTAs that can generate turnover well in excess of the most active equity strategies. New tax rules might potentially imperil endowments invested in strategies run by CTAs.
Strategic Shifts: Vehicles and Structures
For the largest endowments, on the margin, the proposed tax rules should make direct investments through segregated accounts even more attractive. These accounts offer more control over the timing of gains realization — unlike pooled funds where tax consequences of realized gains are only known after the fact.
Institutions with smaller endowments and many fund investments may want to consider consolidating managers to achieve the scale needed to fund segregated accounts.
Finally, to try to avoid triggering immediate gains, endowments with seats on Limited Partner Advisory Committees (LPAC) are likely to advocate for more in-kind distributions for any publicly traded assets held in private vehicles — especially for securities with massive appreciation, like Moderna, for example, after it’s meteoric post-IPO rise.
Private Markets: A Paradox in Play
Some of the largest owners of private assets may decide to return to the public equity markets. While continuation vehicles have become more common recently due to the lack of IPOs and other asset realizations in PE funds, virtually all of the unrealized gains in a PE fund become realized within 10-15 years. Conversely, a public equity separate account can be managed tax efficiently, and unrealized gains can be deferred for decades, potentially.
Private Credit, a hot asset class right now, and Real Estate generate a high percentage of their total return via income that creates an annual tax liability. Endowments will need to balance having enough liquidity coming into the portfolio to meet spending needs, fund capital calls, and now taxes — while allocating more to Private Equity, Venture Capital, and Public Equity, where gains will be deferred.
Then and Now: Regulatory Considerations
The October 2020 Tax Cuts and Jobs Act allowed endowments to use fair market value as of December 31, 2017, as the starting point for calculating the basis of non-partnership investments. If the new rules follow suit, there may be no rush to realize gains before the higher rates take effect.
Many endowments are calculating realized gains and losses using average cost for securities sold. For those affected by the new taxation rules, or redesignated into higher tax brackets, it may be worth exploring switching to a tax lot method.1