Nonprofit organizations such as endowments and foundations (E&F) represent ideal clients for gatekeepers such as investment consultants and outsourced chief investment officer (OCIO) providers, according to the latest Cerulli Edge—U.S. Asset and Wealth Management Edition.

Cerulli’s data indicates that only about one-third of endowments and one-fifth of foundations employ a consultant. However, almost half (47%) of institutional investment consultants polled by Cerulli in the 2020 noted “great potential” for new growth within the E&F channel—likely due to nonprofits’ interest in accessing private investments and alternative asset classes. Likewise, many OCIOs perceive health and hospital systems as offering relatively green pastures for growth—66% of OCIOs polled in 2020 noted these organizations would be very important to their growth during the next two years.

While E&Fs have traditionally been selective in seeking third-party help, the current investment environment is changing that calculus for some allocations. “Institutions both large and small are increasingly looking to expand into private markets and other alternative investments,” says Laura Levesque, associate director. “These goals make the manager research and due diligence capabilities of a consultant more attractive for nonprofits, particularly in the wake of the global pandemic and the associated market volatility, which has created greater spending needs and diminished fundraising opportunities for E&Fs.”

For many asset owners, the pandemic uncovered areas of risk in their portfolios they were unaware they were taking. “Investment consultants, OCIOs, and other investment solutions providers that work with health and hospital systems should encourage these clients to reassess their investment risk tolerance while the experience of COVID-19 remains fresh in their minds,” says Levesque. Cerulli acknowledges that some investors will presumably conclude that they fared well in the crisis and that their current risk posture is desirable. Others will conclude that they want to add protection to their portfolios against downside risk and that they need to make changes in their strategic asset allocations.

In addition to the promise of new business from E&Fs, intermediaries in the institutional universe are also looking to further expand into the health and hospital space—many of which operate on a not-for-profit basis. According to Cerulli’s survey of health and hospitals systems, only 5% of respondents indicated that they manage their long-term investment pools without outside help. While these allocators were already being courted by consultants and OCIO providers due to challenges of managing portfolios in a low return environment, the events of the past year-plus may accelerate opportunities in this channel. The pandemic placed additional stress on health and hospital systems’ investment offices already operating with relatively lean staffing, leaving them considering additional outsourcing all the way up to a full OCIO relationship.