Nonprofits’ operating cash flows have been under immense pressure during the pandemic, leading many to rely on their endowment funds to support operations. This reliance, combined with a consensus that the economy is entering a lower-return environment, means that many will have to consider adjusting their spending levels or adjusting their liquidity requirements, according to the latest Cerulli Edge—U.S. Institutional Edition.

The pandemic has largely disrupted nonprofits’ abilities to collect revenue from traditional operating sources. In the case of endowments, the closure of most universities to in-person attendance meant that they could not collect revenue from room and board, sporting events, and dining hall activities. For foundations, those with operating income (e.g., museums) were forced to shut down or limit headcount. With downward pressure on operating revenues, nonprofits have had to rely more heavily on investments and fundraising as sources of revenue.

However, donations from nonprofits’ traditional fundraising activities have also declined as COVID-19 restrictions created a barrier for in-person events. Given that charity events and in-person meetings make up a large portion of fundraising activity, this has presented a hurdle for many. “Nonprofits are now under pressure to dip into their endowments to support regular operations and cover costs,” says James Tamposi, senior analyst. “Should this happen, nonprofit portfolios will be permanently impaired by the COVID-19 crisis.”

For nonprofits, increased reliance on their endowments will have implications for liquidity requirements. The nonprofit space has been extremely bullish on illiquid alternatives. Even during the fallout from COVID-19, consultants surveyed by Cerulli anticipated increased nonprofit allocations to illiquid investments such as private equity (53%), real estate (47%), hedge funds (40%), and infrastructure (40%). Higher liquidity requirements, however, would limit nonprofits’ ability to take on these types of investments.

Although Cerulli believes that private investments will remain a key area in which investors seek returns, a lower-return environment and increased liquidity needs would likely decelerate nonprofits’ push toward illiquid investments. “Ultimately, investors will need to decide whether they want to continue to increase alternative allocations and potentially insulate themselves from volatility while reducing their liquidity or move their risk-seeking portfolios toward assets such as non-U.S. equities and emerging markets to ensure they have adequate liquidity and can support operations,” concludes Tamposi.