OCIO Providers See Greater Demand Ahead from Nonprofits and Health and Hospital Systems

February 8, 2022 — Boston

Pandemic-driven challenges draw smaller client types to OCIO service model

Nonprofits are increasingly seeking the services of outsourced chief investment officers (OCIOs) and are expected to contribute robust growth to the market for the next five years. 72% of OCIO providers expect most of that growth to come from clients with assets under management (AUM) between $101 million and $500 million, according to Cerulli’s report: U.S. Outsourced Chief Investment Officer Function 2021: Revisiting Performance Track Records.

Worldwide OCIO AUM grew almost 25% to reach a total of $2.9 trillion. U.S. OCIO assets grew 27% to a total of $2.0 trillion and are expected to grow 7.5% annually to reach $3.0 trillion by the end of 2025. Among OCIO providers, corporate defined benefit (DB) plans make up just over half (52%) and corporate defined contribution (DC) plans make up 18% of OCIO AUM.

Due to the unique challenges presented by the pandemic, nonprofit clients and health and hospital systems are seeking OCIO providers at higher rates compared to recent years. “Despite strong returns and an increase in donations during the pandemic, operating models have been strained and many nonprofit clients are concerned about the overall sustainability of their investment performance and spending policies,” states Laura Levesque, associate director. “Universities and other education institutions’ day-to-day operations generate a substantial amount of revenue. With classes moving online, and sporting and other large events being canceled, much of the that revenue temporarily dried up. For health and hospitals, fewer elective surgeries and increased overtime also hurt operating margins,” she adds. According to the research, these clients will increase adoption of OCIO over the next five years as a reaction to the challenges faced during the pandemic.

OCIO providers that have traditionally serviced DB plans will need to develop or acquire new capabilities to specifically service the endowment and foundation space. “Services and support for these clients usually differ from the more established corporate defined benefit (DB) clients in OCIO mandates. Their asset allocations tend to vary significantly due to the differing needs of the asset pools,” according to Levesque. “Providers will need to evaluate and possibly enhance private investment benches, prepare to service more complex environmental, social, and governance (ESG) services, and devote more resources to educate committee members on the OCIO relationship to best service the AUM,” she concludes.

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