Endowment-Ready: Preparing for a Mega-Gift from MacKenzie Scott (or Anyone Else)

Endowment-Ready: Preparing for a Mega-Gift from MacKenzie Scott (or Anyone Else)

As the director of the endowment and foundations national practice at the Delaware-based financial services firm Wilmington Trust, Walter Dillingham spends his days helping nonprofit clients grow their endowments. 

In January 2022, Dillingham answered a call from a client whose organization received an unexpected mega-gift from MacKenzie Scott. The board, the client explained, decided to put the entire windfall in a money market fund. But they couldn’t let it sit there forever. 

“They needed to use some of those funds to support their mission,” Dillingham told me in a May conversation. “They wanted to expand in a few areas and hire more people, so they had to figure out what that number would be.”

Nonprofits have experienced what Dillingham calls “windfall situations” since time immemorial, and in most cases, the donor gives the organization a heads-up. The same can’t be said for Scott’s “Quiet Research” giving. Under this model, her team researches and contacts nonprofits before giving them a surprise mega-gift. But in some cases, recipients don’t know how or where to allocate the unexpected windfall.

That’s why Dillingham penned a new white paper titled “Getting a McKenzie Scott Gift: Is Your Charity Ready for a Significant Windfall?” Gleaned from his work with clients, including six who received Scott grants, and a review of articles, recipient websites and the Yield Giving site, the report lays out a five-step plan showing how an organization can dispassionately allocate a windfall gift. A critical step in this process is deciding whether to use funds to seed or build the organization’s endowment — assuming it’s even set up for one.

“When you get a Scott gift, you probably have two emotions,” Dillingham said. “First, you’re elated, but then the next minute, you’re stressed. So I created the white paper as a blueprint to help organizations handle the money.”

Seeding and strengthening endowments

Like practically everyone else in the philanthrosphere, Dillingham, who joined Wilmington Trust in 2010, became fascinated with Scott’s giving, especially after his clients started receiving checks. So about nine months ago, he took a deeper dive into her approach and its impact. “I quickly realized it wasn’t just a philanthropy story,” he said. “It’s the fact that many of her grantees are using these monies to seed their endowments.”

The white paper uses the word “endowments” as an umbrella term to include a restricted endowment or a quasi-endowment. “Restricted endowments are donor-restricted funds and need to be carefully administered and monitored,” Dillingham wrote, “while quasi-endowments are unrestricted funds and overseen by the board, for donor intent. Both restricted endowments and quasi-endowments are often managed together and have the same mission — to have a long-term portfolio that provides an income stream (typically 4-5%) and a cushion during stressful times.” 

In one of the paper’s most compelling analyses, Dillingham lists 14 colleges that publicly announced that they would allocate a portion of Scott’s gift to their endowments. Baltimore’s Morgan State University, a historically Black research university, said it put $38 million — 98% of Scott’s $40 million gift — into its endowment. Another recipient, Pennsylvania’s Lincoln University, put the entirety of Scott’s $20 million gift toward its endowment. 

Essentially, by bolstering their endowments, universities are using Scott’s money to strengthen long-term sustainability and increase a vital revenue stream, which, as Dillingham notes, usually accounts for 4-5% of an endowment fund’s value. Coupled with the client whose organization put Scott’s gift in a money market fund, the figures dispel fears expressed by some foundation leaders that nonprofits would allocate her windfall in a reckless or wasteful manner

Nonetheless, I asked Dillingham if he could envision such a scenario — reckless or wasteful spending by recipients. “It could happen,” he said, “but I haven’t seen it happen.” Scott, he explained, did her due diligence and cut the checks with the belief that leaders could be trusted to manage an abnormally large grant. “She isn’t handing grants out to anyone. They’re checking off their boxes to make sure these nonprofits have strong leaders, they’ve done successful things and they’re poised to do even better things.”

Preparing for a mega-gift

Dillingham encourages nonprofit leaders to go through a five-step process to prepare for an unrestricted mega-gift. 

The first component is listing and quantifying the organization’s short, intermediate and long-term needs, such as using the funding to expand programs, support capital improvements and hire more staff, and whether to set some of it aside for an endowment fund.

Next, leaders should work with a financial planner to develop a customized investment policy statement based on the outputs from the previous step. During this stage, stakeholders who set up an endowment fund should articulate its objectives, time horizon and the organization’s risk profile, and determine how it will allocate assets between stocks, bonds and cash. 

“We spend a lot of time with our clients on this step,” Dillingham said. “As you know, the market goes up and down, and you don’t want to be in a situation where people are losing sleep.”

The third step calls for setting up policies and procedures for the organization’s endowment funds. This is a critical activity for organizations starting an endowment program from scratch. For organizations that already have a program in place, it’s always a good idea to revisit its governance, policies and processes.

If the donor or organization makes the mega-gift public, leaders may have to navigate some unfamiliar conversations, such as telling other donors that their ongoing support is, in fact, still needed, or showing a foundation program manager how the money is being allocated. The fourth step encourages leaders to develop a communication strategy so the organization can proactively address these kinds of questions from the funding community.

Dillingham mentioned one client, a religious organization, that went from $1 million in assets to $40 million after it sold off property. “A big concern was what they were going to tell their congregation,” he said. The organization crafted a plan informing the community that it would put most of the windfall into the endowment and some of the proceeds to fund projects. It continued to raise money for its annual fund and donations have increased slightly since implementing the plan.

The fifth and final step is building an endowment growth plan for the future. Among other inputs, the plan should establish a windfall policy that dictates how the organization will allocate a large gift. For example, Dillingham noted that one of his clients implemented a policy stating that any unrestricted gift over $36,000 must go into the organization’s endowment fund.

The plan should also consider how the endowment’s assets can grow through investment management and, just as critically, fundraising, since leaders shouldn’t put all their faith in the magic of compounded interest. “Over the next decade, future portfolio returns are anticipated to be lower than historical returns,” Dillingham wrote. “It will be crucial to look externally to grow the endowment through new gifts.”

Thinking it through and making a plan

I suspect some of these action items will sound familiar to some readers, such as those whose organizations already happen to have an endowment. But there’s a difference between having an endowment and knowing what to do with a large and unexpected gift.

In addition to Dillingham’s own experience with clients who were caught flat-footed by a Scott grant, respondents to a Center for Effective Philanthropy survey reported that her large check brought with it a greater sense of “self-imposed pressure” to spend the money effectively. Having a plan at the ready can go a long way to dial back that pressure.

And what if the organization still doesn’t have a plan in place? “The worst thing you do is make big decisions quickly,” Dillingham said. “You want to take a step back, bring in your team and your board, and be thoughtful.”

All of which brings us back to the nonprofit leader who excitedly rang up Dillingham after receiving a surprise gift from Scott.

Fortunately, the board’s decision to park the money temporarily in a money market fund was a sound one. “It’s a good starting place, because those funds get good rates, around 5%, they’re low-fee and regulated,” Dillingham said. The client ultimately set aside 20-30% of the money for short-to-intermediate needs like funding programs and hiring staff, and put the balance into a quasi-endowment fund.

Dillingham stressed that every situation is different and the percentages will vary based on the organization. What’s most important in preparing for a mega-gift is crafting a strategy that’s aligned with the organization’s risk tolerance, considers whether a portion of windfall should go to a new or existing endowment fund, and includes a communication plan to educate the donor community. 

“It’s important to think it through,” he said. “Because otherwise, once you get the money, it’s chaos.”

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