What Is a Unitized Endowment Pool (UEP)?
A unitized endowment pool (UEP) is a form of endowment investing that allows multiple endowments to invest in the same pool of assets. Each endowment owns individual units in a UEP and investors generally see their returns monthly. New endowments entering the pool can buy in by receiving units in the pool valued as of a specific buy-in date.
- A unitized endowment pool (UEP) is a type of investment used by endowments that allow multiple groups to invest in the same basket of assets.
- Each endowment owns units in the UEP, with the value of each unit determined as of a specific buy-in-date.
- UEPs are similar to mutual funds, except they are only available to endowments, not to the public.
- UEPs allow the individual endowments to have access to greater diversification by teaming up with a number of other firms.
- The benefits UEPs provide to endowments include access to less liquid investments, access to complex financial markets, such as those of emerging economies, and the ease of selling illiquid investments.
Understanding a Unitized Endowment Pool (UEP)
A unitized endowment pool (UEP) is sort of a mutual fund, but it’s on a bigger scale and specifically for endowments, as opposed to retail investors.
While even small endowments often have a substantial amount of cash to invest, it’s sometimes beneficial to pool together with other endowments for diversification. UEP units serve to clearly segregate each endowment's share in the pool. For example, a UEP with a market value of $10 billion may have 100,000 units worth $100,000 each and split those units among multiple endowments.
Unitized endowment pools are one of three main investing options for endowment funds. Some choose to invest in UEPs exclusively. Others hire external managers directly. The largest tend to hire internal managers to attempt to grow endowment assets. A few use a combination of all three.
The number of endowments that invest in unitized endowment pools and other outside investment managers, as opposed to making all decisions in-house, tends to run in cycles. In the decade following the 2007-2009 financial crisis, for example, more midsize- and large endowments hired management expertise from the outside, in general, in an effort to focus on controlling costs and putting more focus on risk management.
Benefits of a UEP
Some UEPs provide access to less-liquid securities such as private equity and stakes in timberland. Each tends to have attractive returns over time, but also carries significant liquidity risks.
A smaller endowment might not own these assets outside of a unitized endowment pool because they don’t have the internal expertise to manage these assets. Moreover, selling units of a unitized endowment pool with a share of these types of assets is sometimes easier and faster than trying to sell illiquid assets directly.
The school with the largest endowment is Harvard University, with an endowment of $42 billion in 2020.
Some unitized endowment pools also have more experience with emerging-markets equity and debt than an endowment fund’s own team. Endowment funds tend to own at least some of these types of assets, as many plan to invest for very long time horizons; even longer than the average retail investor saving for retirement.
Many endowments choose to take on more risk in search of higher potential rewards that have a better chance of beating inflation over time. This could be viewed as a downside but it depends on each endowment's risk tolerance and investment time horizon.
What Are the Three Types of Endowments?
In general, the three types of endowments are true endowments, also known as permanent endowments, quasi-endowments, also known as Funds Functioning as Endowments (FFE), and term endowments.
What Is a Unitized Investment?
A unitized investment is a type of pooled investment structure that allows investors to purchase units in a pooled investment vehicle, such as an investment fund. Each investor owns a portion of the investment vehicle through their units. Unitized investments typically have a specific investment concentration or strategy.
What Is an Endowment?
An endowment is an investment structure for non-profit organizations that allows for their donations to be invested in order to generate returns with the ultimate goal of financing their operations.