Endowment Tax Changes: Secondaries Market Implications In 2025 And Beyond

As we head into the fourth quarter of what has already been a busy year in the secondaries market, we wanted to revisit a topic from the summer that may impact sales activity: the endowment tax regime.

Enacted in July, "The One Big Beautiful Bill Act" provided for increased taxation on certain private college and university endowments for tax years starting after December 31, 2025. Ropes & Gray has commented on this legislation throughout its evolution and implementation (see notes here, here, here and here). As a refresher:

• The "endowment tax" applicable to private college and university endowments under Code Section 4968 was introduced in 2017 and is currently a flat 1.4% tax applied to net investment income for schools that meet certain criteria, including having at least 500 students and investment assets per student of at least $500,000. Approximately 56 universities have been subject to the endowment tax in recent years.
• For tax years starting after December 31, 2025, colleges and universities subject to the endowment tax will, in summary, pay tiered rates based on investment assets per student, referred to as "student adjusted endowment" in the legislation. In addition, only colleges and universities with at least 3,000 students will be subject to the tax going forward, which an increase over the prior 500 student threshold.
• Schools with student adjusted endowments of over $2 million are subject to an 8% rate; schools with $750,000-$2 million are subject to a 4% rate; and other schools are subject to the preexisting 1.4% rate if they meet certain criteria.

So what does this mean for secondaries market participants over the next few months? While the bill that was enacted was watered down compared to the initial version (which included a 21% rate at the top end and had additional intermediate tiers), the increases are still potentially material enough to affect investment decisions at the margins.

Endowments may consider realizing appreciated positions prior to effectiveness of the more punitive rates, potentially including through secondary sales. They may also consider when it would be most advantageous to realize losses so as to optimize offsets against gains. They may also reevaluate borrowing in lieu of dispositions as a source of liquidity for infrastructure and expansion projects.

The increased endowment tax rates affect a relatively small handful of institutions, but the affected institutions collectively have very substantial assets under management and include some that have been active in the secondaries market in the recent past. We note, too, that these changes are taking place at a time when colleges and universities are facing an uncertain political environment more generally. We'll see what unfolds in the next few months and beyond.

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