The Alternatives Revolution Is Maturing: Nonprofit Investors Need a New Playbook
Jeremy France
The alternatives revolution has given endowments and foundations more sophisticated portfolios, but it has also raised a more uncomfortable question: Has portfolio complexity outpaced the governance, liquidity planning and operating discipline needed to manage it?
Focusing on the latter idea matters because nonprofit portfolios fund scholarships, research, grantmaking, hospitals, cultural institutions and community programs. When markets become volatile or liquidity becomes harder to access, the consequences can extend beyond investment results to the missions these portfolios are designed to sustain.
The next phase of institutional investing will be defined less by who can add the most complexity to a portfolio and more by who can manage it well. For nonprofit investors, success increasingly depends on whether a portfolio can support spending; withstand budgetary, fundraising or market stress; and keep the organization focused on its mission.
Alternative investments now account for 36% of endowment and foundation portfolios, on average, surpassing U.S. equities at 27%, while growth in allocations to private market assets With fewer organizations expecting to increase their exposure to alternatives over the next 12 months, the next test is not access, but whether institutions can manage the complexity, liquidity demands and governance burden that come with the portfolios they built.
From the Margins to the Core
Simply owning more alternatives is no longer the mark of a sophisticated institution; the next source of advantage will come from managing existing exposures with greater precision, discipline and transparency. The old marker of sophistication was access; the new marker is control.
As alternative investments move from the periphery to the core of institutional portfolios, governance becomes the real differentiator in portfolio performance, determining whether added complexity remains useful or becomes a source of strain.
Portfolio complexity is rising faster than organizational capacity: Morgan Stanley’s 2026 Endowments and Foundations Survey found that most respondents expect investment team size to remain unchanged, even as portfolios continue to become even more sophisticated, placing greater demands on committees, boards and external partners. A portfolio can look diversified on paper while still creating liquidity, oversight and decision-making challenges when conditions deteriorate.
Portfolio construction is about design; portfolio management is about execution. That means investment teams need considerable understanding about how private market commitments, liquidity needs, spending requirements and risk exposures interact, and need to ensure governance structures can support informed decisions as conditions change.
The institutions that excel will not necessarily have the largest alternatives allocations, but the clearest framework for deciding when to commit capital, preserve flexibility and keep investment complexity aligned with organizational capacity.
Liquidity Is a Priority
One consequence of larger allocations to alternatives is that liquidity can no longer be viewed as secondary. For nonprofits, liquidity is about preserving the ability to make grants, fund programs and meet obligations when external conditions are not accommodating.
Endowments and foundations must keep funding operations and advancing their missions, while managing capital calls, private market commitments and uncertain fundraising environments. That balancing act has elevated liquidity from an operational concern to a strategic priority.
This is not an argument against alternatives, which can remain an important source of diversification and long-term return potential. It is an argument in favor of treating liquidity management as part of the investment process: stress-testing portfolios; understanding how spending demands and capital commitments could interact; and preserving flexibility without compromising long-term objectives.
The question is no longer simply, “What returns can this portfolio generate?” It is also, “How will this portfolio behave when conditions become more difficult?”
The New Definition of Success
For decades, institutional investors largely measured success through return generation. That standard will always matter, but returns alone are becoming an incomplete measure of success.
Nonprofits face rising spending needs, greater portfolio complexity, geopolitical uncertainty and increased pressure on governance structures. A strong portfolio is not simply one that generates attractive returns; it enables an institution to fulfill its mission through a range of market environments without forcing abrupt cuts to programs, grants or long-term commitments.
Resilience means aligning portfolio strategy with spending needs, liquidity requirements and governance capacity, while preserving the flexibility to adapt as conditions change.
The New Playbook
The alternatives revolution is not ending; it is entering a more mature stage.
The first phase was gaining access to a broader investment opportunity set. The next phase is ensuring portfolios can withstand uncertainty, support organizational needs and perform as intended when mission demands are high and markets are under pressure.
For nonprofit investors, the new mantra is clear: Treat liquidity as strategic, view governance as part of portfolio resilience, and measure success not only by what portfolios return, but by how reliably they support mission continuity through changing market conditions.
Portfolio construction and allocation decisions got endowments and foundations to this point; portfolio resilience will determine whether they can keep funding the work they exist to do when the next period of stress arrives.
Jeremy France is the head of institutional consulting services at Morgan Stanley.
This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of CIO, ISS Stoxx or its affiliates.