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If you're lucky enough to figure among the alumni of the University of Oxford, you're likely to have heard the news: your place of learning needs cash. Lots of it. In late May, Oxford launched the most ambitious fund-raising drive ever undertaken by a European university, aimed at boosting its coffers by at least $2.5 billion. The eager among you have chipped in already — helping Oxford to more than $1 billion so far — but there are many that haven't. Still need convincing? "The task before us is to guarantee Oxford's future pre-eminence," announced Vivien Duffield, chairman of the campaign, "in a world now changing so fast that we must lead or fall behind."

It's a test being sat on campuses all over Britain. Short of cash, and jostling colleges from America to China for the smartest students and staff, universities across the country are rethinking fund raising. The need is obvious: investment in British higher education stood at 1.1% of GDP in 2004, according to the most recent data from the OECD, while the U.S. spent 2.9%. From medieval Oxford and Cambridge to ambitious modern universities like Warwick, institutions are slowly sharpening their competitive edge. As worldwide college entry rates and numbers of students learning overseas soar, "no matter which way you look at it," says Heather Bell, appointed last year as Oxford's first director of international strategy, "higher education is internationalizing and the competitive intensity is increasing."

The challenge is a familiar one to universities throughout Europe. Low investment means institutions across the European Union pocket an average of $16,000 a year less per student than their U.S. rivals, according to a 2006 report by the European Commission. Lower revenues mean lower spending, and the result is bleakly evident in rankings of the world's best universities. In the highly regarded table published annually by China's Shanghai Jiao Tong University, European institutions fill just four of the top 25 places; wealthy North American institutions account for almost all the rest.

There are signs that Europe has awakened to the problem. On June 2, for instance, the University of Toulouse 1 inaugurated the Toulouse School of Economics, offering English-language graduate courses, thanks to $52 million in donations from corporate donors. A change in French law last year granted state-run institutions like Toulouse more autonomy, so such fund-raising efforts could become widespread in France. In Germany, where local governments have been free to levy tuition fees since 2005, federal and local governments have earmarked some $3 billion to promote excellence in research at selected universities through to 2011. Others spy money-spinning opportunities abroad. At the Paris-Sorbonne University Abu Dhabi, opened in late 2006, students are carefully selected for entry and required to pay $20,000 each year for tuition. Despite France's reforms, the Paris-Sorbonne University — the Gulf school's publicly owned parent — is forbidden to do either back home.

British universities have been even busier than those on the Continent in responding to the challenge from the U.S., but the private funding gap remains enormous. While U.S. public investment in higher education, relative to GDP, is similar to that of the U.K., eye-popping tuition fees and generous philanthropists have endowed American higher education with more than six times more private investment.

Students and their families spend more than ever to go to private four-year colleges in the U.S. — last year alone, average annual tuition fees to such institutions shot up by 6% to just over $22,000. In comparison, fees in England, although higher than in much of the rest of Europe, are modest: the government only introduced its current system in 2006, and has capped fees at roughly $6,000 per student. Even after adding the state's own contribution — and until the government reviews fee levels next year — Cambridge is short by some $10,000 for each student.

Plugging that gap means tapping a university's endowment. That "is no different from U.S. universities," says Alison Richard, vice-chancellor of Cambridge. "But our endowment isn't sufficient, so it's a real stretch." Private donations invested by Yale University are currently worth some $23 billion; the endowment fund of rival Harvard is $35 billion. Dozens of other American universities boast funds valued at more than $1 billion. Even Britain's wealthiest universities are poor by comparison. The central endowment fund at Oxford is about $1.3 billion, and Cambridge's stands at roughly $2 billion. (The universities' individual colleges — Oxford has 39, Cambridge 31 — separately hold endowments worth a total of $11 billion.) At London's Imperial College, one of the world's best for scientific research, funds amount to around $115 million; and the endowment at the London School of Economics (LSE) is worth some $110 million. Over the last 50 years in Britain, says Richard, who was Yale's Provost before moving to Cambridge in 2003, "the great efforts that were taken in the U.S. to call upon the alumni and friends of universities did not happen here."

A Nonacademic Approach
But that was then. Money raised through Oxford's appeal will be poured into new facilities and the endowment. Scholars at Cambridge needn't feel outdone. Under its own campaign, launched in 2005 to mark the university's 800th anniversary next year, Cambridge hopes to bring in $2 billion by 2012, and has already raised some $1.3 billion.

The big money such campaigns generate comes with a huge responsibility to invest those funds cannily, and both universities are making suitable arrangements. Nick Cavalla, formerly an exec at Man Global Strategies — part of the Man Group, the world's largest publicly listed hedge fund — started work as Cambridge's first chief investment officer in April last year; Sandra Robertson, previously the boss of Portfolio Management at the Wellcome Trust, an influential U.K. medical charity, took up the equivalent role at Oxford five months later.

"We hope we can get our rates of return to levels comparable to the best North American universities," says John Hood, vice-chancellor of Oxford. They've some way to go. In the decade to August 2006, Oxford's central endowment delivered an annualized return of 6.7%. Over an almost identical period, an appetite for riskier investments helped Harvard's endowment return 16.7%. At Yale, the rate was 17.2%. (In a coup for Cambridge, David Swensen, the former Wall Street exec who has masterminded Yale's returns, now sits on the university's own Investment Board.)

Still, Oxford and Cambridge have high profiles and good names that won't do either any harm in reaching their targets. And their younger rivals are boosting their own names on the global stage. Imperial College, which celebrated its centenary last year, aims to pull in $410 million by 2010 to improve its campuses and bolster scholarships. Across town at the LSE, workmen are putting the finishing touches to an eight-story teaching facility, financed from the $200 million whip-round among alumni and other donors completed in March.

Almost all British universities now staff an alumni office responsible for finding former students and hitting them up for cash. As a result, the slice of British universities' income derived from endowments and investments hit a record of just under $800 million in the 12 months to August last year, 13% more than in the previous year. And since private donations take the strain off the public purse, the government is keen to promote further giving: in a $400 million scheme outlined in April, it has pledged to match such donations to universities for the three years starting next month.

Recruiting the smartest staff or students, though, is not just about pulling in cash. As part of its $400 million strategy to break into the world's top 50 universities by 2015, the University of Warwick — ranked 57th, according to the U.K. Times Higher Education Supplement list, as it approaches its 50th birthday — plans to permanently host branches of three or four overseas research universities on its site in the heart of England. Nigel Thrift, Warwick's vice-chancellor, won't say which universities it has in its sights; negotiations with North American and Asian institutions are ongoing. But its "International Quarter," he says, will pursue "proper, long-lasting collaborations with three or four institutions around the world, rather than 20."

Crucial in fleshing out Warwick's goals was input from its Council, the university's executive body, drawn largely from professions outside academia. Lay members, many working in business and industry, "add an enormous amount to the institution," says Thrift. Indeed, many U.S. and U.K. universities pack their governing bodies with external members; the LSE, for instance, "is, technically speaking, a company," says Howard Davies, its director. "The university has always had something like a corporate board."

But it's not the case at Oxford or Cambridge, where academics have a majority on both universities' executive bodies. Hood, a New Zealander with a background in business, is Oxford's first vice-chancellor to be chosen from outside the University. In late 2006, when he proposed giving lay members a slim majority on a new governing council responsible for non-academic matters, the idea was turned down by the Congregation, the parliament of Oxford dons. In the scramble to catch up with wealthier U.S. colleges, the dons' power could discourage potential benefactors. "A governing body dominated by academic members of a university," says Philip Harding, chairman of the British Universities Finance Directors Group, "will probably be less attractive to a major donor than one whose governors are from a mixed background."

Hood may not have the board he wanted; his decision last November to quit when his five-year term ends in September 2009 means it's unlikely he ever will. But by orchestrating Oxford's mammoth $2.5 billion campaign, he'll have played no small part in increasing the university's competitiveness in the years to come. On June 18, the university pocketed a $50 million donation from Michael Moritz, a U.S.-based venture capitalist, one of its biggest ever. He has done his bit for the dreaming spires. For the remaining Oxford alumni out there, the question is: Have you?

• Adam Smith / Oxford
• Famous institutions such as Oxford and Cambridge are trying to build new financial muscle to compete for talented staff and students