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Global Investor Magazine, December - January 2008, By Caroline Allen
Charity begins... with a good plan
There are more wealthy individuals than ever before worldwide, and they are often keen to support charitable causes. Picking the right cause and deciding how to back it is giving rise to a new kind of philanthropy and support services, finds Caroline Allen
Call it the professionalisation of giving, or just making sure that the time and money donors contribute to their favoured causes is well spent: the world of managed philanthropy is undergoing a radical reconstruction, resulting, according to most of those involved, in far more effective outcomes.
There is more and more evidence to show that private giving is better targeted, better managed and more effective than public giving, where there are growing questions of accountability, transparency and even affordability, notes Tanja Jegger, head of philanthropy at South Africa's Stonehage group, which looks after portfolios worth some $24 billion.
The sector has come a long way from the 19th century concept of the philanthropist industrialist, beneficial though that model may have been. "Charity" has an antiquated aura about it. There are still benefactors who are content to put a coin in the tin, or simply sign a cheque in return for a footnote of thanks, notes Jegger. But more commonly, wealthy donors now want a deeper level of engagement in a process now described as 'social investment'.
A hand up
"The change is that modern donors want to give a hand up, not a hand out," she explains. While most private banks offer a philanthropic service, and the larger charitable endowments and foundations are run as professionally as any institutional investor, the sector is beginning to study, measure and create products and services to meet the demands of a new type of client.
The catchment pool for such advice is undoubtedly growing. The number of billionaires worldwide jumped 60% between 1996 and 2005, while global demographics show babyboomers (those now aged 50 to 60) are planning for wealth transfers as they approach retirement.
One study suggests that the next 50 years will see the biggest-ever transfer of wealth, some $12,000 billion, to the next generation. Part of this will go to benefactors, part to governments in the form of taxes, and the rest to charitable organisations. Significantly, much of this wealth has been earned, rather than inherited.
In the UK, 75% of those who appear on the benchmark Sunday Times Rich List are now self-made millionaires, against 25% just 20 years ago. In the US, the Forbes Rich List counted 946 billionaires worldwide, with a total wealth of $3.5 trillion. The average age of the principals is 62, and 60% of the list are self-made.
Geneva-based wise, an advisory company founded by Etienne Eichenberger and Maurice Machenbaum, has done pioneering work on inter-generational wealth education and transfer. They note that in the last 10 years, the number of new charitable foundations set up every year in Germany has gone from 200 to nearly 900, perhaps a conservative estimate, since The Economist magazine puts the number of charitable trusts at 4,000 in 1997, rising to more than 13,000 in 2006.
In France, the number of new charitable foundations is growing by 28% annually, to some 400,000 charity 'associations'. Definitions might suggest some double counting, but there is no mistaking the trend. Brazil, where patronage and social entrepreneurship has a distinguished history, has 150,000 charitable associations actively operating.
Not only are there more wealthy benefactors willing to give, but they are giving more than ever before. Philanthropists with at least $1 million in net financial assets donated more than 7% of their wealth on average in 2006, and the ultra rich, those with assets of more than $30 million, gave an average of 10% of their wealth, according to a report by Merrill Lynch and Cap Gemini in June. That means such gifts totalled an estimated $285 billion worldwide.
Stonehage's Jegger points to the UK Giving List Index, which charts the proportion of total wealth donated in the preceding 12 months. In 2007 the average was 9.36%, almost triple the year before. Business entrepreneurs and financiers dominated the index, which included a $1 billion pledge by London-based mining magnate Anil Agarwal to build the standard-setting Vedanta University in Mumbai, India.
Globally, giving has always had different regional profiles. In the US the philanthropic lodestar has long been billionaire industrialist Andrew Carnegie, who reportedly remarked that it is more difficult to give money away intelligently that it is to earn it in the first place. The new role models are investment guru Warren Buffett and Microsoft's Bill Gates, who want to see a set of outcomes. Gates' declared aim is to eliminate the world's 20 worst diseases within a generation.
Buffett, whose personal fortune tops $44 billion, famously said he wanted to give his children enough money for them to do anything, but not enough to allow them to do nothing. He then announced the transfer of £20 billion to the charitable foundation of his long-time bridge partner... Bill Gates. The impact on the global philanthropic sector is yet to be determined, but considering the annual budget of the United Nations is some $12 billion, it is likely to be considerable.
There are dozens of other mega-donors who, for a variety of reasons, are willing to put their fortunes towards a common or specific good, including Hungarian-born financier George Soros, micro finance power-givers Pierre and Pam Omidyar, Jordan's Queen Rania, China hotelier Yu Panglin and Hong Kong's Li Ka-shing, who joins the $1-billion-plus donor club with Islamic champion Prince Alwaleed bin Talal al-Saud.
However, such figureheads, especially those who have made their fortunes themselves, are now far more demanding on how their largesse is spent. Where traditional charity generally involved a one-off gift, often late in life, with a general aim of 'doing good', new philanthropy involves sustained support, maybe throughout a lifetime, where specific objectives are set and the path to them monitored.
A report from the Scorpio Partnership, a wealth consultancy, found that benefactors in the UK, Germany and Switzerland don't have the services they need to make charitable donations and philanthropic gifts. A survey of 34 ultra high net worth individuals with net assets of between $90 million and $2.5 billion in the three countries found donors are willing to pay for advice, but lawyers and private bankers generally don't offer the skills to identify and help select projects.
"The lack of suitable advice, particularly at the start of the philanthropic process, is a serious barrier to many potential European donors," said Nigel Harris, chief executive of London-based New Philanthropy Capital (NPC), the advisory firm that commissioned the report.
"Wealthy donors know what they want to achieve, but professional advisers tend not to be the first point of call for advice on how to give," commented Catherine Tillotson, a partner at London-based Scorpio. "Philanthropy is as strategic to some of them as their equity portfolio, and a lot of private banks are starting to be interested, but the question is, how can they commercialise it?"
"For integrated wealth managers, philanthropy creates a number of opportunities to add value to the client relationship," notes Stonehage's Jegger. "On a qualitative level, it is developed through advisory services which match purpose and family values to capacity, and identify and monitor appropriate projects. On a quantitative level, value is added through legal and structuring services (vehicle formation and administration), asset management, grant making and bespoke reporting."
Stonehage's three step format for social investment is 'define, design and deliver'. It is often a protracted and complex process, but can be an energising and healing force among squabbling siblings or family units. "Family philanthropy tends to bring people together, where they can sometimes be divided by other financial matters."
wise in Geneva works with the financial advisers of wealthy families to set up intranets and web-based tools where parents and children can discuss wealth and other issues important to them. It reflects a world where clients and their children may live in different continents and have to be aware of security threats, both to themselves and their fortunes.
Adds Jegger: "Of course there are different motivations for giving. It may be a mandatory religious commitment, or tax driven, or even simply competitive behaviour among peers. But many people undertake incredible personal journeys through their engagement. It's often very emotional. You have to trust the people you are involved with. The donors come to realise that money is like energy, and they can decide what to do with that force." She says there is growing interest in the concept of a "third child", a charitable trust that is a beneficiary alongside other children.
The business models for engaging with the philanthropic sector are becoming far more creative. A formative thinker in the sector is Maximillian Martin, global head of philanthropy services at UBS in London. "Philanthropy harbours an interesting paradox," he says. "Structurally, charitable foundations can be designed to operate in the long run, in principle in perpetuity...this notion of 'historical time' is an important driver of philanthropic action. But how can one make a difference over long periods in a changing world?" Drawing on historical references, he argues that well-timed interventions at 'inflection points' can tip issues, fund new initiatives with potential for self-sustained scaling, and pilot innovations that the public sector can replicate.
In the 21st century, firms like New Philanthropy Capital copy investment banking's analyst structure, providing unconflicted research on possible beneficiaries. A not-for-profit organisation, it is dedicated to putting verified information about charities into the public sphere. It does not invest its own funds in any charity, and a research report on any organisation, which involves assessing both 'hard' and 'soft' measures, does not guarantee any funding from donors.
Other structures, like multi-family offices, may commission or buy such research and also give advice. One step further along the social investment spectrum are the venture philanthropists, who want hands-on engagement. And then there is a range of service providers, from the traditional legal and fiscal experts to data providers like Guidestar.
"The metrics of success are more complex than in the commercial sector," says NPC's Harris, who, like his fellow directors, has long experience in the investment banking sector. "Successful donors, in particular entrepreneurs, tend to think of what they are doing as a social investment. They want to see a return, but not necessarily a financial one. Some come with a very precise area of interest, others may look at their engagement as a portfolio of interests, and asset allocate amongst them."
As in mainstream financial investing, there are different risk levels. "If you engage with a large, well established charity there is less likelihood it will fold, or fail to attain its goal. It's the blue chip equivalent. Whereas a start-up may face business, management or market issues, and it may fold or not achieve what you were hoping it would."
How to exit
Increasingly, donors are also being urged to consider how they exit their 'investment'. Are they giving a one-off sum, for one year, or 10 years? Is it open-ended, inter-generational? What happens if the management of the beneficiary organisation and the strategy changes? An organisation too reliant on a single donor could face collapse if one funding source dries up, not only jeopardising work done, but possibly inflicting further harm.
"We are a charity ourselves, and like any business I can tell you we value long-term, engaged, informed investors," says Harris. "So that is what we would encourage. We have to be very upfront about a client's commitment, by time or results. The best relationships are where everyone, the supply side and the demand side, understand each other."
Taking the investment analogy further, are donors now edging into the 'activist' sphere, giving with strings attached, getting involved in their targets? That model is more evident in the US, where, Harris notes, there is an entirely different dynamic between individuals, the state and philanthropy, and one which does not translate easily to Europe and the UK.
Firms like Boston-based New Profit, Washington-based Venture Philanthropy Partners or Impetus in the UK, get highly involved with the organisations they back, with active managerial input, including a seat on the Board. As Stonehage's Jegger puts it: "Trust is good, but control is better."
Bridges Ventures is a venture capital company with an explicitly social mission. Started by Ronald Cohen, former chairman of Apax Partners, and Tom Singh of New Look and 3i, Bridges has raised two funds so far. The first, of £40 million, included £20 million in matching investment from the UK government. The second fund raised £75 million, entirely from the private sector, beating its target by 50%.
The second fund made UK-based Bridges the biggest investor of its type in the world. Its closest equivalent is the New York City Investment Fund, founded by Henry Kravis, the head of Kohlberg Kravis Roberts, one of the world's largest buy-out groups. NYCIF has raised more than $100 million since 1996.
Inspired
Michele Giddens says the firm applies a social screen to all its investments, requiring them to be either regenerative (to an area, staff, suppliers or clients) or sustainable, demonstrating strong social benefit in areas like healthcare, education, the environment and ethical business. Bridges invests up to £10 million per company and has backed 33 to date, with three successful and profitable exits.
Initially Bridges sought backers to support their funds but they are now finding investors coming to them. "They become inspired when they see how it works and they like the private entrepreneurial structure, which they know and understand." Backers become limited partners. They are not involved in investment decisions, which are taken by the fund manager, but can add board members and keep an eye on what is being done.
The firm expects to be operating globally in the next year or two, and Giddens says new players to the sector would be welcome. "I imagine other City organisations – especially in the alternative area, will be setting up these sort of structures. It's all good, there are enough projects to go round!"
The skills needed to engage in social investment through a fund are difficult to combine. "Ideally, candidates would have some venture capital or private equity background. They need hands-on managerial experience and the kind of skills to present to investment banks, the World Bank or international politicians."
But she believes several forces are aligned to boost the sector. "Many successful young executives want to do something more than make money. They want to make a difference. Secondly, consumers are becoming much more demanding about the ethics and provenance of products – fair trade, green investing etc. And thirdly, there is very strong growth in alternative investment structures, whether listed or unlisted, globally."
The advisory opportunity is immense, but so far most wealth managers have failed to master and guide the constantly shifting relationship between the issue, the beneficiary and the donor, and to hit what UBS' Martin identifies as the key inflection points.
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