The world’s wealthy are increasingly seeking to put their money into philanthropic causes, and financial institutions are finding ways of helping them give their money away.
What do the world’s richest people dream about? After having achieved everything that drives most people: recognition among peers, material success and status, some will still feel enthusiastic about their current engagements. Others are part of a growing group of people who aspire to leave a legacy to society.
Andrew Carnegie, the 19th-century captain of industry and great believer of the reallocation of his immense wealth to charitable causes, was fond of saying that the man who dies rich dies disgraced. For the 21st-century millionaires who agree with Mr Carnegie’s reasoning – or who simply wish to donate part of their wealth to charity – private banks have set up philanthropic services to assist and advise on donor strategies.
Philanthropic focus
Although advice was provided on an informal basis until a few years ago, more recently private banks have decided to increase their focus on the philanthropy space, mainly motivated by clients’ interest, which has been fuelled by the growing number of wealthy individuals around the globe.
“Quite frankly, there is tons of money out there,” says Charles Raymond, managing director and philanthropic adviser at Citi Global Wealth Management Group. “The huge amount of financial resources available is a consequence of the explosive growth of hedge funds, private equity and technology. Some wealthy individuals have sold their businesses and have brought their business acumen, contacts and relationships into the philanthropic space on a full-time basis.”
The prime example of such a trend is Bill Gates, the world’s richest man, who has left Microsoft to dedicate his time and money to running the foundation set up with his wife Melinda. The foundation immediately received a $37bn commitment by the world’s second richest man, private equity investor Warren Buffet.
Headline stories aside, private banks can also support clients with less clear ideas on how to navigate the not-for-profit space. One of their motives is to avoid transferring too much wealth to their children.
“People are getting more and more concerned about the damage associated with leaving their children with vast amounts of money,” says Mark Evans, head of family business and philanthropy at Coutts, Royal Bank of Scotland’s private bank. “I think that a big part of it is the fear that passing on large amounts of wealth to children who are either not interested or not prepared to take the responsibility of managing it can be hugely harmful.”
Charity proliferation
It is not just wealthy individuals’ appetite for philanthropy that is increasing. Charities have proliferated in recent years, leaving possible donors with infinite alternatives for their charitable contributions.
“There is much more choice simply because of the explosion in the number of organisations you can give to,” says Maximilian Martin, global head of philanthropy services at UBS. “In the US, about 90,000 new non-profits are created every year, [giving a total of about] 1.5 million. In the UK, there are more than 180,000 charities. Even Switzerland [with its relatively small market] has an estimated 11,000 foundations. There is a lot of complexity and a lot of choice, which is great. However, the number of alternatives poses the question of how to navigate this space.”
The growing number of charities that have been captured by private banks’ radar allows clients to make informed decisions about organisations that do not carry a brand name. Cancer Research is the dominant UK organisation in its field, but specific research carried out by smaller charities can also be presented to clients as a solid alternative.
Such is the case with Oxford-based Survive Cancer, set up by Dr Carmen Wheatley, and her specific research on vitamin B12’s effects on sepsis and septic shock. Dr Wheatley crossed paths with David Poole, Citi Private Bank’s head of business development for Europe, and hopes to integrate public research funds with private donations.
Philanthropy has traditionally been prominent in the US, where measuring the scale of the not-for-profit sector is still easier, also thanks to the country’s centralised tax system. The latest data from the National Center for Charitable Statistics of The Urban Institute, a Washington-based research organisation, indicates that the social sector generated an annual turnover of more than $1300bn between 2004 and 2005.
Capital markets
It is not only size that is shaping the market. The past few years have been particularly exciting for the field of charitable giving and the concept of philanthropy has been transformed by capital markets’ ideas. The origin of this is the move of many professionals from the worlds of business and banking to the philanthropy sector.
London-based charity New Philanthropy Capital (NPC) is rumoured to have been born in the canteen of Goldman Sachs a few years ago, and is run by a former Schroders senior director who used to manage the bank’s foreign exchange and interest rates trading teams. Nigel Harris, chief executive of NPC, is deepening the charity’s research on not-for-profit organisations, which offers information to possible donors similar to that which a bank’s clients would receive on a company prior to an investment.
The approach that donors have to philanthropy is also changing, and there is a greater demand for accountability and engagement in the social investment process. There are still many ‘chequebook’ donors, but an increasing number of wealthy individuals wish to be closely involved in the cause they choose to support. This phenomenon is defined as venture philanthropy, or engaged philanthropy, and is spreading widely around the world (Europe has its own European Venture Philanthropy Association and most philanthropy institutions around the world are looking at the phenomenon).
New ventures
Venture philanthropy is particularly suitable for social entrepreneurs who aim to achieve measurable and scaleable outputs, and have the ability to build organisational effectiveness – as opposed to the often ineffective and unaccountable model traditionally associated with charitable organisations.
The concept of philanthropy is developing and with it new types of social ventures are being brought to life. “Ten years ago, people were very sceptical about investing in environmental projects such as wind power and water conservation,” says Mr Raymond. “Today, these investments and others like them are acknowledged as the way of the future. Last year, [British entrepreneur] Richard Branson pledged $3bn of his transportation operations’ profits to environmental projects. And he wasn’t talking only about philanthropy. He was talking about investments that were going to improve the environment and yield a profit.”
Microfinance is another area of interest for today’s philanthropist. It gained attention when the Nobel Peace Prize 2006 was awarded to Bangladeshi economist Muhammad Yunus and the Grameen bank he founded for pioneering the use of microfinance.
At about the same time that the Nobel prize was given, the European Investment Fund and Geneva-based microfinance specialist Symbiotics closed a deal to raise funding through the capital markets for microfinance institutions. The €26bn transaction financed Balkan and Russian institutions belonging to international charity Opportunity International Network and was structured as a collateralised debt obligation.
“Microfinance is growing so rapidly and has such a need for capital that foundations and philanthropic dollars can’t keep up,” says Mr Raymond. “Microfinance institutions that go from being non-governmental organisations to being regulated banks [will] have access to the capital markets. That’s where ultimately the money that will support microfinance will come from.”
Innovative products
Furthermore, with the emergence of customised structured products, some envisage that it will be possible to incorporate certain social investment needs in products available to private clients. Mr Martin offers the example of an investor who could give a loan to a social organisation, which, depending on the organisation’s performance or needs, could be transformed into a grant after a year.
Other innovations include the creation of sustainability indexes, such as the Dow Jones Sustainability Index, and the possible introduction of social and environmental aspects (in addition to financial performance) to accounting principles.
Such exciting applications of market models to the social sector are gaining more and more credibility and will propel social investment into the future. Estimates for the US alone indicate that an intergenerational wealth transfer of $41,000bn, the largest in history, will take place in the next 50 years.
Philanthropy is now effectively seen as a possible component of an asset allocation strategy, and it is becoming an extraordinarily fertile territory for innovative ideas. This will allow private banks’ clients to be increasingly effective and creative with their philanthropic interests. “[Wealthy individuals] are looking to enjoy the experience of giving,” says Mr Evans. “They want to have fun giving their money away, in the same way they had fun making it.”
