WB Breakfast Briefing: Philanthropy and Social Investing – The New Asset Class?

Emma Rees

19 December 2007

Philanthropy is big business. Warren Buffett pledged in 2006 to donate three-quarters of his fortune to philanthropic causes and the most recent Sunday Times Rich List reported that the top 30 philanthropists in the UK pledged or donated £1.2 billion to charities in the past year. According to the Charities Aid Foundation, charitable giving is now equivalent to 0.73 per cent of GDP in the UK and 1.7 per cent in the US. Today’s philanthropists are increasingly moving towards what is being termed “strategic philanthropy” and a number of private banks and wealth managers have launched services to meet their clients growing philanthropic interests. With global philanthropy such a hot topic, the subject of WealthBriefing’s second Breakfast Briefing with ERI Banking Systems, held recently at the Barber Surgeons Hall in the City of London, was entitled Philanthropy and Social Investing – the new asset class? Attended by an invited cross section of philanthropists, wealth managers and advisors to the industry, the event was addressed by some of the leading lights in philanthropy and chaired by Stephen Harris, WB editor. Harvey McGrath, former chairman of Man Group and a non-executive director of New Philanthropy Capital shared his experiences as a philanthropist. Mr McGrath said that he gave because he was able to and, having accumulated his wealth during his career rather than inheriting it, felt a duty to give something back: “I don’t want to damage my children with excess wealth and feel a responsibility to give it away”, said Mr McGrath. “I’m not into generational wealth transference and don’t want to give a chunk to the government. It’s also rewarding on an emotional and psychological level. I enjoyed building a business and find it at least as rewarding in the not-for-profit and philanthropic space.” Mr McGrath said that whilst initially he gave reactively, he ultimately found this unsatisfying. As a result, he adopted a more strategic and focussed approach and his background, in Northern Ireland, led him to certain themes around uniting divided communities, education and disadvantaged individuals and communities: “My interest lies in building capacity for improving effectiveness of an organisation doing good work, which provides a longer term, more leveraged impact”, he said. “A good example of this was my providing development capital to New Philanthropy Capital, who provide a hard-nosed analytical approach to charity.” The charities that Mr McGrath supports include School Home Support, a national charity that builds bridges between home and school to enable children and young people to make the most of their education through provision of trained mentors, as well as integrated education in Northern Ireland: “If education is segregated along religious lines, preconceptions and prejudices become hardwired. Whilst the government supports integrated education schemes, it does not provide start up fees, and philanthropic capital has bridged the gap,” concluded Mr McGrath. Mark Evans, head of philanthropy at Coutts & Co, who set up a dedicated philanthropy department in 2005, described how philanthropy can help build new business for private banks and strengthen client relationships: “Many of our clients take the business of giving it away as seriously as the business of investment. We helped one client to determine how best to allocate his resources to alleviate world poverty, by mapping the world and identifying 30 charities that met his objectives. For another client wanting to set up a foundation for his daughters to run, we worked with the Institute of Philanthropy and New Philanthropy Capital to help them understand and tackle the route causes of homelessness, such as drug addiction, family conflict, refugees and mental health.” Mr Evans described how Coutts encourages its bankers to introduce the concept of philanthopy at an early stage in order to strengthen client loyalty and build new business by asking key questions: “It can be as straight forward as opening a charities account with the Charities Aid Foundation, which provides cheque books which can be given to children. We also bring clients together in philanthropy forums which provide a catalyst for discussion – so far the 20 forums have been attended by 800 people”, he said. Coutts also works with the Funding Network, which is “a bit like a Dragons Den for charities” according to Mr Evans. Tied to a charities auction, this event allows charity representatives to make a six minute “elevator pitch” with an aim of raising £5,000. Mr Evans also revealed that Coutts is launching a philanthropy handbook at the end of the year, as well as taking part in a one hour ITV documentary looking at its clients’ philanthropic journey. The Merrill Lynch Cap Gemini World Wealth Report 2007 found that philanthropy had expanded significantly, particularly in the ultra high net worth space, and that the ways of giving had also changed. In 2006, whereas 11 per cent of HNW individuals gave 7 per cent of their wealth, 17 per cent of the UHNW gave 10 per cent of their wealth, equating to $285 billion in donations globally in 12 months. According to Nick Tucker, managing director of Merrill Lynch Global Private Clients in the UK and Ireland, two key things drive philanthropy by wealthy individuals; the desire not to spoil their children and the increasingly self-earned nature of wealth. To support his point, Mr Tucker explained that whilst those who had inherited their wealth gave $110,000, those who had earned their wealth gave on average $232,000 across the course of a year. Giving also varies geographically, with six per cent of Europeans requesting philanthropy as part of their portfolio compared to 14 per cent of those in North America. Giving is also rising at a faster clip in the US perhaps due to tax incentives for philanthropic giving. 60 per cent of Europeans said that they gave to give back to society: “When investing people’s wealth it is important to understand the purpose of their wealth, as this leads to in-depth conversations with clients”, said Mr Tucker. “Whereas the nature of giving was passive, it is now more active. Wealthy individuals want to see a return on their investment and take a hands on, more global, approach”. “We work with companies like New Philanthropy Capital at the identification stage. The way they report is similar to an analyst’s report on a company, so our clients are comfortable with that.” Mr Tucker said that Merrill Lynch’s global philanthropic team includes three people in the US, two in Europe and two in Asia. It also holds “boot camps” for the children of wealthy individuals which includes a session on philanthopy where they have to present on why they have chosen to donate to a certain charity. New Philanthropy Capital was set up as a registered charity in 2002, by a group of senior figures from the financial services community who wanted to improve the quality and quantity of resources available to the charitable sector. It provides independent research and tailored advice on the most effective and rewarding ways to support charities. James Garvin, director of advisory services for NPC, said there is a glut of investment research, but too little research on philanthropy. He said that one of the key drivers of philanthropy is wealth being crystallised suddenly rather than earned over a lifetime and those giving increasingly want to apply the same rigour to philanthropy as they do in their business lives. Referencing recent research for NPC by Scorpio Partnership, Mr Garvin said that it was hard for wealthy individuals to find qualified independent advisors to tell them if a philanthropy project will provide them with value for money. Using an investment analogy, Mr Garvin said that NPC’s clients view their philanthropic efforts as investment rather than divestment, and want to see a healthy return: “Charities can produce results”, he said. “ For example a report on truancy and exclusion can look at the cost to society of an excluded child, such as social services, crime and so on. The social cost of exclusion is £64,000 ($129,000) whereas the cost of intervention is substantially lower. We calculated that the return on this investment is 24 per cent”, said Mr Garvin. “Risk can also be related to charity, such as the risk of overdependence on certain key staff or strained finances. Like the risk inherent in investing in a start up rather than an establised company, founding a charity has attendent risks. However, in charity risk and return are non-correlated and you can often gain greater returns with low risk.” Mr Garvin also explained how donations could be put into portfolios that were diversified across different causes, and that leverage can amplify returns where additional funding can be achieved through matched funding from the government, for example: “Research is key to determine approach. Using the example of domestic violence, the obvious solution might be to fund a refuge, but in fact a more effective approach may be to get the abuser out and allow the victim to remain in their home. Advice is also key and whereas one might equate effectiveness with a low ratio of administration costs, an investment in administration might be a great opportunity to maximise impact of spending and help the charity run more efficiently. An investment approach is a useful tool, but the emotional content is just as important in finding rich pickings from philanthropy”, Mr Garvin concluded. Last to address the briefing was Geoff Burnand, chief executive of Investing for Good. Mr Burnard explained that social investing is investing in a business whose primary driver was social, not financial. He talked about the possibility of achieving blended returns from a combination of different sources such as education, health and microfinance. According to Mr Burnand, the UK social investing sector comprises 55,000 businesses which turnover £77 billion annually and make an £8 billion profit, equivalent to 1 per cent of UK GDP. He also said that 40 per cent of returns from charities were from trading activities: “Microfinance is an interesting area. 2.8 billion people globally live on less than $2 a day and many more in abject poverty, on less than $1 a day. It is a sector that is currently worth £16 billion and expected to grow to £25 billion by 2010.” According to Mr Burnand, social investing appeals to many different audiences including asset managers, enterpreneurs, private banks and family offices. However, he believes that mainstream capital is not brave when faced with something new: “Social investing has the look and feel of the hedge fund industry ten-fifteen years ago. Investments tend to be illiquid. The industry tends to take a binary view – that either capital is invested for a profit or return or that it is donated. By contrast, social investing balances the social with the financial return. We are increasingly working with advisors, asset managers in constructing portfolios for clients.” The audience’s interest and engagement was demonstrated by a lively questions and answers session chaired by Stephen Harris. The presentations are available as an audio download by clicking here.