May 22, 2023: How the next-gen approach to philanthropy is different
When it comes to seeing things with fresh eyes, look to the next generation.
Our lead story this week delves into how next-gen wealth-holders are taking the concept of traditional philanthropy and turning it on its head. They’re aligned with their parents in their overall mission to do good — they just see that impact investing is the way forward.
Amy Guttman talks with industry experts like Jennifer Kenning of Align Impact, who explains that today’s investor knows that investments grow wealth. By growing that wealth, they’re able to repurpose funds to make an impact — a win/win for everyone. Issues like climate change, affordable housing and infrastructure are particularly top-of-mind with this set.
Similarly, our sister publication Pensions & Investments touches upon this generational divide created by how each generation perceives charitable giving. So how can the next gen prove this can work? Experts believe it's by remaining nimble in their approach so they can invest across asset classes and seek out those profitable opportunities.
Finally, we’ve put Marcus Baram to work this week at the annual SALT iConnections event in New York City. Baram posted frequently to our live blog and social media, sharing real-time conference feedback with our community. Hot topics this year included artificial intelligence, offense growth plays and commercial real estate. Head to our LinkedIn page for all the event details.
As always, we appreciate any comments, ideas and insights that would make this newsletter more useful. I look forward to growing this family office community with your help. Please email me at [email protected].
HANDPICKED: How the next-gen approach to philanthropy is different
By AMY GUTTMANN
Erica Berger began running her family office after her father died in 2021. Before his death, she persuaded him to pivot from funding land restoration projects to impact investing.
“Historically, we've had farmland,” said Berger, who is based in Los Angeles. “We've cleaned up soil and done well doing it. We were looking in California, but I was concerned about water intensity. I said: ‘Why don't we start an investment arm that's focused on mitigating climate change and increasing agricultural renewal? Owning land isn't the only way to clean up soil and improve the quality of our food.’ ”
Berger’s father was on board once she could demonstrate success with her own ESG (environmental, social and governance) portfolio. Equipped with a background in early-stage technology, Berger took a startup approach.
“We started small, but we invested together," she said. "I hired a due diligence consultant and attorneys.”
One of their investments is in a company called Forerunner, a floodplain management platform. “Rather than acquire land, we’re supporting people out there doing these things already with interesting new technology,” Berger said.
Next gen investors see impact investing as a more effective way to grow and redistribute the same capital rather than traditional philanthropy. The latter is often seen as a negative financial return, whereas an impact investment grows wealth and provides opportunities to repurpose funds, which appeals to younger generations, said Jennifer Kenning, CEO and co-founder of Align Impact, an independent advisory firm specializing in impact investment strategies. Pragmatism, among other factors, is driving this trend toward impact, she said.
“People are starting to see the reality of climate change and sustainability because you can't escape it wherever you are," Kenning said. "A lot of the issues that we're trying to solve are big infrastructure issues like easier access to education or affordable housing. They need real investment dollars versus philanthropic dollars. Philanthropy is needed for certain things like emergency response to natural disasters — quick and immediate solutions, not long term.
“They can see that the recycling of capital has a profound effect on society, and they've had enough data over 40 to 50 years around how philanthropic capital hasn't really worked in a lot of areas. We're still dealing with people who don't have access to water, electricity, sanitation, things that we've been throwing philanthropic capital at for a long time.”
Their expectation for returns differs drastically from those of older generations. Unlike their parents and grandparents, who were taught to prioritize maximizing returns above all else, next-gen family office members are content to earn 7% to 10% if it achieves objectives and improves the lives of others, Kenning said.
MAKING IMPACT THROUGH DAF, PRI
Donor-advised funds (DAFs) and program-related investments (PRIs) within foundations are two of the most popular vehicles for impact investing. Younger people are at least twice as likely to give through a structured vehicle like a DAF, according to the Bank of America Private Bank Study of Wealthy Americans.
DAFs are favored for their ease of use and flexibility, said Josh Stamer, chief strategy officer at California-based Anonymous Philanthropy, who has structured private family foundations in partnership with advisory networks. Funding sources can include cash, shares, noncash assets and third-party entities, he said.
Many of Stamer’s clients use PRIs within family foundations. They can include equity investments in for-profit companies with a social mission, a low-interest loan or recoverable grant to a nonprofit, or a loan guarantee. PRIs play a valuable role in the changing shape of philanthropy, Stamer said.
“Next-gen philanthropists see this as being in direct alignment with both investment and mission,” he said.
One of Stamer's clients structured a PRI in a small, for-profit compounding pharmacy to offset the high price of a lupus medication that was effective but cost-prohibitive for most patients. “By doing this as an investment rather than a grant," he said, "the philanthropist was able to provide ongoing input and oversight. There’s potential for a significant return on his investment for the foundation.”
Overall, Erica Berger believes that the two generations can unite to create impact.
“It took a lot of patience," she said. "But ultimately, we have the same values, just different approaches.”
Family offices put greater emphasis on impact
By BAILEY MCCANN
As awareness of ESG risk factors including climate change, supply chain issues and social impact grow, family offices are increasing their impact investments and using their unique position to craft mission-driven strategies.
While this type of investing sometimes gets painted as a generational issue driven by the desires of millennials and Generation Z, a number of family offices have been in this space for decades.
Rockefeller & Co. LLC, for instance, launched the first iteration of its Odyssey mission-driven venture capital strategy in the 1970s. According to the 2022 iteration of "Investing For Global Impact: A Power For Good," a private wealth survey from Campden Wealth on behalf of Global Impact Solutions Today and Barclays Private Bank, 32% of private wealth portfolios include some form of impact investing strategy and that figure is expected to increase to 50% within the next five years. Four in 10 respondents said they expect between 80% to 100% of their portfolios to be in impact investments by that time.
The survey, which was conducted between April and July 2022, had 149 participants and family offices represented 58% of respondents.
USING ALL AVAILABLE TOOLS
Builders Vision, a family office-backed impact investment platform, takes an "all available tools" approach to impact investing. Builders Vision targets four areas: food and agriculture, climate and energy, oceans, and community improvement projects.
There are three CIOs that lead investments for Builders Vision based on these four areas. Builders Vision uses a combination of direct investments, venture capital and growth equity, a cross-asset portfolio that includes third-party investment managers, and philanthropic investments.
There are also flexible pools of capital that Builders Vision uses to make investments in areas where they make so-called impact-first investments. These are investments that are higher risk.
"We have the flexibility to go into areas and make investments where we're hoping to build markets that will eventually have market rates of return but in the interim have high impact," explained Noelle Laing, CIO for the Builders Initiative, one of the investment teams within Builders Vision. "These are in areas like energy, food and oceans. We're making investments with first-time fund managers and early-stage companies either in debt or equity."
Ms. Laing said that using this broad approach allows them to maximize the investment opportunities that are available to them as well as the potential for positive impact. "There's a lot of white space in impact investing for people to come together with goals they want to achieve and craft solutions around that. We try to stay flexible so that we can find the right opportunities."
Builders Vision has created an internal impact measurement and management system that it uses to evaluate all of its investments to make sure that they are meeting the goals of the four focus areas.
According to Ms. Laing, the system works both as an initial screening framework to sort through investment opportunities and then once an investment is made, the system makes sure that investments are meeting their impact goals.
"It's a qualitative and quantitative process," she says. "We don't want it to become another compliance box that gets checked; we're engaged throughout the life of our investments."
Both Ms. Laing and Kathleen Simpson, CEO for the Russell Family Foundation, said that flexibility and specificity are two keys to a successful impact investment strategy. Having the flexibility to invest across asset classes can create new opportunities. It's also important to set clear impact goals. By narrowing the approach to specific focus areas, it is easier to measure impact and make sure that portfolios stay aligned, they said.
The Russell Family Foundation was launched in 1999 following the sale of the Frank Russell Company to Northwestern Mutual Life. Jane and George Russell funded the foundation with proceeds from the sale and have subsequently used the foundation to issue grants, run community programs in the Puget Sound region, and launch an impact investing program that started in 2004. The work of the foundation focuses on climate finance, education and food systems.
In the beginning, impact investing was a small part of the foundation's total portfolio — accounting for only 7% of investments in 2014. At that time, Ms. Simpson said, the foundation made a decision to divest its exposure to fossil fuels and undertake a review of its investment portfolio.
"It was really a time for us to pause, reflect and say we want our whole portfolio to align with our values," Ms. Simpson said. "We have a lean internal team and we work with external financial advisers to create our strategies. We had them model portfolios for impact. We found that we could make impact portfolios that didn't require us to make concessions on returns."
The foundation's investment portfolio is now 94% aligned to its impact goals for sustainability. In October, the foundation announced a net-zero commitment that will decarbonize its portfolio by 2030.
Like Builders Vision, Ms. Simpson said they use a variety of tools to meet these goals. They use divestment, negative screens, portfolio tilts and investments in specific funds that naturally align with the work the foundation already does on sustainability.
"We want to be able to maintain the foundation, and we have been able to do that effectively with a portfolio that is reflective of our values. We believe all investments have impact — good and bad — so you really have to look closely at what those are and whether or not they match with what you're trying to achieve," Ms. Simpson said.
STAYING ABOVE THE FRAY
Families play a unique role in the impact investing landscape because they can take on risk or craft their own impact goals, which may be challenging for large institutions subject to fiduciary or recent legislative limits on ESG/impact investing.
That could give them a bigger role to play when it comes to sustainable investing — at least until the backlash against public funds blows over
Katherine Hill Ritchie, director of strategic development Nottingham Spirk, a single-family office investment platform, said what often gets lost in the backlash conversation is that looking at impact or ESG factors is merely adding another layer of risk modeling to an investment process. "If you're looking at issues of governance or whether a company is having a significant adverse impact on climate — those are risk factors, it's not purely about values," she said. "We're talking about making good investments — you want to have all of the available information so you don't end up on the wrong side — this is important data to get."
Builders Vision calls these risk factors "system frictions."
"If you're looking at food, for example, there is a lot of friction in the food system. We can look at how to improve that and create something that is more resilient and humane. That's going to lead to long-term investment performance," said Ms. Laing. "The opportunity set for impact is robust and growing. We think that's positive from an investment perspective and in terms of the impact we are trying to achieve."
From Pensions & Investments, a sibling publication of Crain Currency
Family offices pouring money into biotech, health care: About a fifth of family offices surveyed by Alastair Graham — who tracks the investments of over 2,000 single-family offices through his database, Highworth Research — have invested in health care or biotech in the past two to three years, the Financial Times reports.
Don't count out CRE: At this week's SALT iConnections conference, top real estate investors expressed optimism in the sector, especially with high-quality new buildings, both residential and commercial, that have plenty of light and air and sustainability features. Read more in our live blog on the conference's highlights.
More shoppers than ever consider buying a luxury SUV: During the first quarter, about 73% of high-end shoppers looked to purchase a luxury SUV, the highest number on record, according to an analysis from Cox Automotive. Meanwhile, shopping for luxury cars slumped to a new low — only 45% of these shoppers considered a car.
Help us with a story: Calling all experts on diversity, equity and inclusion: We're working on a series of DEI articles and would love to talk with industry experts to see how DEI operates within wealth management. If you have any comments on the topic, reach out to [email protected].