March 8, 2023: Why some next-gen family-office members prefer impact investing over philanthropy
When it comes to making a lasting change, millennial investors believe that impact investing has more potential than philanthropy. That distinguishes next-gen family-office members from their parents, who often had negative associations with the early days of impact investing, Amy Guttman reports.
On the topic of impact investing, we also talked with Tim Freundlich at ImpactAssets — who’s a pioneer in such investments — about what made him a true believer. He discusses why impact investing is suited to donor-advised funds, some of his best investments and how he thinks the field is evolving.
As we near the end of winter, if you have any insights into what family offices can expect in the months ahead, please pass them along. We’d love to use them to guide our reporting and are open to running op-eds or commentaries from readers.
Crain Currency is always looking to invite new members into our exclusive network of family-office professionals and family members being served by them. If you know someone who would benefit from being part of our network, please take a moment to invite him or her into the fold by clicking here.
And as always, we’d appreciate any comments, ideas and insights that would make this newsletter more useful. Please forward these to Executive Editor Frederick Gabriel at [email protected] or me at [email protected].
HANDPICKED: Why some next-gen family-office members prefer impact investing over philanthropy
San Francisco-based investor Jim Chowdry had recently finished grad school when he decided to take a more active role in his family office. "I knew that we had money, and I didn't really understand how it was invested or what the assets were," he said.
Chowdry's father had generated the family's wealth through the aviation cargo business he built from the bottom up. The self-made entrepreneur's death in a plane crash in 2001 led to the formation of the Chowdry family office.
Two years after joining the office in 2016, Chowdry took a cruise with his mother to Antarctica that proved persuasive in the family’s pivot to impact investing.
“It was the first time my mother had attended a lecture on climate change,” Chowdry said. “We talked to the people operating the cruise ship, who said they’ve actively seen the glaciers recede over time. It was an interesting way to expose my mother to this way of thinking.
"Ultimately, she agreed that if my sister and I were passionate about impact investing, we should take it more seriously.”
Chowdry is leading his family’s transition to impact investing. “I wouldn't say that anything that we were invested in six to seven years ago would qualify as having any type of impact," he said. "Today, 5 to 7 percent of our investments are impact.”
The family has also retained a financial adviser with expertise in not only vetting investments but also measuring impact to shift a greater percentage of their portfolio.
Besides a more intentional financial strategy, Chowdry and other millennials are prioritizing impact investing over philanthropy. More than 60% of millennial investors believe impact investing has greater potential to make lasting change than philanthropy, according to a 2022 report by Fidelity Charitable.
- Next-gen family-office members view impact investing and philanthropy as distinctly different.
- More than 60% of millennial investors believe impact investing has greater potential to make lasting change than philanthropy.
- Unlike their parents, next-gen investors don’t have negative associations with the early days of impact investing, when it earned a reputation for low risk and low returns.
- Their strategy: Multiply the impact of capital while generating returns before eventually disbursing funds through a philanthropic grant.
Rachel Gerrol is co-founder and CEO of Los Angeles- and London-based Nexus, a global community of next-generation family-office members, investors and social entrepreneurs that offers education on impact investing. Gerrol has witnessed the change.
“In 2011, many of our members self-identified as inheritors, trustees or philanthropists," she said. "Now those same people are self-identifying as impact investors. We've seen an incredible evolution of people in the next generation who saw themselves as agents of the philanthropic change their families sought to make who are now thinking about the full breadth of their capital and how that can be deployed to drive change at scale.”
MORE EFFECTIVE GIVING
A 2022 Bank of America study found that 87% of millennials believe their giving will be more effective than that of earlier generations. Beyond the consideration of social and environmental outcomes in their decision-making, next-generation family-office members view impact investing and philanthropy as distinctly different.
“There isn’t a risk appetite in the philanthropic space to take on some of the grander challenges of our time,” Gerrol said. “Investment capital can drive what has a longer tail effect on climate than philanthropic gifts that have been made for decades.
"If we relied on philanthropic capital to come up with vaccines for the pandemic, we'd probably still be waiting.”
Unlike their parents, next-generation investors don’t have negative associations with the early days of impact investing, when it earned a reputation for low risk and low returns driven by advisers who played it safe.
Lori Choi is senior wealth manager and a partner at Veris Wealth Partners, which has offices in New York, San Francisco and Portsmouth, New Hampshire. Choi said wealth managers have caught up to the trend and are adapting to meet demand for customized donor-advised funds (DAFs), which are investment accounts with the sole purpose of charitable giving.
“Rather than disbursing capital through grants right away, clients will do a 10-year lockup customized DAF that feels very high-impact to them," she said. "One client allocated funds to a reproductive-health investment. It might have a longer-term or higher-risk profile or a lower-return profile than the market.
"Ten years ago, this wasn’t an option. Now, Fidelity or Schwab will partner with a firm who can conduct due diligence to provide these custom solutions.”
The strategy is to multiply the impact of capital while generating returns before eventually disbursing funds through a philanthropic grant.
'IT'S IN THEIR DNA'
Choi and Gerrol believe younger-generation investors will drive even greater adoption of impact investing in family-office portfolios. Thirty percent of next-generation family-office members have already assumed control of operations, according to the 2022 North America Family report produced by RBC and Campden Wealth. In some family offices, a younger member is often given a small carve-out to demonstrate returns before larger amounts are allocated to impact investments.
Much of the confidence that younger investors have in investing in innovative and alternative solutions to social and environmental challenges comes from the cultural norms of their generation. “It’s in their DNA,” Gerrol said. “They talk about money and investments with their peers.”
San Francisco-based Karine Sarkissian didn’t have a background in finance before joining her brothers in leading their family office. Sarkissian attended conferences to fill the knowledge gap. She and her brother convinced their father, a longtime philanthropist, that directing their funds to solutions-based venture investments would be a better path to profitability as well as provide a more sustainable impact.
“I told him, ‘If you can guarantee returns and support those companies in a way that's a lot more advanced, then you don't have to depend on donations,” she said.
The family’s portfolio is now 100% impact, with the help of a CIO who vets investments.
Sarkissian still sees the benefit of philanthropy but is clear about its limitations.
“We have talked about creating a foundation that has a different purpose, maybe a scholarship," she said. "There's a point at which unless you have a donation, you have to think about your budget in a very different way. When you think about a company that's impact-forward, it leads to stronger sustainability.”
Sarkissian and her peers see their investments as a way to build something rather than just give money away.
“We’ve proven the returns and performance of a lot of our impact-forward companies so clearly to our board and our parents that the numbers are there and they're speaking for themselves.”
PEER-TO-PEER INSIGHTS: Tim Freundlich
Tim Freundlich is a pioneer in impact investing. He started at Calvert Investments before working on social venture capital and microfinance. Freundlich founded Bethesda, Maryland-based ImpactAssets in 2010 to provide 100% impact-investing services.
How did you know ImpactAssets would be a success when impact investing was still very much in its infancy?
We were getting lots of families coming in saying, “I want to do impact investing, but they [financial institutions] won’t let me, or they don’t know what I’m talking about.” The hypothesis, which has been proven, is that leading-edge impact investing fits everywhere well but is very, very well-suited to donor-advised funds. So we created a system so that people could get the tax break setting up their family philanthropy account and then take advantage of aligning not just with impact investing but with things they were passionate about, whether it’s affordable housing or education for women and girls in sub-Saharan Africa.
Who is your average client?
Most of our assets are from family offices. Others are recently minted billionaires who may not have a family office. We also work with large tech companies and with very modest folks across the country, too. Account sizes range from $25,000 to over $100 million, and we have zero minimums on parts of our platform. We’re dealing with schoolteachers up to millionaires and billionaires.
How does it work?
It works similarly to a private foundation but with a much better tax treatment because it’s within a 501(c)(3) public charity. People make the donation to fund the account. If it’s an appreciating security, public or private, they get the full, fair market value today. That can be very advantageous. For example, if you’re a founder and you started with shares that constituted zero — let’s say you get an IPO and sell the business for $200 million — you get the full today value of those zero-cost-basis shares. Whereas, if you give them to a private foundation, you get zero.
That’s an extreme case, but it’s a real thing. Lots of founders with low- or no-cost-basis standard stock really prefer donor-advised funds for that reason, and that’s a huge driver for our clients. You get fair market value for the tax deduction. We then create highly customized, evolving strategies deeply integrating your values and passion in the investment of that endowment capital. Then you plan how you want to make grants with your time horizons and liquidity. We make grants that align with your philanthropy. The idea is that investments return and become liquid, making it a perpetual, virtuous engine that evolves.
We create several diversified pools that may have some public ESG portfolio components, private debt and private equity, venture capital, all with impact. We organize those around themes like climate solutions, gender equity or racial justice. We also have liquidity pools like a community investment strategy that is private debt.
What were some of your best investments?
We invested in Beyond Meat before the IPO. We were in Sweet Green and made multiples of dollars from that IPO. We have clients like Seth Goldman, the founder of Honest Tea, which he sold to Coca-Cola. He does below-market, concessionary, impact-first investing alongside Beyond Meat. These two kinds of investments can exist together.
How do you see impact investing evolving?
We as a society, and especially the next generation, are really understanding that this climate crisis is real. There’s enough of a societal shift going on around climate, social causes and a real zeitgeist, especially for the next generation of these families, to pursue alignment and significant change. I think it’s accelerating.
Interview conducted by Amy Guttman
How a Saudi prince lost his $250 million “London Palace”: The sale of a 205-year-old, 40-room mansion would be London’s most expensive residential deal on record and “has opened a rare window into the normally discreet top end of the British property market,” the Financial Times reports. The sale also reveals “the financial pressure on senior members of the Saudi royal family after Crown Prince Mohammed bin Salman sought to rein in lavish state spending on princes and marginalise those not closest to him.”
Saks studies luxury buyers: The latest Saks Luxury Pulse survey found that 62% of consumers plan to spend the same or more on luxury items in the near future as they have in the recent past, adding: “Respondents with an income of $200K+ plan to prioritize spending first on travel, events and activities, followed by clothing.” Nearly a third of travelers plan to go to warm-weather and beach vacation spots, and 18% plan to visit a big city. On the shopping front, a majority of women say they're getting luxury-shopping ideas from Instagram.
Risky debt shines: Interest in junior debt is surging despite the fact that such bonds are “typically not backed by collateral, and in the event of a crisis, it only gets paid back after other bonds,” Bloomberg reports. The reason? A short duration, such that investors have a clearer sense of the interest rate environment they’ll see throughout the bond’s lifetime. Issuances by U.S. banks are up 5.25 this year, and European banks’ bonds are up 2.8%.
Help us with a story
We’re working on a story about how to build a family office that lasts — one with a shared mission and succession plan to endure for generations. If you have any comments on the topic, reach out to us at our email addresses above.