How the next-gen approach to philanthropy is different
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.”