03 April 2018
When it comes to philanthropic activity among our private clients, we’ve witnessed a marked shift in recent years. Whereas previously a wealthy individual would likely have made a charitable donation and then let the recipient spend the money as they see fit, we’re now finding that, more often than not, ultra-high-net-worth (UHNW) families wish to be actively involved in the giving process. They want more input in the day-to-day management of the charitable pot, as well as full transparency around how it is spent. Moreover, the lines between philanthropy and business are blurring.
Investments with a cause
Philanthropic financial vehicles are now becoming more sophisticated than the traditional charitable foundation and more central to clients’ wealth management and business strategies. In particular we are seeing a trend towards impact investing, i.e. investments made into a company, organisation or fund with the intention of making a positive social or environmental impact alongside a financial return. For instance, a family may have ties to a particular developing country. They want to help people at a grassroots level, so will look to set up an investment structure directly focused on improving the lives of the people in that country.
The key difference between philanthropic giving and impact investing is that the latter is also for a profit. That said, lower returns are accepted in exchange for the achievement of a social or environmental outcome – such as increasing access to healthcare or building social housing. In some cases, an appointed manager will be rewarded according to social/environmental impact as well as financial performance.
A great example of an organisation that facilitates impact investment is The Baobab Network. Set up by two university friends, the network offers corporate businesses unique talent development opportunities through working with start-up businesses in Sub-Saharan Africa to drive growth, innovation and investment in the region. (Indeed, last November our very own Joanne McEnteggart spent a highly rewarding two weeks in Ghana for the Women Entrepreneurs programme!) On its website, the Baobab Network explicitly seeks “early stage equity investors who are putting their money into companies with a view to make a financial return as well as a social impact.”
Lending where others won’t
Hand-in-hand with impact investing comes microfinancing. Also known as microcredit, microfinancing refers to the offering of loans, savings and insurance to low-income entrepreneurs who would otherwise have no access to traditional banking services.
In line with the growth of the microfinance market over the past couple of decades, private capital has become increasingly relied upon by microfinance institutions (MFIs) to reach scale and extend social outreach. Private investors have been joining forces with donor organisations to create microfinance investment vehicles (MIVs), or microfinance funds, which facilitate the funding of MFIs in developing economies. We have certainly seen an increased interest in microfinance funds among our clients.
A global trend
Sustainable, high-impact philanthropy is an emerging scene in the private client space and of increasing importance to our clients. While historically we’ve found US clients to be more philanthropically focused than those in Europe and Asia, we are now seeing an increased emphasis on philanthropy overall.
Our own experience is reflected in the recent Wealth-X report, which reveals philanthropy as the top interest (36.3%) pursued by ultra-wealthy individuals across the globe in 2017. The report attributes this trend to a “growing sense of social engagement and motivation for personal fulfilment”; likely driven by the more socially and environmentally minded younger generation, recent high-profile charitable endeavours (such as the Giving Pledge initiated by Bill and Melinda Gates and Warren Buffett), and the strong growth of first-generation wealth in emerging economies where religious beliefs and family/social ties instil a desire to give back.
Staying ahead of the curve
The Wealth-X research further observes that “there will be a rising demand to cater for the increasingly sophisticated channels of philanthropic engagement”. Indeed, at First Names Group we’re well aware that with this evolution comes a greater need for private client practitioners to demonstrate expertise in philanthropic solutions as well as good governance procedures.
According to the Knight Frank 2018 Wealth Report, the global ultra-wealthy population is expected to increase by 40% in the next five years. Further, Asia’s number of UHNW individuals is predicted to shoot ahead of Europe’s, with China’s ultra-wealthy population set to more than double during this period. Given these projections, plus the emergence of innovative philanthropic financial products such as donor-advised funds (DAFs) and social impact bonds, it will be interesting to see how this space continues to develop in the coming years. What I can say for sure is that, as trustees, we must keep adding value for our clients, and a deep understanding of philanthropy is becoming an increasingly important aspect of the trustee’s role.
Kevin O’Connell is First Names Group’s Chief Commercial Officer and an integral part of our senior leadership team. He is primarily responsible for driving the Group’s organic growth strategy. Owing to his technical expertise and experience he also retains responsibility for a number of complex trust-based family relationships.
This article has been issued by First Names Management Limited on behalf of certain companies that form part of the First Names Group. The article has been prepared for general circulation to clients and intermediaries, and does not have regard to the particular circumstances or needs of any specific person who may read it. Nothing in this article constitutes legal, accounting, tax or investment advice.
The information contained in this article has been compiled by First Names Management Limited and/or its affiliates from sources believed to be reliable, but no representation or warranty, express or implied is made to its accuracy, completeness or correctness. All opinions and estimates contained in this report are judgements as of the date of publication, and are provided in good faith but without legal responsibility.
