by David Drake
Growing need for professional philanthropic assistance
Philanthropic assistance to wealthy families is fast becoming a top service provided by family offices today. The explosion in the number of ultra-wealthy individuals in the world, with many arising from emerging economies, is greatly altering the family office landscape. Traditionally set up to provide wealth management services for affluent individuals and families, family offices have changed their business strategies to provide other professional services to meet the growing demands of the wealthy. Many family offices now offer professional assistance to their clients on the best course for their philanthropic endeavors, in addition to their wealth management services.
Rise of philanthropic foundations and family offices
Wealthy families have always been known to give to philanthropic causes in their communities and around the world, for a variety reasons. While some have a family history of generosity, others are driven by the desire for societal change and helping those less fortunate. The motivation to give has prompted wealthy individuals and families to set aside a percentage of their net worth for philanthropic causes.
Philanthropic investment used to be carried out by institutional investors and wealth managers on behalf of wealthy families; however, the trend is changing as many families have decided to take a hands-on approach by establishing their own foundations. Families are deeply and emotionally attached to their philanthropic endeavors, so trust is paramount. Professionally- managed philanthropic foundations provide structure and governance for their activities and often work hand-in-hand with family offices to ensure effective use of their funds.
Motivations for philanthropic endeavors
The desire to leave behind a legacy is one of the strongest motivations for philanthropic activities of wealthy families. As most families expand their charitable activities beyond their home base, there is a greater focus on creating projects with lasting impact. Family offices can help clients discover philanthropic projects, monitor, and implement them in the most professional way.
How family offices are helping make the most of philanthropic initiatives
Most wealthy individuals and families, especially those new to philanthropy, face the challenge of recruiting the right personnel for their foundations. Family offices bring a wealth of experience and specialized networks to play in helping families source highly qualified and experienced staff for their foundations, but are not directly involved in the funding or implementation process of projects. This way, families can retain full control over the funding and execution of their projects without external interference, as well as guard against fraud and ensure quality delivery and proper execution.
Another strategy adopted by some family offices is assisting in the monitoring and execution of philanthropic projects. Most family foundations do not possess the expertise required to handle the increasing complexities of charitable projects; hence, the need for professional advice. Clients who use family offices as advisors can be assured their projects are implemented in accordance with the family’s unique needs and objectives.
The oversight provided by a professional family office also ensures greater transparency as projects are executed according to plan and on time.
Rise of Social Impact Investments
Traditionally, philanthropic activities were carried out on behalf of the ultra-wealthy by foundations and family offices to ensure effective asset allocation. Most families simply wanted to ensure their social and financial goals did not conflict. In recent years, however, the trend is changing, and the line between philanthropy and financial effectiveness has been erased.
Today, social impact has become an emerging field in the philanthropy arena. Families want to meet the needs of humanity while also pursuing their own financial goals. The Global Impact Investing Network (GIIN) defines impact investments as “investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return.”
According to the Monitor Institute Impact Investing report released in 2009, the impact investment market will grow to $500 billion by 2020 (or 1% of $50 trillion in total assets). However, according to the 2012 World Economic Forum presentation on the mainstreaming impact investing initiative, “less than US $40 billion of capital has been committed to impact investments out of tens of trillions in global capital.”
Moreover, the reports of the Council on Foundations and Family Wealth Alliance shows that wealth held by families presents a fertile ground for the growth of impact investment. Family foundations hold an estimated $245 billion in assets, while single and multi-family offices hold $1.6 trillion in assets.
Through impact investment, families have been able to tackle social and environmental problems including improving agricultural systems, countering negative impacts of climate change, providing affordable housing and improving health care. Although profit is not the major motivation, most impact investments are still expected to yield returns that at least cover the initial investment.
How family values come into play in impact investment
Impact investment is driven by the desire to address social and environmental problems. As a result, a family’s core values will determine nature and character of the investment. They might choose to improve agricultural practices, provide housing or access to quality education for the less-privileged, depending on the governing philosophy of the particular family. Some families have a tradition of supporting particular causes and will almost always channel their investments to bring about a positive impact in that area.
Impact investment occurs across diverse asset classes, including angel investment, venture capital, and private equity. Impact venture capital investment has become a favorite asset class among wealthy families. It helps them focus their investment on particular areas of interest, projects, and regions of the world along with greater returns and lower risks.
Note: This article was originally published in Family Offices Today, first issue
David Drake is the Chairman of LDJ Capital, a multi-family office; Victoria Partners, a 300 family office network; LDJ Real Estate Group and Drake Hospitality Group; and The Soho Loft Media Group with divisions Victoria Global Communications,Times Impact Publications, and The Soho Loft Conferences. Reach him directly at David@LDJCapital.com.