Family offices expand their philanthropic ventures
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One of the most memorable characters in Charles Dickens’ novel Bleak House is Mrs Jellyby, a woman who spends her life raising funds to build “settlements” for poor children in Africa, while neglecting her own offspring who ran around her filthy house hungry and in rags. The Mrs Jellyby problem is an ever-present one for wealthy families when they engage in philanthropy: it might be tempting to sink money into blockbuster projects that promise to change the world, but there is always a niggling suspicion that you might do more good by doing something less appealing. So what is the best way for families to do good? And how can the family office help?
Traditionally, family offices have usually not been involved with philanthropic endeavours, which the family either made directly, or via a foundation. But families are increasingly becoming interested in impact investing, which aims to make a profit as well as benefit society or the environment. And when investing is in the title, you can be sure the family office will become involved. According to the World Economic Forum, 17 per cent of the $50bn under management in impact investing projects stems from family offices. The Global Impact Investing Network’s 2015 impact investor survey shows that 58 family offices are involved — more than the number of foundations (47) or development finance institutions (34).
There are good reasons why more family offices might become involved. The WEF lists three main factors: as a way to unite families “around values and positive legacies”; that it helps family members “to be explicit about their shared values”, particularly when it comes to investment and wealth management decisions; and, third, that it can also help “to engage a younger generation in the leadership and management of a family office”.
Undoubtedly some impact investing schemes are impressive, but they are not for all family offices. It is true that many families do have values and want to create “positive legacies”, as the WEF says. But, the GIIN adds, many of the family offices involved belong to wealthy entrepreneurs, often those who have made their money in technology, which means, unsurprisingly, many impact investing projects involve tech solutions. Pierre Omidyar, founder of eBay, for example, has invested hundreds of millions of dollars in microfinance and mobile banking technology in sub-Saharan Africa, as well as in a business that sells solar-powered lanterns in India.
Many family offices, especially those of multigenerational families, are far too conservative for impact investing. Part of the issue is its novelty. One family office adviser said he prefers traditional philanthropy simply because people have been doing it for longer and “have a clearer idea of what works”. Some family business members are sceptical about the need for impact investing and its sibling, social enterprise.
“Why would you set up a business that doesn’t have social impact? The whole idea of setting up a business just to make money is ridiculous,” says one.
Could there be a way to launch impact investing-like projects in a more conservative way?
A suggestion comes from Wadih Hannah and Guy Warner, partners at the Termes Partnership, which advises wealthy families. Riffing on the concept of “family capital” — the idea that business families are not driven by purely financial metrics but are also long-termist and have an ethos of responsibility towards their workers, the communities they live in and the environment — Hannah and Warner have suggested that a group of family offices get together and form a Family Capital Bank to fund businesses.
The idea is that this might be similar to an old-fashioned merchant bank that would put the buyers and sellers together, and maybe even over time might evolve into a principal itself. An entity that encourages “long-term patient capital with a conscience” could, they say, potentially have a huge impact, especially given the amount of money in family offices. And because it would be a form of straightforward direct investing, it would also keep them in their comfort zone.
The sorts of projects a Family Capital Bank funded would probably tend to be slow burners that improve the world in small increments, rather than blockbusting philanthropic projects such as the Gates Foundation’s malaria eradication programme. But creating sustainable, long-term businesses that make the world a slightly better place is a credible alternative.
For all her enthusiasm, Mrs Jellyby’s settlements were never going to get built. But she could have bought her children new shoes.
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