For most of us outside the upper 0.001 percent of global wealth holders, among the things we likely do not end up worrying about on a regular basis is how difficult it is to give away our money. But for many of the world’s ultra-high-net-worth—many of whom give annual gifts to charities in the tens of millions—the limitations of the traditional models of philanthropy are becoming increasingly evident. With a record number of billionaires worldwide, many are finding that simply writing big checks to nonprofits isn’t really moving the needle in the way that they hope.
Take Amazon founder Jeff Bezos’s ex-wife, MacKenzie Scott, who has been among the planet’s most generous philanthropists in recent years. As of the end of 2022, Scott had given away over $14 billion across roughly 1,600 causes and organizations since her divorce with Bezos in 2019. Yet, despite her stated desire to give away at least half of her wealth, she is falling further and further behind her goals. According to Forbes, the billions she has given away notwithstanding, Scott’s net worth has still managed to grow from $36 billion in 2019 to $43.6 billion this year, chiefly due to appreciation of her Amazon holdings. Said another way, Scott’s growth in fortune is far outstripping her ability to part ways with it. And she is not alone.
Forbes’s 2023 list of the world’s billionaires included 2,640 individuals with ten-figure fortunes that hold onto a combined wealth topping $12 trillion, an amount representing around 2 percent of global wealth. Although that number marks a slight dip from 2022, it’s still an astounding statistic that has been on an upward trajectory for decades. For many of these ultra-wealthy individuals and families, there is a palpable frustration with the current vectors available for giving away large sums of money, known as mega-philanthropy—defined as charitable giving of more than $10 million a year—responsibly and effectively.
Mega-philanthropy is the stated objective of many of the world’s richest, but many are struggling to find impactful areas where they can make gifts in the scale of tens of millions; save for academic institutions who generally park the lion’s share of their donations in endowments, there are very few nonprofits set up to take in gifts of that size that generate significant impact.
“For many ultra-high-net-worth individuals and families, giving wealth away is fraught with stress and anxiety,” observed Mark Reed, an heir to the Reed family fortune which owns nearly 1.4 million acres of prime forestland in the Pacific Northwest, making it the fifth largest landowner in the U.S. “On one hand, we want to make sure that we are getting [our wealth] into the hands of responsible organizations that will be good stewards of our giving. But on the other hand, I think there is a growing sense among many wealthy families that the marginal utility of, say, another $50 or $100 million gift to a favorite Ivy League alma mater is somewhat limited.”
“Many are asking, ‘where can we deploy our fortunes in a way that delivers a greater benefit to society and our communities?’” Reed added. “And that’s where I think philanthropic private equity can play a big role.”
It’s probably safe to assert, my lack of a Ph.D. in psychology or neuroscience notwithstanding, that within the minds of many of the world’s richest dwell two distinct goals: charitable giving and making money—or more succinctly, philanthropy and investing. The latter is clearly about generating a return on capital while the former is about helping those in need or leaving a legacy to be remembered.
But now in the rarified airs of those who inhabit the corridors of the “tres comas” club, as satirized in the HBO series Silicon Valley, these two disparate goals are beginning to meld with surprising effects in a new discipline called “philanthropic private equity.”
Suppose there is a large real estate developer that wants to build a 300-unit apartment rental complex in northern New Jersey, attracting young families of police officers, teachers, government workers and other working-class families. Because of the elevated cost of borrowing coupled with the high cost of land, the only way a major developer can bring the project to fruition is by charging market rates. And in an area like a New York City suburb, often that could mean charging rents of around $4,000 a month for a 3-bedroom, 1,200-square-foot family unit. But paying $48,000 a year in rent for a single-parent family of three making less than $100,000 a year before taxes is untenable.
Now, suppose a large family foundation committed to addressing the country’s affordable housing crisis agrees to extend an interest-free, $100 million loan to the project in exchange for a commitment from the developer to lower the monthly rent for every unit in the development from $4,000 to $2,500 in perpetuity. In this simplified example, the developer can build a housing complex that will target working-class families while guaranteeing the economic return needed to satisfy its shareholders. Moreover, the developer will be able to bring the project online much faster than with any government-assisted program while the family foundation is able to deploy its capital to spur the creation of more affordable housing. It’s a classic win-win situation.
In this scenario, the philanthropy is the interest-free loan, and the original capital is eventually returned to the family foundation for further investing. Over a 25-year period, one family foundation might be able to recycle that same $100 million of philanthropy multiple times and, in doing so, facilitate the creation of thousands of new units of affordable housing.
Of course, real-world deals are far more complex, but the salient idea here is that philanthropic private equity is in effect blending the otherwise disparate worlds of giving and investment into one structured financial product that delivers a good to communities that need it most.
Of course, deals like this don’t appear out of thin air. As in any traditional private equity deal, transactions need to be identified and organized and ultimately supervised during the project’s lifespan.
In fact, affordable housing developments, which in the U.S. often rely on structuring and negotiating highly complex tax credits and abatements with state and local government authorities, are among the most difficult transactions to put together, according to Anand Tejani, a former partner at TPG, one of the world’s largest private equity firms. Tejani helped close several billion dollars worth of real estate deals during his time at TPG.
“Affordable and workforce housing are areas that are particularly well positioned to benefit from philanthropic private equity,” Tejani told Observer. “And much like traditional private equity, philanthropic private equity deals need to be sourced, structured, vetted and managed. But the impact can be tremendous. By using philanthropic private equity you obviate the need for traditional tax credit structures which take years to process and are limited in scope.”
“If some of America’s wealthiest families began deploying their mega-philanthropy through the private sector to address the shortfall in affordable housing,” Tejani added, “it could go a long way towards solving the crisis which is at the root of so many other societal issues that have beset communities across the country.”
With some estimates pegging the size of America’s housing shortage at close to 5.5 million units, there is almost an unquenchable need for more capital.
From his sun-drenched office in Jupiter, Fla., Merton Capital founder Sean Davis has become a tireless evangelist for the benefits of philanthropic private equity. A former dealmaker at private equity giant Advent International, Davis knows the space like the back of his hand. However, after years of grinding, a desire to find more purpose in life eventually led him to the nonprofit world where he saw the daily toll that mission-driven charities went through just to keep the lights on.
“There aren’t many people I can think of—none maybe—that have traded a career in high finance for the world of nonprofits,” Davis told Observer. “But I quickly realized that many of the issues that not-for-profits were trying to solve through charitable giving were due to a lack of scale, or in other words, inadequate infrastructure.”
“To effectuate massive change, we need large amounts of capital. And philanthropic private equity is an approach that enables us to invest at scale through large private companies,” Davis said.
He soon discovered that the idea of investing philanthropy into small private companies had been around since the 1960s through IRS-approved program-related investments, or PRIs. The Rockefeller Foundation, for example, has been investing in small private companies through PRIs for decades. But surprisingly, only 2 percent of foundations have ever used this mechanism and most were small scale in nature.
“I realized that this wasn’t a new idea at all. But no one was using this type of structure to scale their investments to the level that I was accustomed to when I was working in private equity,” Davis said. “And that was my lightbulb moment. The impact from larger philanthropy being deployed via large private companies could finally move the needle on a whole array of issues from poverty to climate change. We can use the tools of private equity to bring tremendous good to bear relatively quickly.”
Davis went on to form Merton Capital, a boutique philanthropic private equity firm that specializes in sourcing and executing projects across a range of industries using mega-philanthropy. Merton just completed its first workforce housing deal in Florida.
“It’s still very early days for philanthropic private equity but there are many of us who believe it is an industry that could scale quite quickly,” said Justin Reizes, a former partner at KKR, the firm broadly credited for pioneering the modern private equity sector. He helped build and lead KKR’s Asia practice from the late 1990s to the mid-2010s.
“I think it’s safe to say that within the next five years we will see a lot of deals across many sectors getting done this way,” Reizes told Observer. “Many of the planet’s most intractable problems can be solved with the philanthropic capital from some of the world’s largest family fortunes. There are billions, if not trillions of dollars of philanthropy sitting on the sidelines, ready to be deployed.”
While nearly everyone Observer spoke to for this article agreed philanthropic private equity is in its early stages, no one can put a precise number on how many deals have been done to date or the level of investment that is currently flowing through the space. The reality is that private equity is already known for being among the most secretive industries in the world and philanthropy can be at times equally if not more hush-hush.
“It’s something that no one is tracking yet,” added Reizes. “We hear about things here and there, but it’s all very new. There is a lot of interest in the space to be sure and awareness is growing, but data is still hard to come by. But there is no doubt that philanthropic private equity gives philanthropists the ability to give at a level and speed that reflects their ambitions.”
With the world’s most vexing problems becoming increasingly harder to solve with each passing year, the timing for philanthropic private equity couldn’t be coming at a better time.
login
who are we?
contact us
qosheapp
Toi Staff
Gideon Levy
Belen Fernandez
Andrew Mitrovica
Mort Laitner
Nikkei Editorial
Rami G Khouri
Ali Fathollah-Nejad
visit website
