Ambitious Wealth: The ultra-rich make money faster than they can give it away


The rich can’t help getting richer, it seems. Every year, more billionaires sign up to Bill Gates and Warren Buffett’s Giving Pledge, in which they promise to devote at least half their wealth to philanthropy during their lifetimes. Even among those who do not make that specific commitment, many are increasingly ambitious about using their fortunes for social good.

Yet investment returns are swelling the fortunes of the ultra-rich faster than they can give them away. Much faster.

The annual return of the US stock market over the past 20 years has been more than 8 per cent. The investment portfolios of the very rich probably generated even more than that, since they have access to private equity and hedge fund investments that the rest of us do not. The Harvard endowment — a model for that kind of investing, having pioneered the use of alternative assets — has returned more than 10 per cent annually.

By contrast, the ultra-wealthy in the US appear to be giving away just 1.2 per cent of their fortunes each year. This is according to an estimate by Bridgespan, the consulting group, using data from the US tax authorities and other researchers regarding households with $500m or more in assets.

Reaping 10 per cent but sowing just 1.2 per cent — that is some gap. Cynics will charge that the wealthy are getting positive headlines by advertising their philanthropic promises while quietly carrying on just as before. Yet many billionaires really do mind that gap. They want to bridge it but do not know how.

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Part of the problem is that the infrastructure for large-scale philanthropy has lagged behind the vast accumulation of wealth in this second Gilded Age.

The number of charitable organisations keeps growing — almost 1.6m are registered in the US alone — but only a tiny fraction of these “end users” of philanthropic dollars have the capacity or ideas to absorb very large gifts. An obvious exception is university endowments of the Harvard type, but pouring yet more money into these elite institutions is hardly going to achieve groundbreaking social progress.

Two things are needed to improve the velocity of philanthropy: more large intermediaries to help donors build an impactful portfolio of end-user charities, and larger charities.

Some sizeable and successful intermediaries already exist, of course. The Robin Hood Foundation, whose grants go to organisations fighting poverty in New York, has long been a favourite destination for donations from the hedge fund industry. The Silicon Valley Community Foundation, which focuses on the San Francisco area, has pushed out nigh on $6bn since it was created in 2007, thanks to big cheques from the tech industry.

Some ultra-wealthy philanthropists have committed to seeding more such intermediary organisations and, through those, to backing charities set on having an especially sizeable impact.

For example, the Edna McConnell Clark Foundation, with money from former Microsoft boss Steve Ballmer and others, has created Blue Meridian Partners, a philanthropic fund that looks a lot like a venture capital fund, to back ambitious projects tackling inequality.

As well as finding innovative organisations working to end child poverty, it is committed to scaling up the most promising solutions — much like a venture capital fund can bring advice and funding to help entrepreneurs grow a promising start-up.

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Another case study is Co-Impact — a project funded by the Bill & Melinda Gates Foundation, Silicon Valley entrepreneur Romesh Wadhwani and former eBay president Jeff Skoll, among others. This venture plans to nurture ambitious social entrepreneurs working in the fields of health, education and inequality and match them with donors who can fund their work at scale. Its first grants were revealed in January.

Bridgespan, in a report at the end of last year, floated the idea of a “community foundation for America” to do the work of local social organisations on a national scale. Donors themselves are thinking creatively of ways to collaborate so as to avoid the inefficiency of each having to build their own foundations and grantmaking infrastructure from the ground up.

Making the infrastructure of philanthropy fit to deal with the vast fortunes of the 21st century may not be an especially sexy cause. But if it increases the velocity of giving, it could be among the most impactful things that the ultra-rich could do with their money.

Stephen is reading . . . 

Mastering the Market Cycle, by Howard Marks. The famed investor’s new book could not be more timely, given equity markets’ recent gyrations. Spotting a top in the market involves looking not just for economic or financial clues, but for psychological ones.

@StephenFoley





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