The new new philanthropists
By Ian Wylie Monday, 01 October 2007
Bye bye, Gordon Gekko.
In the CSR era, some of the super-rich are giving away vast fortunes - but with strings. This generous new breed apply the sophisticated financial skills that made their fortune to invest in and control their own charity portfolios.
Are we there yet? Have we reached the top of the current economic cycle? In 1999 we knew the dot.com party was over when Ernst Malmsten, Kajsa Leander and their e-tailer boo.com tanked after burning through £80m on Concorde trips, celebrity-filled nightclubs and five-star hotels. In the late 1980s, the smart money sold up shortly after Gordon Gekko's epoch-defining declaration in the film Wall Street that 'Greed is good'.
And maybe in a few years we'll look back on this current phase and realise that we boomed out on July 17, 2007, the day Sir Tom Hunter and his expensively manicured beard made the front pages after the Scottish private-equity tycoon had pledged to give away an entire billion to good causes before he dies.
Or perhaps it was a little earlier, on May 11, when hedge-fund manager Arpad 'Arkie' Busson and his celebrity pals stumped up a record £26m for charity in one evening of black-tie frivolity at Marlborough House on Pall Mall.
The tipping-point has often been a moment of lavish excess. This time, however the excesses are being lavished on the poor. Greed may be good, but generosity is even better. According to the Giving Index, published by the Sunday Times, £1.2bn has been donated by the top 30 philanthropists this year, three times the amount given in the previous year.
It's the flip side of CSR in an era when the big money is in the hands of individuals rather than corporations. In London, hub of the world's rich, Chelsea and Belgravia resemble Monte Carlo or Zurich-on-Thames and a top tier of young, ultra-wealthy hedge-fund managers and private-equity capitalists are searching for something more than a big yacht, mansion and supercar. Vast fortunes are being made, and given away.
With his pledge, Hunter climbed to the top of the league table of wealthy money men (and it is an almost exclusively male club) competing to be the most recklessly generous.
A couple of years ago, Charles Handy, Irish godfather of gurudom, coined the term 'new philanthropist' to distinguish the philanthropists of a bygone age - the Levers, Rowntrees and Cadburys - from the new breed of self-made millionaires, who have no interest in passing on their wealth to heirs. Instead, they give most of it away, largely to meet social needs here and abroad (unlike their US counterparts, who prefer to donate money to their alma mater - schools, colleges etc).
They give expansively ... but with strings attached. While companies might be happy to discharge their corporate social responsibility with a big cheque then walk away, the successful entrepreneurs Handy interviewed were too restless and controlling to trust existing charities. They wanted to start up their own and bring their expertise to bear.
But Handy believes we are now seeing a sub-sector, what I call 'new new philanthropists': hedge-fund and private-equity managers who, via their own foundations, choose to 'invest' their donations in other charities and projects and use the latest money-market strategies, research tools and techniques to manage the performance of their 'portfolios'.
Using hybrid vocabulary such as 'high-engagement philanthropy' and 'results-oriented giving', nine- and 10-figure men like Tom Hunter, Arpad Busson, Chris Hohn and Jon Moulton are not only doing a great deal of good, but ruffling feathers in the world of charities too.
'We're seeing that people do in philanthropy what they do in business,' says Handy. 'The entrepreneurs want to start things. But what the hedge-fund and private-equity managers are very good at is collecting money and dishing it out. They are shrewd money managers who want to be assured the money they are donating is doing good, so they hold the charities more accountable than they used to be.'
Moulton, private-equity veteran and boss of Alchemy Partners, calls it, bluntly, 'intelligent giving'. He explains: 'There's simply more money around and more opportunity to give it away it on a grand scale. It's the extreme luxury end of spending.'
Sandi Wilson, who chairs the Institute of Fundraising's special-interest group on 'major donors', says speed is the distinguishing characteristic of these hedge-fund and private-equity managers. 'My experience of working with these people is that they are very swift decision-makers,' she says. 'Very often, relationships between major donors and charities take time to build. But what I have seen in the past 18 months from donors in the hedge-fund and private-equity world is a very swift reaction and decision - I've been seriously impressed and I'd like to see more of it.'
The hedge-fund manager likes to deal in absolutes - through discipline and diligence, he aims to minimise risk and enhance returns. The private-equity manager fixes troubled enterprises, squeezing more juice out of the lemon. Both know the value of leverage - investing more money than they manage.
'The money that these major donors invest is often used to leverage other money, kick-start capital programmes or make step-changes to an organisation,' explains Wilson.
The Children's Investment Fund (TCI) is a £5bn London-based hedge fund with a reputation for secrecy (it has no website) and aggressive shareholder activism. Run by the reclusive Hohn, TCI was a major shareholder of the German stock exchange, Deutsche Borse, and forced its chief executive to resign after he refused to abandon plans to take over the London Stock Exchange. Earlier this year, TCI acquired 1% of the shares of Dutch bank ABN Amro, then led an attack demanding that the bank split up or sell to the highest bidder.
Hohn is often described as ruthless. And yet most of the money made by TCI is funneled into a fund that helps children affected by HIV/Aids, provides emergency humanitarian assistance and delivers water, sanitation, hygiene and education in developing countries.
TCI makes annual donations to the Children's Investment Fund Foundation (Ciff), run by Hohn's wife, Jamie Cooper-Hohn, who distributes grants to agencies working in these areas. Last year alone, Hohn, the son of a Jamaican car mechanic, gave £230m to Ciff, making it one of Britain's biggest charities.
'We are at the point where everything, basically, goes into the foundation,' says Cooper-Hohn. 'A quarter, a tenth of what we have should be sufficient for any family.
'Chris and I appreciate that a lot of the situation we are in is being in the right place at the right time. We are both from modest backgrounds, and appreciatively better off than we ever expected to be.'
According to Cooper-Hohn, her husband influences Ciff's philosophy on where the grant money goes. 'We decided at the outset that we wanted to make long-term strategic investments that would have very high returns, and that we'd prefer to stay in cash than make an investment that wasn't super high-value.'
Like TCI, Ciff relies on rigorous research to determine the most effective investments for benefiting children. 'Chris does incredibly thorough research and rules out most of what look like very good investments. On more than one occasion, the research has very much changed the focus of our investment.
'For example, diarrhoea kills many children under five. Our research showed that if you wanted to intervene, the best way was not through access to clean water, where you would make a 10% difference, but by fixing sanitation and hygiene, where you can make a 65% difference. Few want to invest in building toilets, but our research showed that's how we can get the greatest impact from the get-go.'
Ciff also uses a private-equity strategy of placing a portfolio manager with each grantee to ensure it extracts the highest return from each programme, measuring the impact on children's health, psycho-social well-being and educational attainment, then 'calibrating' scores against other potential investments.
'We always have an exit plan,' says Cooper-Hohn. 'We know when our investment has decreased in value in the same way Chris knows that when the stock reaches a certain level he has got his full return. Chris and I are so on top of our investments that if we can get more out of them or scale faster we will dramatically increase our investment.'
Last year, according to UNAids and WHO statistics, 380,000 children died from Aids. But at $1,500 per child, pediatric anti-retrovirals were considered too expensive to deliver. 'We made a decision to break this bottleneck that was considered somewhere between brave and crazy,' adds Cooper-Hohn.
With a grant of £2.9m to the Clinton Foundation, Ciff enabled it to negotiate low margins on anti-retrovirals by promising high volume. 'To get the volume, we had to buy the first year of drugs,' she explains. 'By committing to put 10,000 kids on the drugs, we negotiated the cost down to $180 per child.' By end of 2008, 300,000 will be on the programme and the price has dropped to $50, or £27 per child.
'Now you can take a kid who is terminally ill and for £27 a year keep them alive well into adulthood.'
Cooper-Hohn admits many of the charities she meets find these new methods threatening. Says Percy Barnevik, the London-based Swede who was chairman of Sandvik, ABB, then AstraZeneca: 'The era of fluffy, unfocused and inefficient charities will soon be over.'
He's now an adviser and donor to Hand in Hand, a charity working in the Tamil Nadu region of India. 'Bigger donors demand transparency and well-documented feedback on achievements. They want to know the exact cost of making an adult literate, training a woman to start an enterprise or running a transit school with 100 students.'
Busson's Absolute Return For Kids foundation invests in more than 25 charities and uses tracking software to monitor their performance, whether it's medicating patients in South Africa or finding homes for institutionalised children in Romania. 'The days of donors writing a cheque but not expecting a report on what targets have been achieved are over,' he says. 'It's OK to miss a target, but it's not OK to keep that from your donors.'
On top of his own donations, Busson, chairman of EIM, a fund of hedge funds, has another modus operandi: each year he hosts an opulent dinner, during which he persuades colleagues and celebrities to open their wallets. Bill Clinton, Madonna, Liz Hurley and Tom Ford were among the 1,200 guests who attended an eight-hour fund-raising marathon in May that featured performances from Prince and auctioned prizes that included dinner with Mikhail Gorbachev and lunch with Daniel Craig.
'The majority of guests are very strong businesspeople and entrepreneurs, and we couldn't raise this money if our work wasn't done in an accountable and measurable way,' says Busson.
According to Tatler, he's the seventh 'most wanted man at a party'. The father of two sons with supermodel Elle Macpherson, Busson is more comfortable, by hedge-fund standards, with the limelight. But it's clear there's more to his generosity than ostentation. He may be calling me from his villa in the Bahamas, but Busson's voice almost cracks when discussing details of an ARK project he has just visited. 'Business is an extraordinary thing, but it does not fill your soul the way helping others does.'
Moulton much prefers the quieter, low-profile approach. 'Some of the noise about philanthropy is a little less than gracious,' says Moulton, whose charitable foundation is funding more than 20 clinical trials. 'Some of it has been generated by a desire to improve image - that's certainly the accusation aimed at the Private Equity Foundation (a charity set up this year with £5m from firms and individuals in the buyout industry), which is relatively small numbers and yet heavily trumpeted. Some people are going out of their way to make sure their giving is not very attractive, not graceful.'
For Moulton, the biggest challenge is making sure the money is used effectively. 'The worst thing is to give and watch it wasted. It makes me want to wring the necks of guys who don't think that there's a problem in spending a year to write up a report for completed clinical trials that have shown benefit to patients.'
Currently building an addiction centre in Kent that will open this month, Moulton believes the present philanthropic splurge is now pump-priming bigger projects, but he's concerned that the quest for measurables and efficiency might go too far. 'Some charitable activities are not capable of nice, clear outcomes,' he says. 'Tending for the homeless has a few good outcomes, but a good deal of it is palliative care, which does not have an easy measure. Clinical trials are highly measurable - but we shouldn't expect the whole sector to become focused on measurables. A charity like Macmillan Cancer Support does what it can - but most of its clients eventually die.'
Whatever the criticisms of this kind of philanthropy - it's a ruse to avoid tax, a cynical attempt to buy off criticism or an opportunity for networking - it cannot be discounted. Nearly 15% of the money donated to UK charities last year was given by the 30 most wealthy individuals, the Charities Aid Foundation estimates.
The greater worry is not why the money is donated to good causes, but what will happen to those causes once the money disappears. 'If we hit a downturn, this philanthropy could dry up,' warns Moulton. In the markets, what goes up must come down - and not even the kindest hedge-fund or private-equity managers can buck that cycle.