How family offices and other wealth management groups view impact investing, and the development of this style of money management, were put under the microscope recently at a FWR conference in New York City.
The fourth panel, taking the heading of Clearing a Path Through Complexity: Top Legal and Tax Considerations, featured the following speakers: Tom Riggs, Partner, Director Financial Services Tax, PKF O’Connor Davies, LLP, Financial Services; J J Harwayne Leitner, Counsel, Davis Wright Tremaine; Ed Morrow, Director of Family Wealth Consulting, Key Private Bank; John LaFleur, director, Strategic Philanthropy.
Much of the conversation hinged around the various tax structures and vehicles – donor advised funds, private foundations, trusts and limited investment partnerships – that can be used to in connection with philanthropic and outcomes-based investments. An uncertainty – at the time of the conference – was the kind of tax agenda that might be put into force by Congress. Riggs noted that there are essentially two opposing views about what will happen if, for example, estate taxes are cut – the level of charitable giving will fall as the tax benefit(s) of giving are reduced, or the level of charitable giving will be little affected since tax benefits were never the prime motivator (Riggs believes the former). Riggs also expected that in the end some form of tax levy at death would survive, either in the form of a tax on the value of the estate, tax on unrealized appreciation within estate assets, or elimination of the tax basis step up at death.
Leitner said she thought individuals will continue to contribute to philanthropy despite what happens on the tax front; she predicted the increasing use of LLCs and other structures around charity going forward.
Morrow said ending certain tax breaks around charity as part of a flatter tax code would possibly reduce philanthropy around the lower wealth levels.
Winer noted that in 2010, when there was no estate tax in force, there wasn’t a noticeable cut in charitable giving.
Leitner said that there is a perception that impact investing through structures such as private foundations might be difficult to achieve; she referred to the use of program-related investments (PRIs) which are investments made by a private foundation to accomplish one or more charitable purposes. PRIs are a distinct subset of the “mission related investment” (MRI) universe, and can be made in/to a for-profit or non-profit entity. There is an increasing interest in PRIs as the focus on mission investing generally has grown. PRIs must advance charitable purposes and may not be profit driven; they rarely have market-rate expected return. Riggs noted that the use of PRI’s demand significant regulatory disclosures and compliance monitoring. As a result, clients are seeking other philanthropic approaches. Riggs continued that philanthropy is moving in the direction of the use of LLC’s such as in PEP (‘Private Equity with Purpose’) and IPE (‘Internal PE’) LLC structures, which sidestep the strictures of traditional 501(C)3 approaches. The application of sound business principles and incubation/seeding PE approaches seem to appeal to G2 and G3Millennials, who seek more control and desire an acceptable return on capital., he said.
Leitner said there are cases she has seen of cross-border, international philanthropy, but added: “Close due diligence [on philanthropy] is harder to achieve overseas.” Riggs agreed: “Whenever you go offshore, there’s added complexity.”
There was some discussion about the use of the increasingly widespread tool, the Donor Advised Fund. A number of organizations use DAFs to facilitate impact investing, and this is a growing area, delegates heard.
Riggs concluded by saying that in the areas of philanthropy and impact investing he always applied “Occam’s Razor”, concluding: “The simplest solution is very likely the right solution.”
The fifth and final panel adopted this title: Impact Investing, Technology, and Venture Capital: How, Where, and Why. Speakers on this panel were Avi Sharon, Principal - Private Wealth Solutions, Blackstone; Liz Luckett, Managing Partner, The Social Entrepreneurs’ Fund; Matt Greenfield, Managing Partner, Rethink Education; Alessandro Piol, of Alpha Prime Ventures.
Some of the conversation centred around how, with venture capital, an impact investing approach, far from being a “nice-to-have” added feature, could provide useful real Alpha and diversification in a portfolio.
“People are deeply entrenched in the idea that there’s a concessionary aspect [to impact investing],” Greenfield said, challenging that assumption. VCs need to be able to attract talent; impact investing can help with that, he said.
Luckett framed impact investing, referring to examples from her own field, as being about “solving a social problem in a sustainable manner”.
Conversation turned to having a positive “impact” on the very real, current threats around cyber-security, and what to do about it. “Unless you focus on the technology it is almost impossible to be a good investor,” Piol told delegates. With other issues, such as the current spate of initial coin offerings – linked to the interest in crypto-currencies such as Bitcoin – Greenfield expected that about 99 out of a 100 ICOs will fail.
Luckett said she sees big potential from an impact perspective in Big Data. Inequalities in access to information is a pressing problem, so solutions to this would be a positive step, she said. For example, certain information on people can limit access to credit and other important financial resources, she said.
Sharon observed that it was thought-provoking to see that impact investing could actually reduce risk in VC and similar portfolios, a point that has perhaps not been hitherto highlighted in discussions around the topic.
Between the panels were a number of presentations. Gareth Davies, Head of Responsible Investment Solutions, Columbia Threadneedle Asset Management, spoke about data from Europe – a region relatively advanced versus North America in terms of impact investment. Out of a global total market (covering a range of approaches) of $22 trillion, Europe accounts for more than half of that figure, he said.
Josh Cohen, Managing Partner and Co-founder of City Light Capital, gave a presentation about what his organization seeks to do. He described investments he holds that have specific outcomes, such as the ShotSpotter gunshot detector system, now in use across the US by law enforcement and other entities. (That business was in response to the fact that only about 20 per cent of gunshots that occur are actually called in.) Cohen urged delegates to avoid getting mired in definition issues. “Most impact investments have, historically, not been driven by a desire to produce market rates of return. But there are more and more impact investments that do produce such rates of return,” he said. More than half of the new impact funds in registration [in the US] are pursuing market rates of return, he said.
A third presentation, on the theme of Impact and ESG Investing Through Mainstream Financial Markets, was given by Drew Schechtman, ESG Investment Leader, Voya Investment Management, and his colleague, Meg Sullivan, Vice President, Structured Assets & Alternatives. They explained the various ways that investors can select ESG-related investments, monitor portfolios and compare and contrast performance of such investments with those following different methodologies.
The final and fourth presentation, by AllianceBernstein, was given by Erin Bigley, Senior Portfolio Manager - Fixed Income. She spoke about how municipal bonds can be considered part of the impact investing toolkit, as many investments backed by municipalities, such as in education, social services and public amenities, have clear non-financial as well as financial outcomes.