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A source of investment capital for impact ventures and funds
It is with both befuddlement and a sense of optimism that we approach the topic of investing in impact-oriented ventures and funds through donor advised funds (DAFs). Befuddlement in that DAFs aren’t adopting the use case more widely or as quickly as they might. Optimism in that the opportunity DAFs present for the field of impact entrepreneurs is exciting and opens up a new avenue for funding.
First, a little scene-setting is in order. DAFs are vehicles that enable philanthropists to use tax-advantaged dollars for grantmaking over time. Before these charitable funds are granted out, they are often invested in mutual funds or ETFs. Yet these dollars could also be used to invest directly in social enterprises and private impact funds.
There are 1.3 million DAFs offered by 1,000 sponsors across the US. With more than $234 billion held in DAFs today (an increase of nearly 40% YoY), we’re seeing a greater percentage of philanthropic dollars being used to fund innovative ideas… as investments. But it’s just scratching the surface. What if the $230 billion in DAFs fully integrated impact investing throughout 100% of their endowments (rather than just giving away yield and toe-dipping anecdotally in impact investing)?
The challenge we can collectively issue to the DAF industry is to build out investment platforms and capabilities that make it easy for donors to select from deeply impactful investment options, or even to source and recommend their own deals that are then executed from the DAF. We will note that ImpactAssets was founded more than a decade ago to enable donors to do just that – use their philanthropic assets to invest in impact entrepreneurs and fund managers that they believe in, so we know it’s possible!
Because these funds have already been designated for philanthropic purposes, donors often view this capital as being able to take on more risk or less return than their traditional investment portfolio. Some donors have run successful businesses and are looking to ‘pay it forward’ to other impact-driven entrepreneurs. Others are angel investors looking for exciting early-stage opportunities to help get off the ground. Some are foundations and corporations interested in moving the needle on issues like climate change, racial equity and gender equality and they are investing in ventures and funds addressing specific areas of this important work.
With more than $234 billion held in DAFs today…we’re seeing a greater percentage of philanthropic dollars being used to fund innovative ideas… as investments.
Put simply, donor advisors are passionate about causes. Their impact interests often correlate to investible segments that can be amplifiers of their philanthropy. Conversely, their philanthropy can act as a bridge into thematic impact investing.
DAFs leverage capacity and expertise across a much larger operational and asset footprint than a small family or corporate foundation would have by itself. And they don’t have cumbersome boards or decision-making processes, as that is all centralized at the DAF sponsor (the organizations offering the DAFs). And because of aggregate scale, DAFs are also less expensive to operate.
All of the above contribute to an ideal environment for moving concertedly into impact investing from DAFs.
The bottom line for impact entrepreneurs and fund managers is…
Momentum and pressure are growing for the DAF industry to lean into impact investing, from the big national financial firm affiliates to the local community foundations down the street. It’s still early days, though, and we have a long way to go towards maximizing the impact of this $234 billion in philanthropic endowment capital (much less the $1.3 trillion in foundation endowments), representing 1.3 million DAF accounts. But the opportunity is there to utilize DAFs to fund world-changing solutions, we just need to collectively popularize and realize it.
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Aunnie Patton Power
Author of Adventure Finance
May 18 - 12:00 PM EST
Founder, Boston Impact Initiative
March 30 - 12:00 PM EST
Stephanie Cohn Rupp
Partner & CEO of Veris Wealth Partners
April 6 - 12:00 PM EST
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Yes and – we as a field need to continue to do more to make the process simpler. I recently tried to do an investment into a fund through a DAF structure and found the process confusing and bumpy even though I have a good understanding of how impact investments and DAFs work. If we want to bring more people along, we need to make it easier to navigate.