How to Solve the Giving Pledge Bottleneck—and Fund Large-Scale Solutions
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Guest author sean davis proposes that philanthropy be directed toward large-scale construction of affordable housing and other infrastructure projects. 1599686sv/shutterstock
Whenever I see the homeless man at my local gas station in Jupiter, Florida, I’m infuriated by the fact that so many people lack stable housing in a country with such enormous wealth, so much of which is already pledged to philanthropy. Charity is crucial, incremental impact is important, but where are the solutions to our largest social and environmental challenges? And why isn’t more money moving in support of such solutions? Well over $600 billion in pledged philanthropy—committed by the 200 or so signatories of the Giving Pledge—remains undeployed, just sitting on the sidelines. This amount, estimated by Wealth-X in 2018, is probably closer to $1 trillion given the market gains since then. To answer these very questions, I wrote the book, “Solving the Giving Pledge Bottleneck,” which Palgrave Macmillan is releasing this month.
I’ve been working since 2014 on how to deploy very large philanthropy, in the amounts promised by Giving Pledge signers, as so much of it is stuck in a bottleneck and not currently funding anything, let alone large-scale solutions. Back then, I was a few years into advancement work, raising major gifts to fund more housing and services for homeless people in Florida. I realized that there was almost no long-term planning compared to that I had seen in the for-profit world. I had worked for private equity firms in Brazil and New York before moving to Florida and it was clear and painful to see that nonprofits didn’t have the luxury to build large growth plans. We also didn’t have the resources to access, solicit and secure, say, a $200 million gift from these philanthropists.
These were the early days of innovations like social impact bonds, and venture philanthropy had lost some of its shine due to a lack of visible scale. At the time, nonprofits were not soliciting funds in the ballpark of $200 million, or pitching fully developed plans of that size to solve a particular issue in their area or across a region. And, for the most part, they still aren’t today. Due to decades of nonprofits having to underinvest in management, planning and systems, and a giving culture focused on cost controls instead of impact generation, nonprofits mostly can’t access these funds. They can’t hire all the staff needed to create large expansion plans, the staff to solicit the funds, and make the management investments to execute on the plan.
As Dan Pallota argued in his famous 2013 TED Talk, nonprofits are penalized for investing in management and marketing due to the oppressive “overhead ratio.” Nonprofits are considered ineffective if they spend more than 20% of their budgets on management and fundraising. This keeps them from growing. More importantly, because nonprofits require donations to sustain themselves, growth puts more pressure on already limited fundraising resources. Scale, therefore, remains elusive for nonprofits.
A new crop of venture philanthropy managers has come up, in part, to help to create vehicles to deploy larger funds into nonprofits. Blue Meridian Partners, Co-Impact, Lever for Change, The Audacious Project and others are third-party active managers of philanthropy. They each have their own approach, and have begun to see success (Blue Meridian has been deploying about $200 million each into 10 nonprofits for a few years). Each has a different level of “active management” for the philanthropy they deploy on behalf of a group of well-known billionaires. They agree that it is hard to find nonprofits with plans for this kind of scale, and with the ability to quickly double or triple their size to have a greater impact.
The nonprofit world simply does not have the ability to take in this huge pool of philanthropy in a way that would allow them to scale their work quickly. Yes, every nonprofit would take all the funds they can, but can they scale 100% or 200%? Because of the overhead ratio, very, very few nonprofits globally can take in $200 million or more. The time and effort to retool systems, management, and culture, in order to aggressively grow to solve issues, is intense.
If there were 150 nonprofits globally ready to seriously scale, and we gave them $200 million each, that would be $30 billion in philanthropy. This is a very large amount of funding. Yet this is still just 5% of estimated funds committed by Giving Pledge signatories going into 2022. So the ability of the nonprofit world to take in mega-funds to scale quickly is very limited. We max out at 5%. What do we do with the rest? And these are the pledges from only about 200 billionaires. What about the almost 3,000 others? This has been a bottleneck of significant proportions.
Moving more money, funding solutions
MacKenzie Scott has shown us a way forward. Very large unrestricted gifts, with no strings attached, to hundreds of nonprofits. Over $8 billion to 800 nonprofits and more to come for sure. This is certainly having an impact. It is allowing these well-respected nonprofits the freedom to invest in themselves, in ways they have never before been allowed to do. This can have great impact, yet impact that is still often incremental. What about solutions? How can we actually reach solutions to some of our largest challenges within our lifetimes, or in the next 10 years? Or earlier? We can. We just haven’t been looking in the right places.
The path we have found to both solve the bottleneck at the Giving Pledge and reach large-scale solutions, is to leverage larger for-profit companies, and their seasoned management teams, as the vehicles to deploy this philanthropy. This is already being done at the “venture” level by the Bill & Melinda Gates Foundation’s venture capital investments, which are funded by philanthropy. It is being done by all PRI and MRI investors and, in the developing world, by USAID and others blending philanthropy into smaller for-profit projects. Larger impact and solutions can be reached by doing this, but with “later-stage” companies, more akin to buyout investing versus venture capital investing.
Private and publicly traded, later-stage companies are mostly unaware the IRS allows this, and that they can take in $200 million or more in philanthropy to generate more impact, which today may be uneconomical to generate. Philanthropy can give them the flexibility to build more affordable housing, clean energy plants, and fund many other projects that are uneconomical today, by paying down costs or replacing debt, as examples. These are larger vehicles that can take in 10x and then 100x that amount on a regular basis. Their management teams have the capability of doing that.
At Merton, we are developing deals for philanthropists to generate large impact by supporting projects that are highly replicable and sustainable, as the recipients are for-profit entities. Nonprofits, as mentioned, usually require more philanthropy as they grow, which greatly limits growth and impact. The game-changer is that later-stage for-profits can take in billions along specific investment strategies.
As private equity professionals committed to accelerating our path to solutions, we are working to negotiate and structure philanthropic deals with large developers to replace debt in tax credit-subsidized affordable housing projects. We are looking at providing an impact loan with no current interest to a new affordable housing development in the Midwest. Depending on the philanthropy we attract, we can replace $1 million or $20 million in debt. In exchange, the developer agrees to lower rents permanently as interest expense is greatly reduced. The developer will earn the same profit while making them more competitive in securing tax credit awards. We are also including a return to the donor based on future performance. It’s a win-win for all and generates a high level of measurable impact. This deal can be replicated over and over with the same developer or others. These types of philanthropic investments require specialized real estate investing professionals.
We are also looking at using philanthropy once tax credit funds run out, as there are sometimes 20 unfunded, large affordable housing projects in an award area (1,000 awards are made annually in the U.S.). Developers are delighted to build more if philanthropy can augment the limited funds.
This approach could eliminate the lack of affordable housing for specific vulnerable populations, by city or even nationally. This is not an aspirational statement. If a philanthropist wanted to house all the families in need in a particular city, enough buildings could be developed to fully meet this demand by using philanthropy as tax credit funds. All in beautiful, for-profit, financially sustainable, mixed-rent buildings. About 5,000 of these financially self-sufficient buildings could provide enough affordable units to house the entire homeless population in the United States. The buildings would be developed by for-profit and nonprofit developers and then nonprofits could be contracted to provide services to meet specific needs: chronic homelessness, youth aging out of foster care, victims of domestic violence, human trafficking victims, elderly poor, etc. Less than 10% of the Giving Pledge would be needed to finance 5,000 such buildings.
We are also working with private water utilities to purchase smaller private water utilities in traditional consolidation strategies, funded by private investors. About 21 million Americans lack access to safe drinking water—by adding philanthropy, investors can purchase and upgrade water utilities that are distressed. Without philanthropy, these acquisitions and upgrades are uneconomical. According to the Columbia Water Center at Columbia University, almost 5,000 small private water utilities are just sitting there, without the funds to be upgraded, and pumping out polluted water right now. By blending investment and philanthropy, enough of them could be purchased to solve this challenge. To actually solve it. Such funding streams could also be used to invest in new technology and contract with water nonprofits to drive solutions. This would require less than 10% of funds committed in the Giving Pledge.
These capital-intensive industries, and others, like wastewater treatment or clean energy, can take in $200 billion or more in specific deals and projects that quickly add up to a solution to a major challenge.
Solving the Giving Pledge Bottleneck
The book takes a step-by-step approach to help those that are unfamiliar with later-stage private equity to understand how this can work. It covers the importance of taking a careful private equity approach in terms of negotiating impact with these industry experts, structuring the investments to ensure impact, conducting due diligence to de-risk the investments, and long-term oversight to confirm impact and drive solutions. On the other hand, it also helps for-profit CEOs, investors, and others to understand how these flexible funds can be blended into their core businesses.
It is an exciting time for philanthropy and for social impact in general. Philanthropic private equity investments and loans, into later-stage companies will help solve the Giving Pledge bottleneck. The Giving Pledge has been very successful in inspiring others and now we have to develop the deals to help them deploy their philanthropy.
There has never been an opportunity to finance more good.
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Sean Davis is the founder and CEO of Merton Capital Partners, a social impact asset management company focused on philanthropic investments into later-stage companies. Merton is addressing some of the world’s largest social and environmental challenges by combining the philanthropic objectives of individuals, families, and foundations with the for-profit goals of public and private companies. His book “Solving The Giving Pledge Bottleneck” is available on Amazon, Barnes and Noble and Springer.
