What if you could start your own foundation – but with no administrative hassles or set-up costs?
Even better, what if you could use your foundation to make loans to nonprofits and social enterprises so that your capital could be repeatedly recycled to create impact again and again and again?
A new kind of fund combining philanthropy and investment allows you to do exactly that – it’s called the Donor Advised Fund (DAF).
The principles of a DAF are simple.
First, a donor makes a non-redeemable gift to a fund that pools gifts from many other donors, effectively acting like a foundation. The gift is typically tax-deductible at the time it enters the fund rather than when it is paid out, giving the donor immediate benefit. The fund manager then takes care of all the paperwork and works to find and select a suitable recipient, just like an investment fund.
If DAFs were simply a neat way to package philanthropic giving into a portfolio, they might be interesting but hardly groundbreaking. The factor that makes DAFs radically different from any other philanthropic product is this – before granting out the money, a DAF, with donors’ permission, can use the funds for impact investing.
Impact investments are usually low-interest loans made to social enterprises. Typically these loans are higher risk, which can make them unattractive to traditional investors. Yet they are often the only route of funding for social enterprises that need capital.
A DAF can lend to those social enterprises, offering them exactly what they need and it can absorb the high risk. If the loan falls through, for instance, it still creates social value and just becomes a donation. But if the loan is repaid, it can be lent out again and again – creating social value repeatedly.
Three DAF managers are already offering opportunities to donors wishing to enter into this space.
- The UK’s Charities Aid Foundation is one of the world’s largest provider of DAFs, managing over US$2 billion in funds. Fourteen years ago, they launched CAF Venturesome, a DAF sub-fund specialized in making loans to eligible organizations. It has now provided low-cost unsecured loans to over 500 social organizations with a total of US$52M. CAF Venturesome deliberately seeks out high-growth social organizations in the early stages and helps get them off the ground. Holly Piper, head of CAF Venturesome, says, “It’s amazing to see the results of more than a decade of Venturesome loans, which have transformed the ability of hundreds of organizations to make a difference in their communities.”
- The US-based organization ImpactAssets aims to scale-up and ‘democratize’ impact investment through their DAF. Their numbers speak for themselves – between 2011 and 2015 the fund has grown by 35% to a total of US$269M out of which US$88M was used as impact investment.Fran Seegull, Chief Investment Officer and Managing Director for ImpactAssets, says, “ImpactAssets is a 501c3 non-profit organization dedicated to increasing the flow of capital to impact investing through innovative product development and field building. We see ourselves as impact entrepreneurs.”
- Based in the US, Hong Kong and UK, the group SharedImpact goes one step further and allows impact investments across borders while letting donors receive the tax benefit in their home jurisdiction. “Our DAF lets a UK or US resident support a nonprofit or social enterprise anywhere in the world, but receive the tax benefits as if they were home-based,” explains Bob North, CEO and co-founder of SharedImpact. This potentially could open a floodgate of funding for under-capitalized social impact projects all over the world.
As donors increasingly wish to see both a financial and a social return, DAFs provide a “foundation in a box” that paves the way for anyone to take the leap into both traditional philanthropy and impact investing. For social impact organizations, this could help increase the sources of affordable capital for nonprofits and social enterprises and become a true revolution.