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Marianne Scordel

The art of doing good well


Marianne Scordel of Bougeville Consulting writes on a new pooled option for philanthropic foundations.

In the course of our work, we often come across hedge fund investors who exist, and want to realise an adequate return on investment, for the purpose of serving a charitable cause. Hedge fund managers themselves, as with other successful business owners, also do, in some cases, set up their own family foundations, which become investment vehicles in their own rights and distribute part of their profits in the context of philanthropic contributions. 

These investors of a specific kind exist for non profit and are devoted to ‘doing good’, as a purpose in itself rather than by way of simply managing externalities, and are, in fact, very diverse. They vary as far as their origins, focus, size, decision-making, funding mechanisms, governance, and many other things are concerned, so it would be rather futile to try and characterise the sector, or describe what ‘an average foundation’ might look like. 

Notwithstanding this diversity, two recurring features seem to apply: 

• Foundations are consumers of financial services, they need to manage their assets in ways that will allow them to continue to spend money on the causes they have chosen to support. What they spend on asset management (e.g. management and / or performance fees) will constitute an opportunity cost in terms of the overall assets they will have left for the purpose of supporting a charitable activity, programme or cause. 

• Although European foundations can be of various sizes, the 114,000 or so European public benefit foundations manage a combined total AUM of EUR433 billion, which compares with 104,000 foundations in the US, managing USD823 billion1. European foundations are therefore smaller, overall, than their US counterparts, a fact that is compounded by the high degree of asset concentration in Europe: large (mainly corporate) foundations exist in Europe, leaving many foundations with a level of AUM lower than a simple averaging calculation might suggest. 

At a time of increasing pressure on state funding in Europe, and of greater social need, the foundation landscape is bound to evolve and, with it, the solutions that form part of its environment. 

One such evolution concerns those foundations’ mandate to manage their assets. 

Foundations can hire in-house teams of investment professionals, however doing so requires that they are large enough to be able to afford paying employees. It is estimated this only makes sense financially for organisations with a minimum of EUR500 million under management, which represents only a small proportion of foundations in Europe. 

The alternative to using in-house staff to manage assets is to delegate management to a third party, for instance a professional multi asset class wealth manager. Such a solution will create scale, but, typically, the manager will charge well over what their efficiency might represent in terms of cost savings. Average margins for investment firms are around 30 per cent, and there is no doubt that part of the fees foundations have to pay to their asset managers constitutes a drag on their returns. 

An alternative solution is emerging in Europe – including the UK – with the creation of Akademia Investments2, an asset manager which, once fully operational, will be owned by the foundations it will serve. 

Benoît Mercereau, one of the two co-founders of Akademia and a former Managing Director in the Wealth Division of Goldman Sachs, is keen to explain that the new venture will follow the model of The Investment Fund for Foundations (TIFF) in the US. TIFF was set up in 1991 with support from the CIOs of the Yale and Harvard endowments to assist smaller foundations and today manages over USD11 billion on behalf of 800 foundations. 

“Foundations with an in-house investment team enjoy higher returns on average – about 1 per cent a year – but most can’t afford to have those teams. The solution is for several foundations pooling resources together to hire a joint investment team: this is what we want to do for them,” says Benoît Mercereau, who adds that Akademia will, itself, be funded by a large foundation and individual philanthropists, to ensure as much of the return on investment as possible is distributed to the foundations whose assets Akademia will manage. Those foundations will pay some fees, which, initially, will pay for part of the costs only. At the end of each year, any profit made on those fees will be distributed to the members. 

In addition to being efficient from a scale and from an absolute cost perspective, Akademia will bring its members the additional benefit of managing their assets according to their values, a topic which is talked about a lot at the moment, and addressed only to some extent by commercial asset managers3. 

At a time of crisis and of greater need, innovation in the world of foundations is to be welcomed. Greater investment returns for foundations – whether as a result of lack of fees or of better performance than would be generated by inadequate in-house arrangements – have a part to play in helping foundations fulfil their role. 

But then again so do amounts that are being donated to foundations in the first place. In Europe, amounts being donated, as well as numbers of donors as a percentage of a given population, are simply very low compared to the United States. Fundraising efforts are increasing, and cultures are slowly changing. Overall, the charitable sector is moving in the right direction.
 


Footnotes:

1. Sources: Donors and Foundations Networks of Europe (DAFNE) and https://www.fondationdefrance.org/sites/default/files/atoms/files/philan...

2. http://akademia-investments.org

3. www.alphaq.world/premium/alphaq/faith-and-investment for a discussion on this topic from a specifically religious angle

Marianne Scordel is the Founder of Bougeville Consulting, which provides customised assistance to hedge fund managers setting up or effecting changes to their businesses. Over time, she has dealt with a variety of structures and strategies. Prior to setting up Bougeville, she worked for Nomura and Barclays Capital. She is an Alumna of St. Antony’s College, Oxford. 

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