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The City’s new boom market: philanthropy

Simon Nixon says the new rich are eager to give billions away — but that their largesse is best used as ‘social risk capital’, not as a substitute for state welfare

15 November 2006

4:43 PM

15 November 2006

4:43 PM

As we approach the festive season, spare a thought for the children of billionaires. These are joyless times for those holding out for an inheritance. As they climb aboard the private jet that will whisk them off to the yacht where a team of chefs will prepare their Christmas dinner, many will be wondering if Daddy has already cooked their goose. The super-rich are slaves to fashion. And the latest fashion is giving it away. Bill Gates and Warren Buffett, the world’s wealthiest men, started the trend by pledging to give away around $30 billion each. Now multi-millionaires everywhere are desperate to offload their excess zillions before it has time to damage the kids.

The buzz in the City is that philanthropy is back, after a gap of about 100 years. The hedge fund industry has led the way. Some specially created funds, like Ark (Absolute Return for Kids) and TCI (The Children’s Investment fund) give a proportion of their returns each year to charity. A charity auction organised by Ark’s glamorous founder, Arpad Busson, estranged partner of Elle Macpherson, raised £18 million in an evening. Private equity groups such as Permira and Alchemy have also set up trusts. Leading City figures such as Sir Ronald Cohen of Apax Partners and Stanley Fink of Man Group have given up their jobs to concentrate on philanthropy.

For all the self-righteousness in the City, however, the kids don’t have to worry too much just yet. British giving is peanuts compared with the US. At 0.7 per cent of our GDP, we only give half as much as Americans. And wealthy Britons are the most miserly of all. The richest fifth in Britain give 1 per cent of their income, while the poorest fifth give 3 per cent. Nor does anybody seem willing to live up to Andrew Carnegie’s dictum, ‘He who dies rich, dies disgraced’. Even Warren Buffett’s huge donation to his friend Bill Gates’s charitable foundation will still leave him with several billions in hand to keep future generations of Buffetts off the streets. And it’s fair to say that sales of yachts, private jets and other fripperies of extreme wealth are rocketing far faster than charitable donations. Generosity has its limits.

Even so, talk of a philanthropy boom is more than simply self-serving propaganda by the financial elite. Over the past two decades globalisation, technological change, financial innovation, tax cuts and the slaying of inflation have allowed some people, particularly on Wall Street and in the City, to amass giant fortunes relatively young, long before they are ready to retire. There are now 793 dollar billionaires in the world, up from just 476 three years ago, according to Forbes. Three quarters of those appearing in the Sunday Times rich list are self-made millionaires, whereas 20 years ago 75 per cent inherited their wealth. And over the past 30 years the richest 10 per cent of Britons have doubled their share of national wealth to 14 per cent. What’s clear is that a growing number of these people want to give some of it back.

Why they want to do so is not the point. Many are motivated by genuine altruism. Unlike those who inherit old money, self-made millionaires tend not to feel the same sense of intergenerational stewardship towards their wealth. Others may be seeking honours or public status, although this seems to matter less to British donors, who tend to be less fussed than Americans about having buildings named after them. Or perhaps, sub-consciously, the mega-rich see philanthropy as a form of voluntary tax — a necessary corrective to maintain support for a capitalist system that has led to wide inequalities. Previous philanthropy booms — in the late 19th century men like George Peabody and Joseph Rowntree gave away huge sums — also coincided with sharp rises in inequality.


What matters is whether today’s philanthropists are spending their money in ways that will make a difference. They’re certainly going about it differently from previous generations. Whereas Victorians liked to put their money into trusts to be trickled out in grants to deserving charities, today’s donors are more hands-on. Being younger and still at the peak of their powers, they want to work closely with charities or run their own projects. ‘They want to see a return on their investment,’ says Nigel Harris of New Philanthropy Capital, which advises donors. ‘They’re looking for a social return. They want to see they’re doing some good.’

Some of them are profiled in Charles Handy’s book The New Philanthropists (Heinemann). There are a smattering of City slickers, but not all are tycoons or even stupendously wealthy. Sir Tom Hunter sold his retail business for £500 million and now devotes his time to giving it away, topping last year’s Sunday Times ‘giving list’ with donations of over £20 million. Sir Peter Lampl gave up business to devote himself to the Sutton Trust, an educational charity. Irish property developer Niall Mellon flies to South Africa every month to supervise the building of homes in townships. What unites them, says Handy, is that they all prefer to be actively involved in their charities, rather than passive writers of cheques.

But what if you’re a billionaire with money to give away but no idea who to give it to? Fear not. Alongside outfits like New Philanthropy Capital, top investment banks now offer their high net worth clients help in this field. Citigroup, for example, has a global philanthropy advisory unit which uses its worldwide contacts to identify projects for its richest clients — people with an average of $50 million in the bank. ‘The clients love it,’ says Chip Raymond, head of Citigroup’s philanthropy unit. ‘They’re just as interested in discussing their charitable work as their investments.’

Not everybody is comfortable with the all this. ‘They’ve got to be careful,’ says Geoff Mulgan, former head of Tony Blair’s strategy unit and director of the Young Foundation. ‘If givers start to demand too much power over the way services are provided, they’ll start to become resented. They should study history. The 19th-century Charity Organising Committee became deeply hated. It was seen as an upper-class plaything and dubbed Lady Bountiful. There’s been a big move over the last 20 to 30 years to make charities more accountable to their beneficiaries. It would be a mistake to try to reverse that.’

Besides, people need to keep a sense of proportion about what philanthropy can achieve, says Mulgan. Right-wingers may fantasise about a new generation of engaged citizens rolling back the frontiers of the state, but it’s not going to happen. ‘Even if charitable giving in Britain was to double to 1.4 per cent of GDP, it would still be dwarfed by the 42 per cent of GDP swallowed up by the state. People don’t want charities to usurp the state as the core provider of social services. Don’t forget, in the last three elections, people clearly voted for more spending on public services, not less.’

So what’s our modern philanthropist to do with his groaning wallet and aching conscience? How can he give away his money without causing offence or duplicating the work of government? The answer is to do what these people do best: take risks. Banks and governments are hopeless at funding risky untested projects. Philanthropists aren’t accountable to anyone so it’s easier for them to back radical new ideas; they can supply ‘social risk capital’, says Harris, to fund pilot projects which cannot otherwise find backing.

And that’s what the most effective new philanthropists are doing. The Prince of Wales has been doing it for years through the Prince’s Trust. Bridges Community Ventures, which also provides venture capital to entrepreneurs in deprived areas, recently turned one £120,0
00 investment into a stake worth £22 million in four years. Bill Gates funds blue-sky research into diseases such as malaria that drugs companies ignore. Philanthropists have pioneered the provision of microfinance for those too poor to get credit, leading the way for a new commercial microfinance market. These donors are blurring the boundaries between charity, the private sector and the state. Philanthropy that pays its way: now there’s a thought to warm the hearts of children of billionaires everywhere.

Simon Nixon is executive editor of breakingviews.


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