By: Heather Hoke, Senior Consultant
Recently I came across a term that was new to me…. philanthropic private equity. The researcher in me had to know more!
Heather Hoke
As of late 2024, the United States had 902 billionaires with a combined wealth estimation of $16 trillion! 185 of them have signed the Giving Pledge and demonstrated their commitment to philanthropy, yet so much seems to remain undispersed. The problem seems to be that there aren’t many nonprofits that are equipped to take in, quickly scale up, and effectively deploy very large charitable gifts. As Dan Pallota argued in his 2013 TED Talk, nonprofits are criticized if they spend more than 20% of their budgets on management and fundraising and this keeps them from growing. If nonprofits can’t grow, they can’t effectively solve large societal problems. Scale therefore remains elusive for most nonprofits. Because of the overhead ratio, very few nonprofits globally can take in $200 million or more. Per Worth in 2021, there are at most 150 non-profit organizations worldwide that have plans for large-scale growth and the infrastructure or expertise to deploy targeted gifts of $200 million or more.
There are firms that have formed in response to the lack of sufficient existing infrastructure in organizations to deploy large amounts of capital toward high-impact solutions. One such firm is Blue Meridian Partners, which scales non-profits working on issues related to poverty in the U.S. on behalf of its pool of philanthropists. They select and support strong management teams, often investing $100 million or more in each project. This collaborative model for philanthropy allows investment of large sums of capital for organizations to rapidly scale up solutions with the demonstrated potential to solve some of the biggest problems trapping people and families in poverty.
New approach to large-scale philanthropy
If there was ever a time that large-scale philanthropic gifts are needed, it’s now! These gifts can solve humanity’s biggest challenges. Philanthropic private equity is an emerging trend that has the potential to unlock trillions in private wealth to fund bold solutions to address the world’s most pressing problems. The idea is to leverage large for-profit companies, and their experienced management teams, as the vehicles to deploy transformational gifts.
This is already being done as venture philanthropy, but larger impact solutions may be reached using “later-stage” large companies. That’s where philanthropic private equity comes in. Philanthropy can give them the flexibility to build more affordable housing, clean energy plants, and fund many other projects, by paying down costs or replacing debt, as examples.
How is it different from venture philanthropy?
Venture philanthropy and philanthropic private equity both aim to fund social impact ventures but differ in their approach. Venture philanthropy applies principles from venture capital and business entrepreneurship to invest in start-up, growth, or risk-taking social ventures. It is not explicitly focused on profit but rather on making investments that promote social good. Within this approach, non-profits make investments that advance their mission.
One of the best-known examples of venture philanthropy is the collaboration between the Cystic Fibrosis Foundation (CFF) and Vertex Pharmaceuticals. In the 1990s, CFF adopted a more business-like approach to its mission and began to invest directly in research and drug development, shifting from a passive grant-making model to an active partner in the development of potential treatments for cystic fibrosis. In 2000, CFF invested $40 million in Aurora Biosciences (now Vertex) to fund development of what would become the first therapies to treat the underlying cause of cystic fibrosis in exchange for a share of the profits. In 2014, CFF sold royalty rights for CF treatments developed by Vertex for $3.3 billion and in 2020, CFF sold their remaining stake in royalties for $575 million, bringing in additional resources for the nonprofit.
For a deeper dive into venture philanthropy see a great blog post by my HBG colleague Christine here.
How is it different from impact investing?
Impact investing is an investment strategy that seeks to generate financial returns while creating a positive social or environmental impact. This investment strategy can involve different asset classes, such as stocks, bonds, mutual funds, or microloans. The point of impact investing is to use money and investment capital for positive social results.
The Bill & Melinda Gates Foundation has a strategic investment fund which is invested in ventures that align with the foundation’s goals of improving health, education, and gender equality. The investment fund takes bold risks by investing in “innovations and organizations that are often overlooked by traditional investors or can solve problems faced by the world’s poorest.” The Rockefeller Foundation, as well as the Ford Foundation, use a vehicle called “program-related investments.” They see where for-profits can be leveraged to generate impact for philanthropy that can’t be delivered by non-profits.
Philanthropic private equity
The emerging strategy of philanthropic private equity uses private equity approaches, such as debt financing and restructuring, to invest in established for-profit businesses, aiming for both financial and social returns.
One firm working in this space is Merton Capital Partners, a philanthropic private equity firm that specializes in sourcing and executing projects across a range of industries using philanthropic investments in later-stage companies. Merton is working with ultra-high-net-worth individuals who wish to realize a larger scale impact with their giving. Merton develops projects with large private companies that have the ability to deploy significant philanthropic capital, in consultation with expert, local nonprofits to deliver sustainable, measurable, and scalable social impact. Returns in the form of capital are repaid to donors and these returns can be reinvested for further impact.
A simplified example of philanthropic private equity is to structure a deal with a large real estate developer to offer affordable housing. The firm, with the backing of the philanthropist, could provide a non-interest bearing multi-million loan to the developer, which would reduce interest expenses for the project. These saving can be used to lower rents permanently, enabling the developer to make the same profit but delivering more affordable housing units. Projects could be financed at 0% from philanthropy in clean energy projects as another example. Doing this with all the large clean energy companies could be the most impactful move to improve global climate change!
As there are cuts and elimination of government funding while at the same time costs are rising, support services will be in even greater demand. There has never been a better time to think about how to effectively deploy large-scale philanthropic donations that can make a huge impact on humanity. The innovative approaches to large-scale philanthropy that are emerging seem quite promising in helping to solve some of our biggest challenges!
