Could family foundations be persuaded into social investment?


The UK's top 100 family foundations hold nearly £30bn in assets – potential riches for the social investment market. But – Cathy Pharoah says – trustees are yet to be convinced to risk the family silver

Government, Big Society Capital, and others building a social finance market to invest in social enterprise growth have high hopes of charitable foundations as investors. There are broadly two particular avenues for bringing in philanthropic funds. They can be used to support early-stage social ventures whose higher level of risk makes them unattractive to commercial or public finance, which are not ‘investment-ready’. At the other end of the risk spectrum, investment in successful social ventures yielding economic and social returns – ‘programme-related investment’ – can be included in foundations’ asset management portfolios.

At the Big Society Capital launch in April 2012, venture capitalist and Big Society Capital chair Ronnie Cohen predicted that ‘foundations are going to go through a period of social innovation' in which they increasingly achieve their mission through social investment of their assets rather than through giving away the returns on their investments.

Is he right? Family Foundation Giving Trends 2012, published in December, provides new insights into foundation funding patterns. This year’s report not only updates the annual spending of the UK’s 100 largest family foundations (defined as independent registered charitable trusts funded originally by family wealth, whether or not the founding family is still represented on the governing board), but also analyses what influences their decision-making.

It reveals that while a small number of foundations regard social investment as an important strategic option, the majority appear unconvinced.

Why is this? What does the research tell us about the gap between the aspirations of social investors and those of foundations, and how it might be bridged?


Family foundation spending – stretching the purse strings

The results show that family foundations, which represent about three-quarters of all foundation funding, gave around £1.3 billion in 2010/11. Although they experienced an overall real annual fall of 1.8% in charitable spending, there was a surprise rise of 6.2% when the giant Wellcome Trust, (whose spending reduced), is excluded. The research shows that though spending power has fluctuated in line with market returns on investment over the last few years, family foundation funding has proved fairly resilient but also inelastic. Its value today has still not returned to its pre-recession value in 2007/08.

So could this pot of charitable expenditure, about 8% of all private funding to voluntary organisations, go further if used to build social enterprise capacity rather than directly to plug holes in public welfare provision?

A big challenge is that because income is not growing, any increase in one area means a decrease in another. So although loaning money to social enterprise offers a way of potentially recycling and gearing foundation funding, this has to compete with other highly valued beneficiary commitments. Family foundations are very responsive to the needs of organisations trying to raise funds: of the 40 foundations who responded to an online survey, 80% reported such needs had ‘a lot’ or ‘moderate’ influence, one of the strongest influences. Comments included:

  • we are still funding areas that the state underfunds.
  • we have a long history of reactive grantmaking which is likely to remain our main focus.
  • we feel that continuity is important, and we like to be consistent.

For family foundations the choice between meeting immediate need and investment in long-term capacity-building is hard. The two are not seen as direct substitutes. So if foundations are to provide more finance for building business capacity, especially at the high-risk end, they need convincing that their key beneficiary groups will not lose out.

In developing countries investment in building a local health clinic, for example, can bring long-term health services to those who had none. It is harder to make the investment case in the UK where social enterprise often appears to be about efficiency gains and marginal, untested, service improvements.

In contrast it was clear that a small number of foundations in the survey are highly persuaded of the case for social investment. Four out of 40 (10%), said they were influenced ‘a lot’ by it, and a further 7 were ‘moderately’ influenced (18%). One foundation was explicit that alternative social finance would be part of a strategy for expanding its funding base for the future. They said:

  • we will provide a broader basis and support capacity building as well as pure financial grants.


Protecting the family silver

So far, this article has looked at foundations’ spending capacity. But for many, the much bigger prize in terms of social investment is access to foundation assets. The total net asset value of the top 100 was £29.7 billion in 2011, representing a real annual fall of 3.5% (or 1.04% if Wellcome is excluded). Asset value has not yet returned to pre-recession value.

Total and eye-popping figures for the value of charity assets are often bandied around in a way that is misleading. Family foundation assets are highly skewed towards a few large foundations. Just 15 own 84% of the assets of the top 100, and the single Wellcome Trust, whose objects are prescribed within health and biomedical fields, represents around half of this.

Far from being a collective asset, foundation assets consist of disparate, often small, funds. Collectively, they are stretched over a wide range of good causes. As with spending, family foundations will have to juggle investment choices  between social and economic returns. They still need to be convinced that social investment is a better way of doing things. One comment probably summed up the view of many foundations:

  • Social investment is being considered as an interesting new area, but not yet mature enough for us to participate.


Looking forward

Overall, family foundations believe funding will reduce over the next few years. They feel under pressure to find the best way of using or extending limited resources. This exerts both positive and negative influences on attitudes to social investment, increasing interest in its scope to maximise impact, but also their fear of risk-taking.

It has been argued that a barrier to social investment is that trustees lack confidence in the legitimacy of investing charitable assets in this way, for possibly lower financial – albeit higher social – return. The Charity Commission, and more recently the Financial Services Bill, have gone a considerable way to clarify and recognise its legitimacy as an investment option.

The findings of this new research suggestion foundations not only need confidence in the legality of social investment, but more evidence of how it is in the best interests of beneficiaries.