Australians are increasingly interested in philanthropy and it’s worthwhile understanding all the options available.
Philanthropy has been defined as ‘the desire to promote the welfare of others’. It commonly takes the form of donating or raising money, or volunteering time and other resources.
In Australia, wealth-sharing of this nature has traditionally been ad hoc, with little clarity around the outcomes. However an increasing number of people are seeking ways to take a more organised and impactful approach with their philanthropy.
There are a number of structures available to those wishing to manage their charitable objectives more formally. One such arrangement involves the establishment of a Private Ancillary Fund (PAF).
PAFs are foundations established under a company structure, with family members typically forming the board, along with one independent director. PAFs need a formal investment strategy, and must distribute five percent of assets annually.
Advantages of PAFs include:
- Simple and inexpensive to establish
- Tax deductible donations
- Tax exempt income environment
- Control of grants and investments remains within the family
- Opportunity to train the younger generation in philanthropy and investment
- Multi-generational legacy.
Due to their philanthropic focus and long time horizon, the trustees of PAFs often seek investments that are in concert with their humanitarian intentions. Therefore a PAF portfolio may include assets which aim to deliver both social and financial outcomes. One example is ‘impact investing’.
In recent years, this relatively new form of investing has increased in profile and popularity, both in Australia and overseas. The distinguishing feature of impact investing is the intention to achieve a positive social, cultural or environmental benefit, as well as some measure of financial return. Impact investing offers philanthropists new opportunities to put their capital to use, while aligning closely with their charitable values.
This form of investing offers opportunities across asset classes such as real assets, private equity and fixed income. Impact investments can be made directly into an organisation or via a managed fund structure, and there is an expectation that social and financial outcomes will be both targeted and measurable. Business, government and community are able to invest together to deliver common social objectives.
Examples of impact investing opportunities include renewable energy, low cost housing, job opportunities for long term unemployed, micro-finance, sustainable farming and aged care facilities.
An emerging trend is the use of the ‘payment by outcomes’ mechanism know as social impact bonds. Investors provide capital to private service providers who deliver outcomes that save public expenses.
Perhaps the best known example is the Peterborough Social Impact Bond in the UK. This project successfully sought to reduce the rates of reoffending of male prisoners in Peterborough Prison. Investors received a return based on the cost savings to the public.
The impact investing market is still in the early stages of development, but is believed to have strong global potential. It is estimated to reach a market size of $32 billion in Australia by 2022, and more than $600 billion in the US within a decade.
Anyone interested in learning more about philanthropic opportunities or impact investing should talk to their adviser who can help identify the best approach for their particular circumstances.