September 30, 2009
Gates Allocates $400-Million for Charity Loans And Other Investments
By Ian Wilhelm
In part because of the bad economy, the Bill & Melinda Gates Foundation is exploring alternatives to traditional grant making and has set aside $400-million for loans, investments, and other financial vehicles to further its charitable efforts.
While the foundation has been interested in these ideas for a while, the financial crisis last year added a new impetus, says Alex Friedman, the Seattle organization’s chief financial officer.
The foundation asked itself: “Given that there’s less resources right now available for all of us, including the Gates foundation, and we don’t want to lower our commitment, is there any way we can come up with a new set of tools?” he said.
The Gates Foundation’s assets declined about 20 percent last year; its endowment hovers around $30.2-billion. Even so, it remains the wealthiest philanthropy in America.
While other large grant makers like the Ford Foundation have made so-called program-related investments before, the move by Gates is significant since its $400-million commitment could potentially dwarf that of all other philanthropies combined.
According to the Foundation Center, a New York research group, 121 large and mid-sized foundations provided $391.5-million in program-related investments in 2007, the most recent year data are available.
‘Chinese Wall’
Gates officials are quick to point out the new program does not represent a change in Gates’s investment policy. The foundation has been criticized for owning stock in oil companies and other corporations that some say contribute to the health problems that Gates is trying to fix through its philanthropy. (According to its Web site, the Gateses require the endowment not to invest in companies involved with tobacco and Sudan or engage in “egregious” practices.)
Mr. Friedman says that a “Chinese Wall” still exists between the grant-making side of the organization and its investment team. Instead, the foundation is essentially borrowing from its endowment for its philanthropic mission, which includes fighting HIV/AIDS, improving U.S. education, and helping poor farmers in Africa.
The pool of money will be used in a variety of ways, like providing loans to charities at below-market rates, making equity investments, and offering bond guarantees. While Gates has about six such projects in the works, Mr. Friedman says it is too soon to announce them. He did provide some sketches of the different ways the foundation may use the funds.
For example, it may help a nonprofit group issue bonds to build a charter school. The foundation would provide a financial guarantee on a portion of the bond principal so people purchasing the bonds would feel more secure. “It would lower the risk that any buyer saw when they thought about buying this instrument,” he says.
In terms of equity, he says, Gates could invest in a fertilizer business in sub-Saharan Africa, which would benefit farmers. Traditional investors are often wary of working in some developing countries, says Mr. Friedman, but Gates hopes it can structure deals where it shoulders some of the financial risk to appeal to them.
Taking Risks
Revenue generated from the loans and investments would return to the $400-million fund, though Mr. Friedman says he expects some of the deals to fail. “If we don’t, we’re probably not taking enough risk,” he says.
Mr. Friedman, who joined Gates nearly three years ago, and a colleague will act as “internal investment bankers,” working with grant-making staff members to consider different approaches to helping charities and providing aid.
While the $400-million represents .013 percent of the foundation’s assets, the amount could grow. “Bill and Melinda are excited about it and they think it’s potentially a very impactful tool,” Mr. Friedman says. ”If we’re effective in using the $400-million I would expect that we’d add significantly to those resources.”
While emphasizing that the Rockefeller Foundation and others are also experimenting with new financial tools, he says he hopes that Gates’s example will push others to consider using program-related investments.
“It’s a big move, but it really needs partners to have the catalytic uptick,” he says. “We’re looking for good ideas and we’re, quote, open for business.”
Nicole Wallace contributed to this article.
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I am so pleased that the Gates Foundation is making this commitment. I hope that the leadership that they are showing encourages other foundations to consider similar programs. Aside from leveraging capital in a potentially more effective way for the funder, a well placed loan or loan guarantee often encourages an agency to operate in a more efficient and sustainable manner. Perhaps it is just human nature, but knowing that the money needs to be paid back is a powerful motivator..in this case, for good. Kudos.
JoAnne Berg, CPA
Partner and Board Member
San Diego Social Venture Partners
— JoAnne Berg Oct 1, 09:12 PM #
I salute the Gates Foundation for using endowment to advance their mission. As a member of an investing team at the Kellogg Foundation with a similar mandate, I look forward to identifying ways to collaborate and lessons to share.
— Tony Berkley Oct 2, 10:57 AM #
I also commend the Gates Foundation because those services can help new non-profit organizations like New Millenium love opportunity to achieve financial backing through banking institutions for future projects that requires loans
— Clyde Gravely Oct 6, 06:55 PM #
I am an american citizen from the great state of Alabama.
I have worked since the age of 5 years old;now 43.I look back and see the good I did.My ill parents now dead,youger sister,nephews,niece;;I believe money is a tool to share to hand over. I am just a person with no wealth no fame just a student of life. My understanding of the good Mr.Gates performs is noble beyound my reach…People can give no matter what status,color or religion:on limited time.
Keep up the noble efforts;;; Mr.Gates
— sharon ellis Oct 20, 11:59 AM #