All in a good cause

Deep Pockets

The venture philanthropy model originated in the US, which is a long way ahead of Britain when it comes to charitable giving, despite our attractive tax breaks (see table below).

US charitable giving accounts for 2.2 per cent of the gross domestic product (GDP), double the UK figure of 1.1 per cent of GDP. Meanwhile, the wealthiest 10 per cent of US citizens give half of all American charitable donations, compared with a stingy 21 per cent from the richest decile in Britain.

This may be because the US has a more sophisticated charitable sector, where investors put time as well as money into the causes they back to make sure that their donations are used efficiently. In Britain, charity can still be seen as a burden, a tax on guilt, with little to show for it.

Look at the high profile donors in the US: Bill Gates has reportedly donated at least $29bn (£14bn) over the years and Warren Buffett handed over $37bn of his fortune in 2006. These are shrewd figures, who use charitable foundations to make sure that their gifts are spent wisely.

In Britain, the two most high profile philanthropists at the start of the decade were musicians, not businessmen, and, significantly, they were already actively involved in the causes they supported.

Rock band Coldplay returned to the traditional notion of tithing by pledging 10 per cent of their earnings to charity, raising an estimated £500,000 in 2002. Coldplay was already actively promoting charitable causes, including Oxfam's Make Trade Fair campaign. Meanwhile, David Gilmour, of Pink Floyd, donated the £3.6m profits from selling his London home in 2003 to Shelter, the homelessness charity of which he was vice-president.

Virgin boss Richard Branson, also from a rock background, followed suit in 2006 by pledging $3bn to develop renewable energies. He is also involved in seeing how the money is spent, although this has attracted some cynicism, as the Virgin Fuels unit could be seen as no more than a research & development arm of his own company.

Nevertheless, involvement is the key and this helps to explain why venture philanthropy is starting to take off in Britain, taking a lead from America. Today's high-net-worth philanthropists think like investors, wanting to know that their money is being spent wisely and seeking to add value to their donations through active management.

Good Governance

What distinguishes venture philanthropy from traditional charitable donations is that donors can be actively involved with charities. Instead of posting off a cheque and hoping for the best, venture philanthropists want to see their charities perform well, running along the same lines as successful businesses.

This approach is good for charities, as well as simply reassuring donors. Lord Victor Adebowale, chief executive of social care charity Turning Point, explains: "The best way to keep an organisation's values right at the heart of decision making is to be professional and to ensure resolute governance arrangements which will prevent losing sight of the mission."

He continues: "Social enterprise - the combination of business sense with social values - is a pragmatic approach which enables us to deliver services to those who need them. It allows us to do so more effectively than if I were scrabbling around for short-term funding and piecemeal donations."

Channel Four News presenter Jon Snow, who is chairman of the New Youth Horizon Centre, adds: "The funder derives a sense of accountability and can see how their money is working. The recipient enjoys the benefit of the discipline of both reviewing the project and explaining it to an outsider."

He notes: "I feel strongly that projects which fail to keep their funders updated should never have funding renewed. An inability to abide by a disciplined feedback process is a sure-fire indication that a project is poorly managed."

Private Equity Techniques

Venture philanthropy is driven by techniques developed in the private equity industry and many of its activists have their origins in the world of venture capital. This has led to a focus on targets and reporting, as well as hands-on involvement to add value.

Earlier this year, over 70 private equity players, from big names such as Blackstone and KKR, teamed up to form the Private Equity Foundation. Of course, some cynics argue that this was designed to deflect attention from growing criticism of the private equity industry's approach to investee companies' employees and the low rates of tax paid by fund managers. Indeed, the $9.8m (£4.8m) raised looks small compared with private equity companies' profits, but it is a start.

One of the organisations funded by the Private Equity Foundation is Impetus Trust, whose chief executive, Daniela Barone Soames, is a former private equity investor with BancBostonCapital. Ms Barone Soames says Impetus provides "a low risk, high return model to donors and co-investors - rigorous due diligence, monitoring and evaluation translates into quality assurance and risk mitigation".

She points out: "We offer the opportunity for individuals and organisations to add value by channeling their professional skills for good. This is personally motivating, increases employee retention, helps recruitment and expands diversity."

So far, the results are impressive. The six charities which have been in Impetus's portfolio for over a year have, on average, increased their income by 20 per cent a year and increased the number of people they help by over 50 per cent a year. Every £1 invested has been boosted by £2.50 of co-investment and £3 in value from pro bono work by expert volunteers.

One of Impetus's partners is private equity firm ISIS Equity Partners, which is providing both investment and volunteers. Adam Holloway, a partner at ISIS, comments: "Not only is the Impetus model of funding charities very similar to the one we use in private equity, we are looking forward to helping Impetus improve lives and give something back. By engaging with the charities that Impetus backs, we will provide support to them and increase their social return."

As well as adding value through hands-on involvement from corporate and individual donors, Impetus is like a private equity investor in that it targets relatively small charities (with turnover between £250,000 and £10m) and seeks to back strong management teams in order to generate strong growth, typically following a three-to-five-year plan. The nine charities which Impetus has backed so far range from UK eating disorders charity beat, to third-world development charity, Fairtrade.

A focus on small charities is one way venture philanthropy can add value, as most public giving is focused on well-known charities. Although there are more than 160,000 charities in the UK, 18 charities enjoy an eighth of the entire sector's total income, while 87 per cent of charities have incomes below £100,000 but must share just seven per cent of the overall giving.

Charity donation sources

Most popular causes

How To Get Involved

As well as volunteers from corporate donors, venture philanthropists include the likes of retired entrepreneurs, inheritors and wealthy investors.

If you are keen to become a venture philanthropist, you could take The Philanthropy Workshop, a globe-trotting one-year course organised by the Institute of Philanthropy (www.instituteforphilanthropy.org.uk). Its chairman, Nick Ferguson, is also the chairman of private equity investment trust SVG Capital.

Alternatively, you could use a body such as New Philanthropy Capital (www.philanthropycapital.org), which researches charities and helps donors build up appropriate portfolios for donation and hands-on involvement. New Philanthropy Capital charges donors, typically working for £600-800 a day.

Philanthropy UK has a wide range of resources available at its website, www.philanthropyuk.org, including The Philanthropy Directory, a database of organisations in the sector. You can download the free handbook - A Guide To Giving - from the site.

The Charities Aid Foundation (CAF) allows you to set up a simple trust fund for donating to charities for a minimum donation of £10,000 - see www.cafonline.org. Before you deploy the assets in your trust to individual charities, the money can be invested in a range of four charity investment funds or held in cash.

Trusts over £2m can be run in individual-managed portfolios. The minimum charge is £100, with a one per cent charge for trusts worth £10,000 to £50,000, falling to 0.25 per cent for values over £500,000.

The CAF will give advice on which charities you could invest in. Alternatively, you could make a donation to the CAF's venture philanthropy fund, Venturesome, which backs small to medium-sized charities.

Instead of donating, you could lend to charities through the CAF's Charity Bank (www.charitybank.org), earning between 0 and 2 per cent gross annual interest. Meanwhile, you could also lend to charities through social bank Triodos (www.triodos.co.uk).

Tax Breaks

Charitable donations from income are tax-free (under Give As You Earn). Other donations receive basic rate 22 per cent tax rebates (under Gift Aid) and higher-rate taxpayers can reclaim the extra 18 per cent through their tax-return forms (and then pass that on too, if you wish).

Gifts of assets, such as shares, art or land, avoid capital gains tax and you can reduce your taxable income by the value of a gift. To donate shares free from dealing charges, visit www.sharegift.org.

If you leave a legacy to charity in your will, it will avoid inheritance tax (IHT) so you could create a will to give to charity any of your estate above the nil-rate band (currently £300,000, doubled for spouses or civil partners).

Excess funds from an Alternatively Secured Pension (ASP - income drawdown post-75) would normally suffer IHT and a 70 per cent tax charge on death, creating a top rate of 82 per cent. However, you can leave any ASP surplus, on death, to charity free from tax.

See www.cafonline.org for more on tax rules.