Episode Transcript
Speaker 0 00:00:00 Our market landscape today is clearly unique on many fronts. One constant for many E S G investors is the search for new or different ways of integrating impact investing into their portfolios. Here with us to discuss one potentially unique option that is donor advised funds is Rick Davis, managing partner at lohas Advisors. Rick, thank you for joining us.
Speaker 1 00:00:25 Glad I could be here.
Speaker 0 00:00:26 Well, first of all, if you could just share with us what are donor-advised funds and how are they used for impact investing?
Speaker 1 00:00:34 Yeah. Donor-advised funds, or, or das as they're often called, uh, for sure to philanthropic and social impact investment tools that allow individual family and corporate donors to fund special accounts through what are called DAF sponsor organizations. Uh, donors receive immediate income tax deductions and maintain allocation privileges over the fund's distribution, um, and, and do part to their simplicity as a tax avoidance strategy. DAFs have exploded in use in recent years with well over a hundred billion in assets now in donor advised funds. Um, and for the purpose of, of our discussion, the interesting aspect, uh, to the impact investing world is that das are largely untapped sources for social impact investment, uh, and that's starting to change.
Speaker 0 00:01:28 So you mentioned them, you mentioned that they are tax avoidance strategies and, um, that term probably doesn't seem to be the most positive term to use, but it it definitely is what it is. Is that the key reason that a lot of, I suppose, high net worth individuals or institutions would invest in daf? Are there other qualities that are equally as high as that particular one?
Speaker 1 00:01:52 Yeah, no, there are, there are a variety of benefits of a, of a donor advised fund. Um, the, the tax avoidance aspect is, is sort of where it starts from an income perspective. Uh, as you look at different ways, you know, you make a charitable donation, you set up a donor fund, you set up a private foundation, each of those things has, uh, benefits, uh, to, you know, to the party, uh, setting 'em up, um, or to their advisor advising them to set it up. Um, the interesting aspects about some of those things, of course, are trying to get them directed in areas, uh, that are important to the donor. What we try to do is help, uh, help donors engage with the areas of interest to them leveraging the funds they've already set aside and donor advised funds.
Speaker 0 00:02:40 Okay, great. So in looking at the use case for institutional investors who might be leveraging donor advised funds for their portfolio in today's environment, how could these funds support investment objectives even during downturns in the market?
Speaker 1 00:02:57 Well, you know, the, the nice thing about donor-advised funds and, and it, you know, it even ties in a little bit to our, you know, current crises, um, is that, uh, not only are they untapped in large part, uh, and you know, as I've already mentioned, um, but they're an ideal of, uh, source of capital for investing in, you know, for example, healthcare ventures, uh, that, that might address some of the issues that we're currently facing or solutions that might, uh, you know, social solutions that might, uh, support those hardest hit, um, traditional portfolios, uh, as you've noted, may have been adversely impacted by, uh, recent stock market gyrations and making certain folks less likely to invest their capital in social or economic recovery until they know where the bottom is for their portfolios and the shell shock wears off. Um, but the DAF capital, remember, has already been donated.
Speaker 1 00:03:52 Uh, so these are risk free funds. These are funds that have already been set aside. Um, and to some extent, you know, we need them invested in, in invest, you know, in these kinds of, uh, societal need endeavors now more than ever. Um, so, you know, if, if, if there is an institution or individual investor who enjoyed a prosperous 2019 and, uh, you know, perhaps maybe they're taking advantage of the extended, uh, US income tax deadline, if they haven't already set up a daf, uh, they should be telling their tax or wealth advisor, uh, to make that part of their, uh, 2019 tax plan. Um, but if you already have a da, um, this is certainly the time to be considered deploying those funds, uh, in, in ventures that might be addressing, you know, virus outbreak issues, for example.
Speaker 0 00:04:39 So a very timely perspective considering those extensions are underway.
Speaker 1 00:04:43 Yeah, exactly. Yeah,
Speaker 0 00:04:44 Definitely. So let's talk a bit about data collection and reporting. Interested to see how reporting may play a role in direct investing into impact companies or funds.
Speaker 1 00:04:56 Well, it's, it's in short, it's critical. Um, I can probably give you a variety of examples, but, but I'll give you one. Um, we've done some work, uh, with a digital health and social impact fund called Digital DX Ventures. They're fantastic woman led, gender focused impact venture fund, uh, that zeroes in on companies leveraging AI and big data to develop solutions for early detection of big healthcare challenges, cancer, heart, kidney health, Alzheimer's, things like that. Um, but it's important to their socially minded investors, how the fund tracks its performance, um, both through the companies in which they invest and the actions of those companies. Um, and comparing those against the funds stated sustainable development goals, um, as you know, that that affects the desire of their investors to support the fund in the short term and in subsequent funds. Um, and, you know, so those are the kinds of things that, uh, we see all the time. And, uh, you know, notably digital dx uh, in the, in the light of sort of the broader das impact investment tools, uh, is a great example of the types of compelling social impact investments that can be made from a donor advised fund.
Speaker 0 00:06:12 Yeah, definitely. So in looking at this example, um, which can clearly be a use case for any point, whether the market is doing well or doing poorly, I wanna just take it back to looking at the pandemic, but looking a little beyond that, looking the 2021, for example, how can donor advised tools be used specifically, um, as a recovery acceleration tool? Do you see a use case for it for 2021 that maybe wouldn't have been the case? Say at, at where we are now?
Speaker 1 00:06:42 Uh, I, I do, you know, beyond the, the way I was just discussing in the sense of, of deploying those funds that, uh, that that, that, that are already set aside or that will be being set aside as it relates to, uh, you know, tax, uh, tax extensions, the, you know, there are a variety of ways that, um, you know, DA can be very powerful mechanisms for investing in, uh, for profit, social impact companies, funds, projects, things of that nature. Um, but, but it, but clearly not everyone has the time to dedicate to evaluating individual DA investments, uh, even if you're working in conjunction with our team. Um, but at the same time, there's significant interest in supporting virus prevention or recovery related ventures and solutions. Uh, so one thing we're doing is exploring, establishing a directed daft, um, which is a, in essence a repository held by the designated daft sponsor. So the nonprofit institution in which all funds are earmarked exclusively for a specific investment theme. In this case, it would be virus prevention, uh, such as healthcare innovations or, or virus recovery, uh, which could touch a wider sort of social or economic impact area. Um, and we're currently, uh, looking for and working with parties that might be anchor tenant investors, if you will, um, on this coronavirus directed da.
Speaker 0 00:08:07 And continuing along those lines with funds that are earmarked for those exclusive channels such as virus prevention, et cetera. Could you name possibly three things that you see in the future in terms of DAFs that might take the market by surprise? So a direction that you see DAFs perhaps going in the future are how you see it complimenting other areas that institutional investors are already focused on?
Speaker 1 00:08:29 Yeah. I'll, I'll, I'll give you, uh, well, one, I'll, I'll just start by saying, you know, healthcare is an obvious choice. Um, there are a variety of social impact, healthcare related, uh, solutions, funds, projects out there that I think will continue to be, uh, first of all, it's, it's probably the hottest investment area, um, around right now, but I think it'll be a heavily focused area, um, from, from donor advised funds. And so I think we'll continue to see that. Uh, I also think we will, uh, you know, begin to see more investment from corporations, um, leveraging their own donor advised funds. Uh, you know, they can provide a simple mechanism for the, for companies making strategic investments in mission aligned companies, uh, that, that compliment their own business model or further a stated impact goal. So if a corporation come out and say, we care about X, uh, you know, then using their donor funds to invest in for-profit ventures around that.
Speaker 1 00:09:29 Cause I think we'll see more of. Um, but one of the most compelling use cases we talk about in, in using, uh, da, uh, is using 'EM as instructional tools. And, and this is not one that, uh, a lot of folks think about, but, uh, give explanation. So to the risk free nature of DA investments, uh, remember the funds have already been given away. So the, the predetermined ROI for the donor is negative 100%, right? They're, they're not expecting to get anything back. It's been set aside. Um, but cause of that, uh, DAAs can serve as an ideal investment training ground for children and, and young adults. Um, not only are are children provided with the, the opportunity to invest in the socially and environmentally impactful areas that they're already, you know, most interested in, um, but also, you know, their parents and grandparents can establish legacy of giving cares about in at the instructive, in essential areas of traditional private investing. You know, performing due diligence, uh, structuring deals, evaluating returns, uh, in essence, das in this regard can serve as defacto impact venture capital funds with donors or their children or grandchildren serving as fund managers.
Speaker 0 00:10:45 Wow, that's great. So from the healthcare social impact use case to possible venture capital type use cases to using DAFs as an instructional tool for children around social impact, sounds like there's a lot more to come as we move into the next phase of this year and hopefully into recovery a lot more to come from DAFs.
Speaker 1 00:11:06 Absolutely. Absolutely. I think we're just at the early stages of this. Okay. And one thing to note, uh, is this isn't something that donor advised funds sponsors, uh, have been doing, uh, you know, for, for, for a while. This is a relatively, uh, new, new domain. Um, it's, uh, you know, most, uh, DA sponsors don't allow das to be used as for profit impact investment mechanisms. And those that do often offer sort of a limited selection investment options for donors. Um, but there are some DA sponsors who are showing greater flexibility and das can typically be transferred to other sponsors that better support donors impact investing goals. Um, and we work with our clients existing DAF sponsors to try and get them to enable the types of investing our clients would like. And if that's not going happen, we help clients transfer their DA to sponsors that, that offer that capability. Um, but do think we be seeing more and more, we're already seeing bunch and investing, uh, us
Speaker 0 00:12:12 Rick Davis, managing partner at lohas Advisors. Rick, thank you so much for joining us. We invite you to subscribe to the Refinitiv Sustainability Perspectives podcast on iTunes, Spotify, or wherever you stream your content. What did you think about the podcast? Leave us a review on iTunes or follow us on LinkedIn and Twitter for updates on our show. You can even check us out on YouTube now. Thank you for joining. See you next time.
