Hedge-Fund Philanthropy Comes With Strings

"There is change in the field," says Peter Frumkin, director of the RGK Center for Philanthropy and Community Service at the University of Texas at Austin. "What we've seen in the last 10 years has been high-visibility, high-net-worth individuals playing a much more active role in philanthropy."

Among the new breed of donors are the big investors (Warren Buffett) and corporate executives (Bill Gates) who've grown rich thanks to the stock-market boom, bust and subsequent re-boom of the last decade. Recently, hedge-fund managers have taken a more prominent role in the mix. In 2005, the 25 biggest family foundations created by hedge-fund managers were worth $1.6 billion, compared with $360 million in 2003, according to Absolute Return, a magazine that covers the hedge-fund industry. The flood of hard-driven, hyper-aggressive type-A givers has led to a different way of thinking about how donated dollars are used that Frumkin terms venture philanthropy.

"Venture philanthropy is an attempt to bring the principles of venture capitalism — active engagement in the organizations and heavy involvement in operations — to philanthropy," says Frumkin, author of "Strategic Giving: The Art and Science of Philanthropy." "They're applying the models they're comfortable with from the for-profit world and using them in the context of the nonprofit world."

The problem with venture philanthropy, of course, is figuring out just how to measure returns on charitable investments. Nonprofits operate on a different plane and their directors aren't as attuned to the rigorous number-crunching of the hedge-fund world. Besides, accurately measuring the value of an inner-city after-school program isn't the same as comparing a portfolio's returns against the S&P 500 index. We asked Frumkin how he thinks this dichotomy will pan out if hedge-fund managers and the like continue to play an increasingly prominent role in philanthropy.

SmartMoney.com: Why does it seem private philanthropy is getting more media attention these days? Does it have anything to do with Bill Gates and Warren Buffett giving billions away to fight malaria and other diseases?

Peter Frumkin: Well, first a little background. I have a chart I use when I give talks that shows one line as the government's total nondefense discretionary spending and the total spent on philanthropy in the U.S. If you look at the lines, it was a 6-1 ratio [in the early 1960s]. Today the ratio has narrowed to 2-1. It's only a matter of time when the two lines are going to cross. Philanthropy has become a more important source of capital for social innovation and problem solving than the government. You have so much of the budget for all these other things. The amount of money left over for new programs is modest. Philanthropy is going to become an increasingly critical locus of problem solving. It's going to be a massive shock; private philanthropy, private foundations are going to usurp the federal government in terms of total resources available. It's going to be a different world 20 to 30 years from now when philanthropy starts to outstrip the government.

SM: What's going on in field now? How are the newly wealthy impacting philanthropy?

PF: There is change in the field. What we've seen in the last 10 years has been high-visibility, high-net-worth individuals playing a much more active role in philanthropy. Venture philanthropy is an attempt to bring the principles of venture capitalism — active engagement in the organizations and heavy involvement in operations — to philanthropy. They're applying the models they're comfortable with from the for-profit world and using them in the context of the nonprofit world.