Keesa Schreane [00:00:00] Our market landscape today is clearly unique on many fronts. One constant for many ESG investors is the search for new or different ways of integrating impact investing into their portfolios. Here with us to discuss why the potentially unique option that is donor advised funds (DAF) is Rick Davis, managing partner at LOHAS Advisors. Rick, thank you for joining us.
Keesa Schreane [00:00:24] Well, first of all, just share with us what are donor advised funds and how are they used for impact investing?
Rick Davis [00:00:34] You know, donor advised funds or DAFs, as they're often called philanthropic and social impact investment tools that allow individual, family, and corporate donors to fund special accounts through what is called DAFs sponsor organizations. Donors receive immediate income tax deductions and maintain allocation privileges over the funds distribution; and due, in part, to their simplicity as a tax avoidance strategy, DAFs have exploded in use in recent years with well over a hundred billion dollars in assets now in donor advised funds. And for the purposes of our discussion, the interesting aspect to the impact investing world is that DAFs are largely untapped sources for social impact investment and that's starting to change.
Keesa Schreane [00:01:28] So you mentioned that there are tax avoidance strategies and that term probably doesn't seem to be that most positive term to use, but 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 the DAFs? Are there other qualities that are equally as high as that particular one?
Rick Davis [00:01:53] Yeah. No, there are a variety of benefits of a donor advised fund. The tax avoidance aspect is sort of where it starts from an income perspective, as you look at different ways, you know, or you make a charitable donation and you set up a donor base fund instead of a private foundation. Each of those things has benefits to, you know, to the party setting them up or to their advisor, advising them to set it up.
Rick Davis [00:02:21] The interesting aspects about some of those things, of course, are trying to get them directed in areas that are important to the donor. What we try to do is help, help donors engage with areas of interest to them, leveraging the funds they've already set aside in donor advised bonds.
Keesa Schreane [00:02:40] OK, great. So and looking at the use case for institutional investors who might be leveraging donor advice funds for their portfolio in today's environment, how could these funds support investment objectives even during downturns in the market?
Rick Davis [00:02:57] Well, you know, the nice thing about donor advised funds, and it even ties in a little bit to our current crises, is that not only are they untapped in large part, you know, as I've already mentioned, but they are an ideal source of capital for investing in, you know, for example, health care ventures that might address some of the issues that we're currently facing, or solutions that might, you know, social solutions that might support those hardest hit. Traditional portfolios, as you've noted, may have been adversely impacted by 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. But the DAF capital, remember, has already been donated. So these are risk free funds. These are funds that have already been set aside. And to some extent, you know, we need them invested in these kinds of societal need endeavors now more than ever. So, you know, if there is an institution or individual investor who enjoyed a prosperous twenty nineteen and, you know, perhaps they're taking advantage of the extended U.S. income tax deadline, if they haven't already set up a DAF, they should be telling their tax or wealth adviser to make that part of their 2020 tax plan. If they don't know how to do that, they can contact LOHAS advisers. But if you already have a DAF, this is certainly the time to be considering deploying those funds in ventures that might be addressing a virus outbreak issues, for example.
Keesa Schreane [00:04:42] So a very timely perspective considering those extensions are underway. So let's talk a bit about data collection and reporting. Interested to see how reporting may play a role in direct investing and to impact companies or funds?
Rick Davis [00:04:59] Well, in short, it's critical. I can probably give you a variety of examples, but I'll give you one. We've done some work with a digital health and social impact fund called DIGITALDX ventures. They are a fantastic woman-led, gender-focused impact venture fund that zeroes in on companies leveraging A.I. and big data to develop solutions for early detection of big health care challenges like cancer, heart, kidney Alzheimer's. Things like that. But it's important to their socially-minded investors how the fund tracks its performance, both through the companies in which they invest and the actions of those companies, and comparing those against the funds stated sustainable development goals. As you know, that data affects the desire of their investors to support the fund in the short term and in subsequent funds. And so those are the kinds of things that we see all the time. And, you know, notably DIGITALDX, in the light of sort of the broader DAFs impact investment tools, is a great example of the types of compelling social impact investments that can be made from a donor advised fund.
Keesa Schreane [00:06:16] Yeah, definitely. So and looking at this example, which can clearly be a use case for any point, whether the market is doing well or doing poorly. I want to just take it back to looking at the pandemic, but looking a little beyond that, looking at 2021, for example, how can donor advised tools be used specifically as a recovery acceleration tool? Do you see a use case for it for 2021? That maybe wouldn't have been the case, say where we are now.
Rick Davis [00:06:45] I do, you know, beyond the way I was just discussing in the sense of deploying those funds that are already set aside or that we'll be being set aside as it relates to 2019 tax extensions. There are a variety of ways that DAFs can be very powerful mechanisms for investing in for-profit social impact companies, fund projects, things of that nature.
Rick Davis [00:07:16] But clearly not everyone has the time to dedicate to evaluating individual DAF investments, even if you're working in conjunction with our team. But at the same time, there's significant interest in supporting virus prevention or recovery related ventures and solutions. So one thing we're doing is exploring establishing a directed DAF, which is, in essence, a repository held by the designated DAFs 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, such as health care innovations, or virus recovery, which could touch a wider social or economic impact area. And we're currently looking for and working with parties that might be anchor tenant investors, if you will, on this Coronavirus directed DAFs
Keesa Schreane [00:08:33] And to continue 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 that's perhaps going in the future, or how you see it complementing other areas that institutional investors are already focused on.
Rick Davis [00:08:55] Yeah, I'll give you a one, I'll just start by saying, you know, health care is an obvious choice. There is a variety of social impact, health care related solutions, funds, projects out there that I think will continue to be. First of all, it's probably the hottest investment area around right now. But I think it will be a heavily focused area from donor advised funds. And so I think we'll continue to see that. I also think we will begin to see more investment from corporations leveraging their own donor advised funds. They can provide a simple mechanism for companies making strategic investments in mission align, companies that complement their own business model or further a stated impact goals. Also, if corporations come out and say we care about X, then using their donor advised funds to invest in for-profit ventures around that cause, I think we'll see more of.
Rick Davis [00:09:58] But one of the most compelling use cases we talk about in using DAFs is using them as instructional tools. And this is not one that a lot of folks think about, but I'll be giving explanations. So due to the risk-free nature of the DAF investments. Remember the funds I've already been given away so that the predetermined ROI for the donor is negative 100% percent right there. They're not expecting to get anything back.
Rick Davis [00:10:25] It's been set aside. But because of that, DAFs can serve as an ideal investment training ground for children and young adults. Not only are our children are provided with the opportunity to invest in a socially and environmentally impactful areas that they're already most interested in, but also that their parents and grandparents can establish a legacy of giving to causes the family cares about in a way that at the same time instructive and essential areas of traditional private investing, performing due diligence, structuring deals, evaluating returns. In essence, DAFs in this guard can serve as de facto impact venture capital funds with donors or their children or grandchildren serving as fund managers. So perhaps in partnership with Low Orser or someone like Boss while this great.
Keesa Schreane [00:11:16] So from the health care, 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.
Rick Davis [00:11:35] That's absolutely, absolutely. I think we're just at the early stages of this. And one thing to note is this isn't something that donor advised fund sponsors have been doing for a while. This is a relatively new, new domain. Most DAF sponsors don't allow DAFs to be used as for-profit impact investing mechanisms and those that do often offer sort of a limited selection investment options for donors. But there are some DAF sponsors who are showing greater flexibility and DAFs can typically be transferred to other sponsors that better support donors impact investing goals. And we work with our clients - existing DAFs sponsors to try and get them to enable the types of investing our clients would like and if that's not going to happen, we help clients transfer their deaths to sponsors that offer that capability. But I do think we will be seeing more and more - we're already seeing a bunch of it - but we will begin to see more and more of this kind of investing out of DAFs.
Keesa Schreane [00:12:42] Rick Davis, managing partner at LOHAS Advisors. Rick, thank you so much for joining us.
