#BigIdeas2022: Using Donor Advised Funds (DAFs) To Restructure the Flow of Capital to Diverse Communities

What if there was a way for the wealthy to use an existing tax loophole to invest in diverse emerging asset managers committed to supporting companies led by diverse teams?? Well, there may be a way: Donor Advised Funds (DAF) – a charitable investment account – can provide an easy and quick way to move capital to diverse asset managers.?

DAFs, in short, allow a high net worth individual or entity to contribute funds or non- cash assets to be liquidated for a charitable vehicle and to take the itemized tax deduction upfront as opposed to when a donation is actually distributed. The DAF is hosted by a charitable financial intermediary, otherwise known as a sponsor, that manages the donated funds, selects investments, and often charges a hefty management fee. The donor can recommend investments to the sponsor, but since DAFs are more tax-saving instruments than truly charitable vehicles, the sponsor often has a great deal of latitude in when the funds are dispersed.??

To date, there are over 728,000 individual DAFs across the U.S., with assets totaling more than $121 billion, according to The National Philanthropic Trust. DAFs aren’t new – in fact, America’s elite have used DAFs to claim tax deductions on donations for decades.? The first DAF was created in the 1930s by New York Community Trust –? following a wave of regulation in 2006, the funds have been increasingly leveraged as a way for high net worth individuals to reduce their taxable income. That said, the idea of using them to increase the flow of capital in diverse communities is relatively new and hasn’t been practiced at scale.?

Today, the idea is being implemented by a few DAFs, notably:?

Olamina Fund: which is a $40MM fund that invests in financial institutions led by BIPOC and women founders. The DAF was created by the DAFs of two of the clients of the wealth advisor group, Candide. Additional investment strategy and fund management is provided by an advisory board consisting of BIPOC women.?

Kataly Foundation: Regan Pritzers, co-founder of the Kataly Foundation, created a $50 million dollar environmental justice DAF with a strategy developed by a collective of BIPOC women leaders. The fund, which is sponsored by Impact Assets, is “led by and for the communities most impacted by environmental racism and unjust economic, social, and political systems.”?

At Genius Guild –? the venture capital fund and studio that I founded and lead – my team and I spend a great deal of time rethinking how capital flows into, and out of diverse, communities. As a Black woman General Partner of a $20MM venture fund, I was struck by the structural challenges that exist in moving capital to emerging managers, even though research suggests? that emerging managers outperform older, more established firms. When you add in layers of diversity, these structural challenges become even more stark.?

When I was first introduced to the concept of DAFs during my Aspen Financial Leaders Fellowship, I was intrigued. Could this tax loophole created to shelter wealth be repurposed to invest in, rather than extract from, diverse communities? Since a DAF is technically a charitable vehicle, meaning donors can’t receive any profit/returns received from investments, could this be a way to create Evergreen funds willing to invest in diverse emerging managers and markets??

Enter my #BigIdeas2022: a $100MM DAF that invests in women emerging managers who are building market- based venture funds. The purpose of the fund would be to fully capitalize, a.k.a. close, the funds of these emerging managers so they can focus on investing in diverse high growth companies, as well as to position these managers to generate the data and experience needed to raise a larger second fund from institutional limited partners (LPs). Carry received by the fund would be reinvested in another set of women emerging managers, creating a self-sustaining Evergreen fund that significantly increases the flow of capital to diverse businesses.

Interested in my #BigIdeas2022? Comment below!