From Private Equity to Collaborative Philanthropy: Addressing the Giving Pledge Bottleneck

Graduating from high school in 1992 meant that I was going into college in the early hype of private equity. I read Barbarians At The Gates: The Fall of RJR Nabisco (Brian Burrough, 1989) my senior year of high school after hearing from my father what a leverage buyout was, as he was running Central America for Nabisco at the time. The book was thick and full or words I didn’t understand.

Not long after, during my junior year at Georgetown University, I spent one semester in Rio de Janeiro. A couple days into my studies there, a friend said to me that his father was starting a venture capital firm and needed help from someone who could write in English. I ended up interning with International Venture Partners, an early player in private equity in Brazil. My job was to draft their prospectus.

I was already starting to volunteer with nonprofits, but I used that work to market myself on my resume, as much as I was doing it to help. Let’s say I wasn’t doing too much to help others if it didn’t look good on my future bio. The summer after my senior year in college I did end up helping Operation Smile open a presence in Brazil and later joined their first mission in 1998. It was great to help one of the founders, Kathy Magee, who was just off a long mission in Asia, operating on cleft lips and cleft palates for hundreds of children who otherwise would had a life of neglect beyond belief.

It was here that I saw the incredible dedication of nonprofit leaders, working themselves into great exhaustion, to move their mission forward. Kathy and a colleague had several meetings with large corporations in Brazil and with several government officials. After hearing the pitch a couple of times, I started giving it to help them through their exhaustion.

Kathy is hard charging, sweet, bright, patient and able to deliver the heart of their missions. Crying is common around those listening to the transformative stories of Operation Smile. This is what makes a good nonprofit great. Leadership which is very entrepreneurial, clearing any hurdle that arises. I’ve seen other nonprofit leaders that have similar traits which they use to move mountains through the sheer will to do more good.   

At the outset of my career I did believe that I would help nonprofits in the future, when I had arrived as a partner of a large private equity firm, had several homes, a plane and a travelling polo team. The truth is that on the way towards that goal I didn’t help that many people. As a result, I was robbing myself of esteemable acts that would give me higher self-esteem and fulfillment.

By the time I was back in Washington, D.C. (after further year-abroad stops in Paris and Hong Kong), I was sure I wanted to be a private equity investor. One of my professors, who was also a partner of the firm in Rio, pointed me to investment banking and I joined J.P. Morgan in New York after graduating. I still was not helping much. In contrast to this, a friend who was also at J.P. Morgan, told me years later that while we were in New York working, he volunteered one evening a week at a homeless soup kitchen, anonymously, for a year.

Entering Private Equity

Within a year, I was hired by the first international private equity firm, Advent International, to help them open their office in Brazil. This was a tremendously fun experience as my job consisted of generating deal flow from Brazilian families. I visited all kinds of businesses every week and we ended up investing in two deals while I was there. It was here that my investment banking education met the real comprehensive work of quickly evaluating management teams and businesses to see if we should pursue investments. All aspects of the companies where explored deeply and quickly and it was a great experience. Focusing on future growth was key at that time as we couldn’t leverage our investments at a reasonable interest rate in Brazil. Financial analysis and projections to evaluate growth were a key part of our work as well as modelling out different scenarios.

Entering Nonprofits and Growing the Pie

About 10 years later, in 2009, I entered the nonprofit world after having been out of private equity for a few years. I wrote grants and helped on the capital campaign for The Center for Creative Education, an arts-focused early learning organization, in West Palm Beach, Florida. Then I joined The Lord’s Place, a local organization working to fight homelessness where I set up a major gifts and planned giving program and managed the development of a new housing project for single homeless women. Both of these organizations had very hard working and hard charging CEOs that never gave up on moving their organization forward. Both were also very collegial places full of inspiring stories of their success with individual clients.

While raising money for the homeless, I have come to see how solutions exist. Real solutions to end homelessness within a complex sector. Given my background of focusing on significantly growing companies, I realized at the time that the biggest impediment is capital. I had endless meetings with all the homeless providers, all doing great work, where the theme was better cooperation. The belief was that if only we cooperated more effectively, the problems would be solved. The issue was not this. The issue is the pie was fixed. Unless taxes were raised significantly, there was no clear path to increase the pie. They were very aware of this, and this made for much frustration, for people who thrived on the passion of reducing suffering, the end of suffering was nowhere in sight.

Hope Beyond Taxes: Enter the Giving Pledge

Taxes were the only way to significantly increase funding as the new funds for all the homeless providers from traditional donors were limited. Building the fundraising machines in their development offices, if they had one, was elusive. Much of our budget was already allocated to urgent items, like keeping the lights on. The constraints of this approach, were clear in terms of limiting the growth of solutions, being able to make ends meet working for a nonprofit, let alone being able to retire. Some of these challenges where very well explained by Dan Pallotta in his Ted Talk in 2013, now viewed almost 5 million times. https://www.ted.com/talks/dan_pallotta_the_way_we_think_about_charity_is_dead_wrong?language=en Running nonprofits on a shoe string, and punishing them from investing in growth results in little growth and little system-wide impact. There are many individual lives changed but a solution for the entire problem is not there. Not until now.

Yet later I saw that there is a more important issue than the lack of capital. It is the lack of planning. I found that if finding the funds to invest in fundraising (staff, systems, marketing, social media, PR, training, etc.) was hard to do, investing in planning was almost impossible. This is for me the largest limiting factor of nonprofits today. And it is the largest limiting factor for high nominal, large-scale impact.

When I started following The Giving Pledge in 2010, I asked myself a simple question: how is all this capital going to be invested in nonprofits that don’t have any detailed long-term plans? Soon thereafter I learned about Social Impact Bonds (SIB), and I realized they might be adapted to ensure sustainability, as very large philanthropy was deployed. The reason this was important was that very large philanthropy needed an exit, and to expect the development office of a nonprofit to fill the void may not be realistic. So I thought up Philanthropic SIBs where SIBs would be funded by philanthropy, instead of with investor money that expected a return. Thus payments from the governments for successful interventions would accrue to the nonprofit and not investors.

Armed with these two concepts, very large philanthropy, and sustainability revenues (now in the form or performance contracts), the notion of scaling solutions to homelessness seemed very real and compelling. Yet I very quickly got into the semantics gap (see The Semantics Gap in https://www.dhirubhai.net/pulse/transformative-gifts-why-you-asking-sean-davis/) and had trouble finding individuals that could see what I was seeing. It seemed obvious to me but then again I had a different background than most of the people working on these issues who were from nonprofits, foundations, and wealth management. 

So I went from the private equity world to the nonprofit world and now my private equity world has come back to me through the need for The Giving Pledge funds, and similar ones, to be deployed with long-term planning, to attain large impact. Blue Meridian Partners and Co-Impact are trailblazing this. At Merton Capital Partners (www.mertoncp.com) we have developed several large scale growth plans for nonprofits and we’re looking forward to seeing significant growth in collaborative philanthropy which we see as the active management of large philanthropy.