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LEGAL VANTAGE

Alternative forms of giving and investing

Venture philanthropy and impact investing are growing among private wealth owners, especially among the millennial generation

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VENTURE philanthropy is a term that has increasingly gained traction among private wealth owners in Asia as an alternative means of creating positive social and environmental impact. It is often mentioned alongside impact investing. Though there are nuanced differences between the two, the venture philanthropist and impact investor share a common desire to address social, ethical or environmental issues.

Venture philanthropy was initially a term coined by John D Rockefeller III in 1969. His idea of venture philanthropy referred to private foundations engaging in ''the imaginative pursuit of less conventional charitable purposes than those normally undertaken by established public charitable organisations''.

In the modern-day context, with the tremendous rise of private wealth in Asia, philanthropy is by no means the sole domain of public or government-backed institutions. Rather, the term venture philanthropy sits on a continuum of philanthropy: traditional philanthropy, through grant-making or donations to charitable beneficiaries, solely focuses on addressing social challenges with no expectation of financial returns. In contrast, venture philanthropy invests for social returns and some financial returns, with varying degrees of risk aversion/acceptance.

Impact investing refers to investments into ''companies, organisations, and funds with the intention to generate social and environmental impact alongside a range of financial return… depending on the investors' strategic goals''.

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Whereas traditional forms of investing are purely motivated by financial returns, impact investing is motivated - in varying degrees - by elements of personal ideals, values and passion. One view is that impact investing is a type of investment philosophy rather than a form of philanthropy.

Studies have shown that interest in venture philanthropy and/or impact investing is growing among private wealth owners, especially among the millennial generation (ie those born between 1982 and 2004).

A number of factors contribute to the growing interest, including exposure to ideals of social contribution and environmental sustainability, and having at their disposal, resources and opportunities as next-generation wealth owners and controllers. The establishment of family offices and a professionalised approach to the management of family wealth sow the seed for the ''imaginative pursuit'' of charitable causes that Rockefeller referred to.

Regardless of whether one views venture philanthropy and impact investing as the same or different, the fundamental raison d'être stems from the notion that philanthropists need to behave like disciplined investors in the allocation of their money to solve social and environmental issues.

When one embarks on venture philanthropy, there are a number of regulatory, legal and tax considerations to take into account which warrant a comprehensive paper on its own. For example, in many jurisdictions, charities or their variants are subject to some form of regulation. In Singapore, charities are regulated under the Charities Act (Chapter 37) which is wide enough to regulate ''an institution… which is established for charitable purposes''. Broadly, charitable purposes refer to four established classes:

(a) relief of poverty;

(b) the advancement of education;

(c) the advancement of religion; and

(d) any other purpose beneficial to community.

Commonly recognised purposes include the promotion of health, the advancement of arts, heritage or science, citizenship or community development, environmental protection or improvement, animal welfare, sports, and the relief of those in need by reason of youth, age, ill-health, financial hardship or other disadvantages.

These legally-established classes of charitable purposes overlap with common notions of social, ethical and environmental issues. The Office of the Commissioner of Charities requires that assets of a charity must be safeguarded rather than be subject to significant business risks, with the expectation that funds are to be invested prudently.

While a venture philanthropic fund need not necessarily be structured as a charity, thought and consideration should be put into understanding the regulatory regime and its implications.

As the value propositions - positive social and environmental impact - extend beyond established yardsticks of financial performance, venture philanthropy requires (i) alternative indicators of identifying or screening potential grantees/investees; (ii) self-awareness of the philanthropist's niches and establishing a clear mission; (iii) longer time horizon of impact realisation; and (iv) monitoring the effectiveness of the investee.

Venture philanthropists can take a leaf from the venture capitalist's book: a traditional grantmaker focuses on project-specific efficacy rather than building long-term sustainability and organisational strength of its grantee.

On the other hand, apart from money, venture capitalists also offer other forms of assistance, such as mentoring, commercial or professional expertise and industry connections, which build capacity in the investee. The traditional grantmaker that crosses over into venture philanthropy may thus need to reassess its own capacity, and even consider building a team of experienced staff who are familiar with organisation-building and strategy-development.

Different wealth owners or families with a common mission may want to collaborate, not just to pool their funds, but to also pool their know-how and resources, tap on each other's strengths and enhance their capacity. Depending on the specifics of the venture philanthropy fund structure, fund management regulatory and licensing considerations will also need to be taken into account.

In terms of taxes, a charity registered under the Charities Act is exempt from income tax in Singapore. Outside the realm of income tax exemption for charities, Singapore's robust and competitive tax regime and various funds-related incentives already provides opportunities for efficient structuring. Though tax efficiency is not the philanthropist's objective, it is still a cost consideration like in the running of any organisation, and legitimate tax savings translate into additional funds for the philanthropic mission.

Whether through venture philanthropy or impact investing, next-generation wealth owners are increasingly interested in shifting away from traditional forms of philanthropy to address issues they are passionate about in an impactful way. Equally, they will also need to equip themselves with the necessary tools and capacity to build a sustainable model to further their mission. W