Friday Letter: Golden Age

And they have made a lot of it for the partners in the firms, their advisors and investors. But if it is a golden age for making money, it is also a golden age for giving it away, arguably the trickier of the two tasks.

Bill Gates and Warren Buffett, the world’s two richest men, have blazed a trail with their $60 billion-plus contribution to the Gates Foundation, the software entrepreneur’s legacy dedicated to eradicating disease and poverty in developing countries.

The two billionaires were celebrated for their fresh approach to philanthropy, which concentrates on giving efficiently. In “outsourcing his philanthropy”, as he put it, Buffett looked for competent managers, found Mr and Mrs Gates and backed them with his money. For it is no longer enough to give. You have to give effectively.

In Europe, the launch this week of the Private Equity Foundation, which has raised £5.1 million from European private equity firms in order to “apply private equity to charity”, also captured the spirit of the age.

What the European buyout industry hopes to provide their designated charities is what it wants from its limited partners: smart money. Cynics might contend that in reality both GPs and charities actually prefer the money to be dumb (and deaf and blind), giving them the latitude to do whatever they want with it.

However, it is difficult to fault the foundation’s intentions and rigour. It has screened the market, worked through long and short lists with a new breed of advisors, dedicated to the charitable sector, and selected its charities.

It has pegged its giving to specific, concrete goals and linked the payments to annual reviews of the charity’s achievement of those goals over three years of funding. The 70 supporting private equity firms should be clear where their money has gone and whether it has been well spent. So far so private equity.

It has been suggested the Foundation is essentially a window-dressing exercise aimed at distracting private equity’s detractors from the grubby business of buyouts. We think that’s unfair, even though some of its backers may primarily be driven by a hope for good PR to come out of the project.

There is of course a selfish satisfaction at the heart of all altruism. Recent research from the National Institute of Neurological Disorders and Stroke in the US found that the part of the brain that is active when we make a donation happens to be the brain’s reward centre, the mesolimbic pathway responsible for doling out the dopamine-mediated euphoria also associated with sex, money, food and drugs.

Thus giving is deeply satisfying, which is why many people devote time and energy for little fiscal reward while working for charities. Charity workers are highly motivated individuals who are not in it for the money, a notion which may prove difficult for the industry to understand. That is why, for the financial masters of the universe, the Private Equity Foundation may prove a humbling experience in more ways than one.