Friday Letter Tread lightly

The charitable sector is rife with inefficiency and private equity’s disciplines have much to offer. But focus and sensitivity are the watchwords.  

At the Cass Business School in London this week, Sir Ronald Cohen outlined his vision for a more caring, philanthropic capitalism. He envisaged a transformation as radical as the one that, over the past 30 years, allowed the UK economy to shed its reputation as the “sick man” of Europe to become a vibrant centre of new entrepreneurial spirit.

When Apax Partners, the firm he founded, raised its first institutional fund in 1981, Cohen said venture capital was so badly understood, a friend’s son thought Cohen was an “adventure copulist”. A mistake any child could still make today, but it is hard to imagine the teacher not knowing what the child meant, given the industry’s current profile.

Venture philanthropy, however, would still baffle many, although its roots are as old as capitalism itself. America has a long-standing tradition of the wealthy giving away their fortunes, and US venture capitalists have long been part of it.

In Europe, however, the philanthropic instinct was weakened by the emergence of the welfare state and the high tax burdens it entails, according to Professor Paul Palmer, who shared Cohen’s stage at Cass. (The school is itself funded by a charitable trust established by a wealthy London merchant.)

Cohen, since retiring from Apax, is devoting some of his time to helping evangelise the creed of giving. Or as he terms it: doing something “socially useful”. He started Apax in part to back companies to create jobs. Now he chairs Bridges Ventures, a socially-minded investor that backs businesses in the most economically deprived areas of the UK.

He is also banging the drum for private equity to become more involved in the charitable sector and to introduce more of the value-added management skills into the voluntary sector. Firms like Permira, TowerBrook Capital Partners and others all have charitable foundations. And umbrella organisations for the industry’s giving such as the European Venture Philanthropy Association and the Private Equity Foundation could also make a powerful contribution.

But, as The Economist highlights in an article on corporate social responsibility (CSR) this week, Cohen’s mission is fraught with obstacles. First up, the CSR label is not well liked. Secondly, it is such a fuzzy catch-all it can lead to a lack of focus. Finally, with commitments to corporate do-gooding booming there is no evidence that all of it is doing good.

These challenges are surmountable within a private equity context. For instance: The Impetus Trust, which takes a private equity-like approach to charities to help them maximise the return on time volunteered and capital invested, shows what venture philanthropy can achieve when it has focus and determination.

But perhaps while introducing market solutions to charities and discipline to philanthropy, the private equity industry should not forget that at the heart of many charities are people devoting their lives for altruistic reasons. Note to venture capitalists with a hardnosed business approach: tread lightly for you are treading on dreams.

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