The Rise of DAFs: Three Reasons Why We Invested in CapShift and ImpactAssets

December 19, 2018

As the fastest growing charitable vehicle, Donor-Advised Funds (DAFs) have received a lot of buzz in the impact investing world this year. “Is Impact Investing the Next Big Thing for Donor-Advised Funds?”  asks Nicholas Salter in Inside Philanthropy. “There’s a vast missed opportunity to use DAFs for making impact investments,” argue Ryan MacPhearson, Sarah Kearney, and Emma Kulow in the Stanford Social Innovation Review.  And, with donor-advised funds under the spotlight, now is the time – urge Liesel Pritzker Simmons and Ron Cordes – for donor-advised funds to both align invested assets with their values (step two) and to serve as much-needed patient capital once deployed (step three).

At Omidyar Network, we see three reasons to believe in the potential of DAFs to drive significant social and environmental impact:

1. The DAF market represents a significant and fast-growing pool of capital. In fact, the National Philanthropic Trust recently confirmed that in 2017, philanthropic assets in DAFs officially crossed the $100B mark to hit $110B, representing a 27% growth over 2016¹ and a size roughly half that of all impact assets captured in the 2018 GIIN Annual Impact Survey, $228B. Today, the vast majority of DAF assets sit for extended periods in traditional mutual funds – a major opportunity waiting to be tapped. 

2. As an on-ramp for families interested in impact investing, DAFs could further accelerate the growth of the impact investing market. Many high-net-worth (HNW) families are excited to allocate capital to impact investments but find it difficult to take the first steps. For families not yet ready to build a dedicated impact investing team, DAFs offer a sandbox to experiment with actual deals without needing to build the capacity to fully source, diligence, and execute transactions.  And, for many, there is no better place to start than with dollars already set aside to have a positive impact.  By making it simple for families to dip their toes into impact investing, DAFs could help unlock even more impact capital currently waiting on the sidelines.

3. DAFs can also serve as a source of all-too-scarce catalytic capital – also known as flexible, patient, or sub-commercial capital.  As we share in Beyond Trade-offs, a new series on The Economist’s digital platform, impact investing offers numerous opportunities for investors with different impact and financial goals. Broadly speaking, the supply of market-rate seeking, commercial capital far outpaces the supply of more risk-tolerant, subcommercial capital and grants. Yet the latter two types of capital are crucial to generating types of impact that are not always achievable alongside commercial returns – such as bearing the risks of early-stage innovation, seeding new sectors, and fueling impact in the toughest market segments. As DAF dollars are already tagged for a charitable purpose, donors frequently have a greater appetite to take on greater risk or accept more modest returns in the pursuit of unique impact.  For their part, DAF sponsors are increasingly offering recoverable grants – grants made with the expectation of repayment – to facilitate these types of transactions. Raising awareness about and usage of this instrument promises to increase the supply of catalytic capital in the market while helping donors to recycle funds for future grants and even greater impact.

Given this opportunity, we’re proud to support two organizations that are leading the charge to unlock the DAF market for impact: ImpactAssets and CapShift.

ImpactAssets spun out of Calvert Impact Capital in 2010 to become a nonprofit DAF sponsor and enable philanthropists to pursue innovative impact investing transactions. As a pioneer in facilitating impact investments via a DAF, ImpactAssets’ work continues to push the frontiers of what DAFs should be expected to offer – notably, going beyond positive or negatively screened investments to also offer impact products in private debt and equity funds, as well as direct investments that positively contribute to donors’ charitable impact goals. As ImpactAssets approaches half a billion in assets under management, it is poised for tremendous growth.

One way that ImpactAssets is creating healthy pressure in the market is through their willingness and ability to facilitate donor-sourced, direct, private deals. In 2018, it executed an average of 1.8 such custom deals per week. For example in both 2015 and 2017, ImpactAssets helped Honest Tea founder Seth Goldman and his wife Julie Farkas invest in Beyond Meat, which creates plant-based meat alternatives like the Beyond Burger. Their investment spurred co-investment from other ImpactAssets donors, and Beyond Meat has since tapped JP Morgan Chase, Goldman Sachs, and Credit Suisse to help lead an IPO, indicating the potential for significant returns and liquidity that can then be put towards philanthropic causes. Through this deal and many others like it, ImpactAssets is not only helping families get started in impact investing, but their demonstration effect has raised the expectations of donors, whose growing demand is nudging existing DAF sponsors to find ways to add impact investment offerings to their platforms to stay competitive.

One company stepping into this expanding market opportunity is CapShift. A for-profit company building a turnkey impact investing platform for DAF sponsors, CapShift helps existing DAF sponsors with limited in-house impact capabilities to expand their product offering to include impact investments across asset classes. Through CapShift’s platform, donors will be able to search private investments or simply select a pre-curated portfolio comprised of public companies leading the way on issues like gender equality or climate change.

Though very early in their journey, we are excited by the thoughtfulness with which CapShift is approaching the market. Incubated by MissionPoint Partners, a registered investment advisor that got its start working for the family office and foundation of Priceline co-founder Jesse Fink, CapShift benefits from the insights and experience of MissionPoint’s many years serving families pursuing impact investing.  CapShift also acquired the assets of ImpactUS Marketplace and recruited ImpactUS co-founder Liz Sessler to bring a wealth of lessons learned that can help speed the company’s path to market while learning from those who’ve come before them.  Now beta-testing their platform with one of the largest national DAF sponsors, CapShift is well positioned to perfect a product that makes it easier than ever for DAFs to step up their impact investing game.

Going forward, we see tremendous opportunity for both ImpactAssets and CapShift to unlock a significant pool of capital for impact. They’ll do this by making it easier, faster, and lower risk for families to get started in impact investing and aligning DAF investing with donors’ charitable giving goals. If successful, they’ll also help educate donors about their unique ability to provide flexible capital that is crucial to identifying and scaling new, innovative solutions to the world’s most intractable social and environmental challenges. Achieving this goal requires experimentation with different approaches, and we’re proud to support both organizations as they help define the new normal for impact investing in the donor-advised fund space.

¹ Growth in assets includes both new DAF contributions and market gains

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