According to Mark Cheng and Laura Kromminga of Ashoka, one of EO’s partners, a new type of fund allows entrepreneurs to start their own foundations without the hassle of set-up costs and extensive administrative tasks. A Donor Advised Fund (DAF) is a new philanthropic tool that’s ground-breaking because “before granting out the money, a DAF, with donors’ permission, can use the funds for impact investing.” Read more about DAFs in this recent article published on Ashoka’s Forbes column:
Wish You Could Be a Philanthropist AND Impact Investor? A New Fund Lets You Do Both
What if you could start your own foundation – but with no administrative hassles or set-up costs? Even better, what if you could use your foundation to make loans to nonprofits and social enterprises so that your capital could be repeatedly recycled to create impact again and again and again? A new kind of fund combining philanthropy and investment allows you to do exactly that – it’s called the Donor Advised Fund (DAF).
The principles of a DAF are simple. First, a donor makes a non-redeemable gift to a fund that pools gifts from many other donors, effectively acting like a foundation. The gift is typically tax-deductible at the time it enters the fund rather than when it is paid out, giving the donor immediate benefit. The fund manager then takes care of all the paperwork and works to find and select a suitable recipient, just like an investment fund.
If DAFs were simply a neat way to package philanthropic giving into a portfolio, they might be interesting but hardly groundbreaking. The factor that makes DAFs radically different from any other philanthropic product is this – before granting out the money, a DAF, with donors’ permission, can use the funds for impact investing.
Impact investments are usually low-interest loans made to social enterprises. Typically these loans are higher risk, which can make them unattractive to traditional investors. Yet they are often the only route of funding for social enterprises that need capital.
A DAF can lend to those social enterprises, offering them exactly what they need and it can absorb the high risk. If the loan falls through, for instance, it still creates social value and just becomes a donation. But if the loan is repaid, it can be lent out again and again – creating social value repeatedly.