Philanthropic Capital could be the third source of investment the Water Sector desperately needed to find a balance. How will the blend of philanthropy into private funding and federal grants change the name of the game? Let’s explore:
with 🎙️ Sean Davis, founder and managing director of Merton Capital Partners, adjunct professor at the Palm Beach Atlantic University, and Author of “Solving the Giving Pledge Bottleneck.”
💧 Merton Capital Partners develops innovative investment strategies to unlock philanthropy’s potential by incentivizing corporations to generate large-scale good in their core businesses.
This episode is part of my Series on the Water Crisis in America
What we covered:
💰 What philanthropic Capital Investment actually is, and what it can do to solve water challenges
💸 How, as surprising as it is, giving philanthropic money away isn’t that straightforward in the absence of suited dealmakers
3️⃣ How philanthropists can build a third path beyond traditional market money and grant funds
🎛️ How the right approach is to blend sources to aim for the maximal impact
⌛ How it may take time for that new approach to get widely adopted, and how it is comparable with the 80’s Investment Funds status quo
🏠 Affordable Housing, Broken Water Utilities, Inadequate Wastewater Treatment, 21 million people betrayed by their tap, Increasing Awareness… and much more!
🔥 … and of course, we concluded with the 𝙧𝙖𝙥𝙞𝙙 𝙛𝙞𝙧𝙚 𝙦𝙪𝙚𝙨𝙩𝙞𝙤𝙣𝙨 🔥
➡️ Send your warm regards to Sean on LinkedIn.
➡️ Check Merton Capital Partner’s website
➡️ A big THANK YOU to Sciens Water for enabling this episode!
is on Linkedin ➡️
Teaser 1 – How Philanthropy could jump in for the save of 5’000 US Water Utilities
Teaser 2 – How blending capital could enable to protect the Oceans from untreated sewage
Teaser 3 – How People may have heard of Water Tragedies yet aren’t aware of how systemic the Water Challenges are
Teaser 4 – How clever Philanthropic investment can be appealing to private equity billionaires
Bonus Teaser – How Philanthropic Capital can impressively impact Housing projects
Full Video: My conversation with Sean Davis
Table of contents
- What we covered:
- Teaser 1 – How Philanthropy could jump in for the save of 5’000 US Water Utilities
- Teaser 2 – How blending capital could enable to protect the Oceans from untreated sewage
- Teaser 3 – How People may have heard of Water Tragedies yet aren’t aware of how systemic the Water Challenges are
- Teaser 4 – How clever Philanthropic investment can be appealing to private equity billionaires
- Bonus Teaser – How Philanthropic Capital can impressively impact Housing projects
- Full Video: My conversation with Sean Davis
- Full Transcript:
- What is Philanthropic Capital Investment?
- How can Philanthropy help solve the Water Challenges?
- How to roll out philanthropic capital investment?
- How much do people know about philanthropic capital investment today?
- Can Philanthropic Money generate returns on investment?
- How to create the right deals for the right philanthropic investment?
- Rapid Fire Questions
- Other Episodes:
These are computer-generated, so expect some typos 🙂
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Antoine Walter: Hi, Sean,. Welcome to the show.
Sean Davis: Hi, how are you? Thanks for having me.
What is Philanthropic Capital Investment?
Antoine Walter: You’re active in a field which I have to confess I didn’t know before. You’re in philanthropic capital investment, so what’s that special beast?
Sean Davis: Don’t feel bad. Most people have not heard of that. Essentially, it’s a new industry where we’re looking to institutionalize the investing of philanthropy.
Today, big philanthropists basically write checks to nonprofits, their school, and their church, but they don’t have ways to invest that philanthropy in larger amounts with managers like private equity got invested back in the 1980s.
Private equity firms didn’t have funds. They were just doing deals, and eventually, that industry was institutionalized.
It can help the Giving Pledge better invest their money
So there’s a lot of philanthropy, primarily the Giving Pledge, philanthropic billionaires who have said they’re gonna give half their money away.
Just the giving pledge is 230 people. It’s about a trillion dollars in capital that is unmanaged. It’s not being offered deals! Actually, it’s very hard to give away that money as a philanthropist.
So we’re basically creating deals where philanthropy can be invested with later-stage private companies that can take in a lot of capital that is inexpensive capital, and that allows ’em to do things with much greater impact. And they have the management teams to deploy the capital.
How can Philanthropy help solve the Water Challenges?
Antoine Walter: So what are the challenges in water that you can address with that vehicle?
Sean Davis: It’s very interesting because until I met Alex Loucopoulos from Sciens Water, I had no idea about the infrastructure problems. So there’s a huge section of solutions that cannot be done today because most of the capital is either market return capital or grant money.
Philanthropy is the third type of capital beyond market return and grant money
A lot of the deals that Sciens Water is doing – they’re buying companies, and they’re building companies, and it’s very exciting what they’re doing – but they have to do it on a market basis.
And then there’s sort of EPA other government money that is grant money, but it’s very, very limited. And so there’s a space where philanthropy can come in and help finance impact at a great level. Distressed water utilities are one, and ocean and land-based solutions for the ocean are another.
Philanthropic Capital can help solve the financial equation for 5’000 failing utilities
The water utilities are quite simple:
There are 5,000 water utilities that have been abandoned that are not doing well in generating polluted water for 21 million Americans.
Antoine Walter: What do you mean by abandoned?
Sean Davis: They ran outta money! There are 52,000 water utilities in the US. Many of them are little. And they don’t have a lot of capital, and they run out of money to continue to upgrade their little water utility.
So it starts running into violations and generating water that’s polluted, and that’s one of the big reasons 21 million Americans, I mean, 21 million… that number is just incredible. They have polluted water at home!
Philanthropic capital can blend with private funds (for the better)
The difficulty is that private water companies can’t go buy these distressed water utilities because the economics doesn’t make sense.
The cost to upgrade is too high for them to obtain their minimum return. So by blending large philanthropy into these deals, you can have the private water company afford purchasing and upgrading and running these water utilities, and we’re talking about a hundred billion of philanthropy that can finance the purchase and acquisition and upgrade of 5,000 little water utilities.
… In theory.
How to roll out philanthropic capital investment?
Antoine Walter: That’s a perfect transition to my question. You say «in theory,» but do you have a concrete example of how that’s rolled out?
Sean Davis: In fact, that’s what we’re working on now. Merton Capital Partners is a startup investment company, and we’re putting together these deals, and it’s essentially kind of what private equity was in the seventies and eighties, putting together deals.
So back then, a company like KKR would look for a company to buy and they would convince a bank and convince some investors that it was good and they should give them the capital to buy. This is kind of what we’re doing now!
Three philanthropic application fields: Affordable Housing, Water and Ocean Protection
We’re mostly focused on affordable housing right now because that’s another area where a hundred billion of philanthropy can easily be invested in affordable housing to really, really have a huge impact.
But water is another area, and oceans are something that we’re seeing more interest in from philanthropy. The ocean’s solution is very, very simple as well. Basically, coastal cities are releasing untreated sewage waste, which is illegal, but again, the governments don’t have the money to increase the capacity of wastewater treatment.
And so they don’t do it because the budget’s not there.
For commercial operators, it’s not economical to go do that. So philanthropy can come in, and with 300 or 400 million of philanthropy, you can probably increase the wastewater capacity in South Florida to bring back the reefs and have an explosion of seagrass that is incredible.
That would be one of the biggest ocean projects, but it’s simple! It’s to go to the wastewater treatment plants and municipalities and just figure out which needs to be increased. It’s kind of boring business. So, it’s just an innovative way that we’re trying to build pilots to prove that this is a good use of philanthropy and a way to partner with big private companies.
How much do people know about philanthropic capital investment today?
Antoine Walter: So when you’re building these investment vehicles and fitting them with the right projects, then explain the rationale as to why you need to invest in the ocean or in sewage treatment or in water treatment in these 5,000 abandoned utilities. What’s the level of awareness from the capital money you’re raising? From the people holding that capital?
Do they realize that the problems are thus big in the US and in the World?
Sean Davis: Yeah… The answer is almost zero. There’s almost zero awareness that there’s a systemic problem. People have heard of Flint and Jackson, Mississippi.
They see the headlines, but they don’t realize that it’s a systemic problem that is huge and, again, very simple.
Water infrastructure is underfunded today – philanthropists could be the decisive kick
It’s a problem in the sense that we need to invest X every year in infrastructure, and we’re investing whatever the number is, 1/100 of X. You do that enough for enough time, and you get into the situation where we’re in!
I think Seth Siegel mentioned it really well: we’re a land of cowboys and independent people, and we wanna do what we want to do.
And a lot of these issues are community solutions. And so we’re coming in, with this big pot of money and trying to attract philanthropy, but it’s tough to find philanthropists who want to give to water infrastructure because they don’t know about the problems, and they always see that, well, that’s a government issue.
The awareness of donors is better for Ocean protection
The oceans are a little easier because there’s a lot of personal interest in the oceans. And so we’re moving that project more along, and basically we’re looking for a couple of million of seed money to build a team, to put together a plan to say, okay, it would be 200 million or 300 million or 400 million, and this would be the partner, this would be the construction company or the wastewater private company that would go and interface with Miami Dade, Broward County and so on.
Then figure out what investments are needed, add ’em all up, and then go raise the philanthropy to finance that. At least again, in theory! But we’ve gotta do it.
Can Philanthropic Money generate returns on investment?
Antoine Walter: In their book – the Worth of Water – Matt Damon and Gary White, the founders of Water dot org, explain how there are three buckets of money.
You have philanthropic money, you have venture capital money, and in between, they’re looking for another bucket, which would be looking at lower returns, but still would be making money.
And what they explain in the book is that they have a hard time financing their WaterCredit approach because people either go for philanthropy and then don’t expect any return; or go to Venture because they want to have like the highest possible return and then you rather invest in tobacco or oil rather than water, right?
Nevertheless, it is profitable to invest in water! Maybe at a low return, but it is profitable. So why do you target these philanthropic buckets and not the next ones? The one which would be slightly profitable but rather ESG oriented than pure venture?
Yes: this is how you can create evergreen investment funds
Sean Davis: That’s a great question. In fact, all of our investments, whether it’s affordable housing or waste water or solar – cuz we’re also looking at solar with the biggest power company in the US. All of those investments, because we’re investing philanthropy in private deals that are for profit, we actually get the philanthropy back plus a 2% or 4%, which is essentially the impact first capital that you’re referring to.
We’re using philanthropy that is willing to give us a seed. We invest it in these projects, get a return, and then reinvest the same philanthropy into the next project and create these evergreen donor-advised funds. That’s the goal!
It’s also a way to build bridges with a foundation’s investment thesis
But we have found that some of the philanthropists we talk to have a foundation that has very specific buckets of what they give to, and we don’t fit into that. But maybe they have an impact investment arm, and we can use 2% for profit money in the same deals.
So we’re agnostic to that, but we’re focusing more on the mega philanthropy because it’s such a clear pool of money. These individuals have said, we’re gonna give the money away, and the vehicles to do that are not there.
There isn’t a way to easily do that, and some of the people who are actively trying to give money away have told us it’s harder to give away the money than it was to make the money, which is hard to believe, but it’s true.
How to create the right deals for the right philanthropic investment?
Antoine Walter: I had Reinhard Huebner on that microphone explaining that right now, there’s too much stupid money chasing too few good projects.
I guess that’s where you fit in to try to find the opportunities for that money to come to good use. How much do you have to evangelize?
Sean Davis: What a great term. What a great term! That’s what I’m doing all day. Many times I go to foundations and say, «Hey, this is what we’re doing.» And they’re not finance people.
And so they see these acquisitions, and they see these investments with developers for affordable housing where we’re actually leading the deals, and it’s kind of a different world.
That’s not an easy conversation!
Getting philanthropists on board can be as simple as a conversation…
On the other hand, we might talk to a private equity billionaire, and he gets what we’re doing right away, but he’s never seen that you can invest philanthropy in private deals, which the IRS allows you to do. It’s just been done at the venture level with very small projects!
Changing somebody’s mind that has been giving large checks to Harvard University, and you’re saying: “we can invest in a private company!” And they’re like: “no, you don’t. You can’t!”
You know, a lot of it is that evangelization of finance and figuring out how to explain something. Our challenge is to sit with somebody for 15 minutes. That’s the biggest challenge. Once they hear it, it makes sense. And then you have to get them to the point where they would pull the trigger. And that’s the stage we’re at with several philanthropic groups.
… Yet it will take time for everybody to grasp this rather new investment concept
But when you’re doing something new, it usually takes ten years to establish it. This is kind of like a new sub-sector of private equity. It’s the active investing of philanthropy and really making direct investments that are very targeted.
And going back to your point, like all charity is good, all philanthropy is good. But what we’re building are vehicles where you can buy one water utility and upgrade it, then you can do 10, then you can do a hundred, then you do a thousand.
Because then the private company who you’re investing with is aligned, and their incentives are to make more money, and we’re able to finance that. It becomes a really nice win-win at scale!
Antoine Walter: Fascinating field; as I said, I’m a muggle to it, so I’m discovering it.
To round off these interviews, I have a set of rapid fire questions, so I have a couple of ones for you.
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Rapid Fire Questions
The first one would be: what’s the most interesting project you’ve been involved in and why?
Sean Davis: The affordable housing projects that we’re looking at now, a hundred million of philanthropy allows us to do a thousand units of housing. And if we take 30% of those units, which are subsidized by the regular affordable housing of police officers, we can house all the women who are victims of domestic violence in any city or all the 200 moms sleeping in their cars tonight in Washington.
That’s pretty exciting!
Antoine Walter: What is the trend to watch out for?
Sean Davis: In the water sector? We can talk about the problem a lot and the question is where are the solutions at scale? And I think that’s the area to look at.
Antoine Walter: What is it that you’re doing today in your job that you will not be doing in 10 years?
Sean Davis: Explaining to people what our deals are and how this new set of like philanthropic private equity works.
Antoine Walter: Well, it’s been a pleasure. Thank you for introducing me to that word, and I hope that in 10 years you don’t have someone like me asking you what it is, thank you and enjoy the conference!