Small private foundations give more in tough times-report

NEW YORK Thu Nov 8, 2012 12:00am EST

NEW YORK Nov 8 (Reuters) - Private foundations with assets of less that $50 million increased their investments in alternative assets and gave away double the minimum requirement during a four-year period, a report based on actual foundation transactions showed on Thursday.

The first annual report on small private foundations, published by The Foundation Source, establishes a baseline for future editions on giving trends, endowment growth and decline, and trends in investment strategies for small private foundations, which account for 98 percent of the 80,000 non-operating private foundations in the United States.

"What this information does is provide us with context about underlying investments of those $1 million to $50 million foundations, which are the majority in the country," said William Sutton, who heads U.S. Philanthropic Services at UBS.

"This data informs our investment and budgeting conversation with our clients," he said. "It is a great data point that we can have with our clients on their giving, granting and asset allocation."

The report showed the number of foundations using alternative investments as part of their diversification strategy increased the most between Jan. 1, 2008 and Dec. 31, 2011, compared to the other asset classes such as cash, equities and fixed-income.

In early 2008, more than 38 percent of private foundations used alternative investments; by the end of last year, more than 49 percent had incorporated them into their investment strategies.

The increase in alternative investments was even more pronounced for private foundations with assets between $1 million and $10 million, as investment in such assets rose to 60.1 percent from 41.6 percent during the same time span.

"The $1 million to $10 million group is the most active in terms of new funding, grant making and also in embracing more sophisticated solutions and strategies to try to preserve and minimize the risk to their assets so that they can continue to give at high levels," Foundation Source Chief Executive King McGlaughon told Reuters.

Based on the actual transactions of 519 clients of Fairfield, Connecticut-based Foundation Source, the nation's largest provider of back-office services to small private foundations, these organizations gave well in excess of the 5 percent annual distribution required by federal law, even during the worst of the 2008-2009 economic recession.

Disbursements for grants and charitable expenses averaged 11.6 percent of assets between 2008 and 2011, and the total value of grants increased 4.5 percent during the same period.

The report also showed that donors continually replenished their private foundation endowments, almost matching their grants and expenses.

Despite that, 71 percent of the private foundations saw the value of their endowments decrease during the four-year period, there was an overall increase in giving.

"In addition to maintain a high rate of giving - on average double of what the law requires - actual dollars were up. And while the disbursements were being made donors continued to fund their foundation with an average of 88 cents on the dollar during the period," said Andy Bangser, chief financial officer.

These small foundations are responsible for $18 billion of annual giving, or 42 percent of all private foundation support to nonprofits in the United States and overseas, according to Foundation Source. Yet data on this important sector of the market is scarce because private foundation research historically has focused on the other 2 percent -the largest of these philanthropies.

"This kind of attention has not been paid to the small size foundations even though these are some of the wealthiest families in the country," Sutton said. "I have not seen anything of this sample size, certainly nothing this recent, and nothing that is this comprehensive."

McGlaughon said he intends to update the report with a major release every year and is contemplating issuing a mid-year look on the foundations' developments.

The report includes only foundations that were active clients for all four years of the study period, and excludes foundations that were less than five years old.