Why Private Capital Is Going to Change the World

By: Paulina Cromwell Stannard, CFA

The ‘twin pandemics’ of 2020 – the COVID-19 pandemic and the racial justice reckoning following the murder of George Floyd – have shone a harsh light on the enduring infrastructure of our divisions, our climate and health challenges, and inequities that persist across our social and economic strata.

For decades, we have turned to philanthropy and governmental action to address these entrenched societal challenges – and these two important actors commit an impressive amount of capital each year to address them. In the United States, charitable giving totals $450 billion per year[i] and the federal government spends $4.5 trillion across its budget, with $361 billion spent on programs that support individuals and families facing hardship.[ii].

 Yet, the wealth gap widens each day to unprecedented levels. Almost 51 million households in the United States struggle to pay for basic necessities such as food, housing, and healthcare, and 40% of Americans stated they would struggle to find $400 in an emergency.[iii] The enduring poverty faced by millions of Americans indicates philanthropic and governmental action is not enough. On a global level, estimates suggest that to achieve the UN Sustainable Development Goals by 2030, we face a $2.5 trillion gap annually. Clearly, the systems we have historically relied upon as a society have proven insufficient to meet the enormity of this challenge.

The good news is that there is another solution: private investment capital is what it’s going to take to solve our biggest and most complex problems. But to get there, investors must first recognize the power they each hold to change the world.

Why?

 Private Capital is Plentiful

Investment capital offers a potent antidote and our greatest opportunity to solve our global challenges.

While philanthropic dollars and governmental spending are necessary tools, they serve a one-time, all-impact purpose. Once spent, the financial supply is depleted immediately. In contrast, investments generate a financial return – allowing the same dollar (plus more) to be re-invested, creating recurring financial benefits.

It is also important to note that the private sector tends to be the origin of greatest innovation – much more so than government or philanthropy – which underscores the meaningful role this ‘third leg of the stool’ can play. 

How sizable is this opportunity? Professionally managed assets in the US total over $51 trillion[iv] – nearly ten times annual charitable giving and federal spending, combined. If these investments were intentionally re-allocated toward companies that are doing good and those developing impactful solutions to our most significant challenges, imagine the progress that could be made! 

Private Capital is Flexible

Private wealth is also the most flexible pool of capital – in terms of structure, risk appetite, and time horizon. 

Privately held assets are free from the stringent guardrails that can slow or altogether stall other asset owners. Foundations and endowments have an annual giving obligation, and they are often restricted in their funding scope, as grants and impact investments made using the grant allocation must be tied to the organization’s mission.

Governments also have a very low risk appetite, albeit for different reasons. A vast array of programs compete for tight, heavily debated budgets. On top of that, there are always political constraints that can stall - or even derail - funding for social and environmental programs.  

Individuals and families, on the other hand, can support any causes that they choose – nothing is off-limits or too controversial.

Even as investors, both non-profits and government entities face sizable restrictions as they are bound to an institutional-style decision-making process with strict fiduciary responsibilities. They are typically expected to make investments solely based on financial risk and return, without taking environmental or social implications into account. With increased transparency in financial markets, we have seen that these investments sometimes backfire, and these organizations (founded for the sole purpose of helping others) end up investing in things that are counterproductive to their mission and negate some of the meaningful work they are doing.

In addition, private wealth is often the most patient type of capital – and is therefore well-suited to fund impact investing initiatives that may take years to come to fruition. Private investors (particularly those with significant, often multi-generational wealth) tend to be more comfortable making long-term investments that may lock up their money for decades.

Private Capital Moves First

Finally, of all investor groups, individuals and families are the most likely to align their personal investments with their values. There are countless surveys showing that nearly every investor - at every wealth level - is ready to shift towards sustainable investments.

What’s more, as private investors get to define their own risk and return objectives, they can allocate their capital across a wider range of investment opportunities.

While they of course seek market-rate returns like other investors, they also tend to be more comfortable with risk and are often willing to intentionally accept more of it to achieve outsized impact in return - which is crucial for the seeding and development of important impact-oriented solutions. As a result, private capital can play an important role as ‘catalytic first loss capital’ - which by serving in a ‘credit enhancement’ capacity, encourages the flow of funds to investment opportunities that have strong potential for social or environmental impact - thus bearing a greater proportion of the perceived financial risk and incentivizing more investors to invest.

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Plentiful. Flexible. The power to move first. It’s important for individual investors and families to understand the tremendous opportunity they have to invest their money to solve our greatest social and environmental challenges worldwide.

What’s more – you can invest while still achieving the same market-rate financial return, if that is your objective. You do not have to pick one or the other. Given that, shouldn’t the new American Dream be to build personal wealth by also expanding the wealth and health of our society?

There is no time to lose. We have daily proof of the challenges we face. Now is the time for each individual investor to recognize their own ability to determine the flow of their capital towards impactful products – regardless of the size of their wealth. Only by recognizing the power of private capital can we fully embrace its potential to change our planet so that it works better for all.

[i] Giving USA 2020: The Annual Report on Philanthropy

[ii] Center on Budget and Policy Priorities; “Where Do Our Federal Tax Dollars Go?”; April 9, 2020

[iii]Center for American Progress, “The Poverty Line Matters, But It Isn’t Capturing Everyone”, March 5, 2020

[iv] Forum for Sustainable and Responsible Investment, US Sustainable and Impact Investing Trends 2020