Tim Lappen co-wrote the article below with Josh Cohen of City Light Capital. It was originally published on Financial Advisor on November 7, 2017.
Most parents want their children to be knowledgeable in the ways of the world, to be able to operate successfully and to be in command of their own futures. And few aspects of life are more important than being financially adept. A wise friend frequently says that people will spend an inordinate amount of time and energy getting their money ready for their children yet spend much less effort getting their children ready for the money.
Even if we agree on the goal, what’s the best way to get there? The purpose of this article is to make the case for impact investing as an excellent way to inculcate a family’s values by way of practical experience and sound investment principles.
What is impact investing? An impact investment has two important criteria: (i) the investor is trying to make money; and (ii) the investor is trying to create measurable social impact in the process. Impact investments can be made in multiple sectors, geographies and assets classes, and can have different strategies for change and return profiles.
Why is it important? Besides being an emerging, viable way to deploy capital, impact investments can and should play an important role in training and integrating a next-gen family member into a family office. Taking an active role in sourcing and monitoring the impact investments will help the next gen learn more about the existing family office, hone relevant skills and experience and allow the next gen to find his/her own voice in the family office through helping to identify his/her purpose within the family office’s collective purpose.
For starters, growing up in a family does not guarantee that one understands the family office. Familial ties with the money-making generation do not mean that one can understand the older generation’s values, risk profiles and biases. By making impact investments as part of a family office, one will be able to learn about, pressure test and ultimately understand those values, tolerances and biases while also gaining experience with the processes and protocols of working with family members within the family office framework.
Most family offices historically have expressed their values through philanthropy. Values-driven philanthropic giving becomes increasingly difficult, however, as families expand, operating companies turn into investment vehicles, and each subsequent generation contributes more viewpoints for decreasing shares of the pool of capital. Impact investing is not a replacement for philanthropy; rather it is a complement to philanthropy. Impact investing offers the ability to introduce new perspective to solving the social problems near and dear to families, problems which, frequently, they already have been hoping to solve through philanthropy. Impact investing also offers the opportunity to utilize new technologies, business models, incentives and different types of talent. For example, a family which has previously been focused on philanthropy in schools may find potential impact investments in the education technology sector to have synergies with their existing efforts in this area. Having a next gen working on impact investing will not only be a great way to transfer values from one generation to the next, but also provide families with the added benefits of increasing their asset base, teaching new family members about investing, giving the younger family members exposure to how businesses operate and even providing members with an entrepreneurial mentor who may have a unique ability to inspire as a non-family messenger.
According to a recent study from Deloitte and the Billie Jean King Leadership Initiative, “purpose” is the most important criterion for what millennials look for in a job. By including impact investing in the family office asset allocation, family offices can meet the next gen where they already are—from a values and philosophical perspective. This allows the next gen to find a higher purpose for the work the family is doing collectively. Just because grandma had a passion for botany does not mean that her kids or grandkids do. However, the next gens can find investments based on shared interests, and this can promote collaboration and engagement—both of which are essential in order for a family office to thrive moving forward.
Timothy Lappen specializes in representing family offices (and their principals, families and business) worldwide in any legal matter of importance to them. His law firm, Jeffer Mangels Butler & Mitchell LLP, is based in Los Angeles, CA.