Today’s philanthropists love to talk about leverage. Most often this means they’ll give an institution a whopping gift of say, $10 million, in hopes that the institution will use that leverage to attract other donors and raise more millions. In other cases, leverage means the philanthropist asks the institution to invest the money wisely and make it grow so that the original gift grows over time.
For philanthropists, leverage is essential, since it means that their dollars will act as a catalyst, rather than as a one-time windfall. It also means their funds will have greater impact — and impact is what today’s philanthropy is all about.
Most of the time, leverage is a matter of hope rather than directive. But T. Boone Pickens, the legendary oil-trader (read about his recent lavish birthday party here) has taken leverage to the next level. According to an article by Debra Blum in the Chronicle of Philanthropy, Pickens hasn’t just asked that his money be leveraged. He’s making it a condition of his gift.
The article says that Mr. Pickens has given $50 million gifts to the University of Texas Southwestern Medical Center at Dallas and the M.D. Anderson Cancer Center, in Houston. Yet they can’t spend the gifts until they try to invest the money and grow it to 10 times its current size. If they meet the target within 25 years, they can spend all the money. If they don’t, the money they make on those investments will go to Oklahoma State. (They keep the original gift either way.)
On its face, this may seem like classic control-freak philanthropy. What if there are huge market corrections over that time? What if the institutions just miss the mark? Is this charity or an investment competition? And doesn’t this pit one school against another?
I did some calculations and figured out that the fund will have to generate average annual returns of at least 9.6%. That’s not unreasonable. But in an age in which most investors are shooting for 7% or 8% from the stock market, it won’t be easy.
Still, it’s a noble goal. And given that so many nonprofits invest their money poorly, demanding a minimum level of return will be a good incentive for them to invest more wisely. Even if they miss the mark, the money will still go to a worthy cause.