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Friday, December 1, 2023

Chinese Charitable Foundations Expand Into Alternative Investments To Enhance Returns

Chinese charitable funds are increasingly exploring alternative investments, such as private equity and venture capital. This emerging trend suggests a potential alignment with global practices in how charitable funds and foundations manage their investment portfolios.

In the U.S., charitable funds rank as the third largest group of limited partners in venture capital, trailing only pension funds and financial insurance companies. In contrast, Chinese charitable foundations, influenced by their relatively brief history and regulatory considerations, are gradually and cautiously entering this domain.

If more charitable funds invest in private equity and venture capital, it could have an impact to the space. In 2020, China received a total of 225.313 billion yuan in domestic and foreign charitable donations, according to the 2020 Annual China Charity Donation Report released by the China Charity Federation.

If 10% of these funds were used for alternative investment, it would mean that over 20 billion yuan could enter the space.

There has been an increase in the willingness of both public and non-public foundations to invest in investments including investing in alternative investments.

In 2019, out of 251 foundations, 157 engaged in investment activities, accounting for 62.5%. In 2020, this proportion reached 68.9%, an increase of 6.4% compared to 2019, according to the 2021 China Foundation Asset Preservation and Appreciation Investment Management Report.

The investment activities in this report are more broadly defined, include purchasing short-term monetary funds, bank wealth management products, and trust plans.

Chinese Charitable Foundations’ Investment Approaches

In China, a foundation is a legal social organization established with the purpose of engaging in public welfare activities. Charity foundations are divided into two types: public fundraising and non-public fundraising. The charity foundation of a corporation belongs to the latter, meaning the foundation does not have the right to raise donations from the public.

Although charity foundations are defined as non-profit institutions, primarily relying on donations as their main source of income, they are allowed to preserve and increase the value of their assets in a safe and reasonable manner via investment activities.

But foundations can only engage in investment activities provided that the annual charity activity expenses meet legal requirements and the donated property is allocated in full and on time. In particular, public fundraising foundations must spend no less than 70% of their total income from the previous year on public welfare activities.

If a public fundraising foundation had a total income of 10 million yuan last year, then this year, it must spend no less than 7 million yuan on public welfare activities. After deducting expenses for staff welfare and operational activities, the amount available for investment is less than 3 million yuan.

This means foundations generally don’t have a huge investment portfolio. Well-known foundations in China, such as the China Rural Development Foundation and the China Foundation for Disabled Persons, spent over 80% of their budget on public welfare activities in 2022.

The portion of charity fund available for investment is limited. On top of it, the investment scope of foundations are also limited. They include direct purchase of asset management products issued by financial institutions such as banks, trusts, securities, funds, futures; direct equity investment through initiating establishment, mergers and acquisitions; entrusting property to institutions regulated by financial supervision and management departments for investment.

Under these regulations, charity foundations cannot engage in broad investments like venture capital and private equity firms. Activities such as providing loans to individuals or enterprises under the guise of investment, or directly buying and selling stocks, are not feasible.

Moreover, most charity funds lack the investment prowess compared to professional VC firms. Therefore, charitable foundations tend to prefer purchasing asset management products from banks or other financial institutions.

They rely on indirect investments for alternative investments. Foundations either choose to invest in and hold controlling stakes in subsidiary fund companies, allowing these controlled subsidiary funds to lead external investments; or participate by investing in venture capital-managed funds, collaborating with professional investment institutions.

Counting Chinese Charitable Foundations’ Early Experiments

The China Rural Development Foundation and the Shanghai Charity Foundation have recently started experimenting in the venture capital circle.

The Nandu Public Welfare Foundation, established in May 2007, is a national non-public fundraising foundation, The foundation’s initial fund has 1 billion RMB and has participated in three investments involving purchasing shares in public and private enterprises in various development stages.

Other foundations including the Zhejiang Xianghai Charity Foundation, China Rural Development Foundation, Bethune Charitable Foundation, Shanghai Charity Foundation, and Zhejiang Jiaxing Charitable Foundation, have all been involved in a diverse range of indirectly holding companies shares of various sizes.

Overall, the learning curve for these foundations is steep. The initial and crucial step often involves hiring qualified investment managers. Many foundations are actively exploring or have already embarked on recruitment drives to bring in expertise that aligns with their investment goals.

Moreover, there is another scope of charitable foundation investment mandate: to support related industries. For instance, the 10th China Charity Projects Exchange & Exhibition held in September facilitated donations from various foundations for procurement of products for consumer assistance and industrial investments, attracting over 7.9 billion yuan in donated funds.

Kaylie Pferten
Kaylie Pferten
A pilot of submersible crafts in a former life, now married to my husband David and writing about investment advice.

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