A foundation of strength

Italy’s foundations play a key role in regional economies, handing out grants for a whole range of purposes. The arts sector is the biggest beneficiary, but the country’s 88 philanthropic institutions also provide funding for sports, environmental protection and even crime prevention.

Across Europe, foundations are becoming a more important force, according to consultancy Watson Wyatt, whose specialists have studied the sector. Nearly half of all registered foundations in Italy and Germany were set up since 1990. “In many cases, as financially-strapped governments slash spending on various projects, philanthropy is providing the cash instead,” according to a report by the firm.

Most of the foundations operating in Italy today - including giants Fondazione Monte dei Paschi di Siena, Fondazione CARIPLO and Compagnia di San Paolo - emerged from the privatisation of banks in the early 1990s.

Before this, they had been holding companies to own the banks’ stock. Despite their transformation, the foundations still control large blocks of share capital from their affiliates, though overall these holdings are gradually diminishing.

European foundations are focusing more keenly on maximising returns, says Watson Wyatt. In this vein, Italian foundations are shifting some of their assets into new investment classes such as private equity.

“One of the latest developments involves investment in private equity funds,” says the Association of Italian Savings Banks and Banking Foundations (ACRI). “In this respect, one kind of investment that is not very widespread in Italy, but which is important for economic development, is venture capital.”

But because venture capital carries such a high level of risk, foundations cannot invest substantial sums in it, the association notes. “However, the foundations might help with the development of venture capital in Italy; investments in this sector could be accounted as grants disbursed for institutional purposes,” it adds.

Andrea Canavesio of investment consultancy MangustaRisk in Rome sees private equity investment become one of the areas of focus for some of the foundations. “Once they held 100% of the capital (of the affiliated company), but now they invest in infrastructure, bonds and equity, though a big part of their equity is still the shares of the affiliate,” he says. Since the 1990s, changes in Italian law have required that most foundations divest control of the banks. Despite the shrinking trend for these large block holdings, Canavesio points out that the stakes do benefit the foundations from a strategic point of view.

“Some of these banking foundations have sold shares, but many have not gone below 50%” he says. “if you want to be an active shareholder and develop the territory where you are based, it makes sense to own shares in the largest local bank.”

According to ACRI, 17 of the 88 foundations no longer have a shareholding in the bank they came from, and 56 hold minority interests, and the other 15 have an equity interest of more than 50% in the banks from which they originated.

How the foundations decide to allocate their assets depends of the participation they still have in their former banking subsidiary, says Claudio Pinna, consultant at Hewitt Associates in Rome. “Generally, the more the participation, the less they invest in equities,” he remarks.

Foundations are governed by boards, whose members are generally nominated at local level, says Pinna, and beneficiaries are non-profit organisations, such as local associations and universities. “Taxation is higher than that applied in other countries,” he notes, adding that the foundations are trying to persuade the government to review this.

ACRI says Italy benefits enormously from the foundations, thanks to their ability to operate autonomously, and the sense of responsibility and sharing that comes from the subsidiarity principle. But there are big differences between the ways the foundations are governed.

“Each foundation is a fully autonomous entity, has its own by-laws, with its own criteria for electing its governance bodies; has its own purposes laid down in the by-laws, in keeping with the specific culture of the community in which it operates and its origins,” according to the association.

Every year, the foundations donate about €1.4bn, with grants growing by 6.2% a year, according to ACRI. Every three years, each foundation chooses to allocate most of its grants to five out of the 21 eligible sectors which range from family and related values, to art, cultural activities and heritage.

Most of the foundations are located in northern and central Italy, and the majority of disbursements go to the foundation’s own region, which receives 80.6% of grants on average.

By 2005, the association says Italian foundations had 25.6% of their €51.9bn assets in shareholdings in banks, with other income-producing assets - including financial instruments other than bank shareholdings - accounting for 70.3% of the total.

Both in relation to GDP and in terms of assets per head, Italy’s foundations are the second richest in Europe after Denmark, according to Watson Wyatt.

But in research conducted last year, the consultancy cast doubt on how well equipped European foundations were to make investment decisions, and found that most did not see a connection between spending and investment policy.

Only around 12% of German and Italian foundations said that investment policy was often discussed at fiduciary board meetings, while around 90% of all foundations said operations were often discussed, the firm found. However, the Fondazione Cassi di Risparmio delle Provincie Lombarde (CARIPLO) adopted a new code in 2005 to clarify investment and governance aims.

The ‘regulation for the use of heritage’ which established investment objectives, investment horizon, benchmark, evaluation criteria and roles of both steering board and board of directors as well as the criteria for how the fund for grant stabilisation should be used.

The foundation now aims to conserve the net market value of its assets within a timeframe of at least 10 years, revaluing this according to the European rate of inflation; on top of this, it should support a 2% rate of grant giving.

The long-term benchmark of 60% fixed income and 40% equities should support this, it says. Acknowledging that short-term asset yields may fluctuate, the foundation set up a grant stabilisation fund to support donations in years where the yield is below average and to be replenished when the yield exceeds this.

 

Compagnia di San Paolo

Founded in 1563, it is no surprise that Compagnia di San Paolo describes itself as a long-term institutional investor.

Back in the 16th century, the organisation was a confraternity set up by a group of Turin residents committed to helping the poor. This soon turned into a non-profit-making pawnshop, which over the centuries became the credit institution Sanpaolo - now one of Italy’s largest banking groups.

Following the banking foundations’ bill of reform 1991, the Compagnia became a foundation, while the bank operations changed into a limited company under its control.

These days the foundation’s financial objective is the protection of the endowment’s real value while allowing for growth to benefit future generations. Target return for net capital assets is 3% annually in real terms over a four-year cycle. Spending, on the other hand, aims for constant growth within the 1.5-2.5% range of the average market value of the portfolio, over four years.

Linking up with other investors could cut management costs, the foundation hopes.

“One of the issues we are more focused on is an effort to bring European institutional investors together so that they can participate in a shared and dedicated investment firm,” says chief financial officer Davide Tinelli.

“In this way, we soon hope to have a stronger and more professional investment organisation to do business with managers, brokers, advisers, and so on,” he explains. “The three Italian foundations that started the project are happy to share the Luxemburg-based UCITmulti-manager fund, called Fondaco, that they set up with other European foundations, endowments or pension funds - a stronger joint force will mean better terms and lower costs for everyone, and more professionalism.”

As a long-term investor, the foundation says strategic asset allocation is important and tactical decisions should be avoided. However, its philosophy does include growing its exposure to alternative strategies. These are not to be introduced as a fad, it says, “but based on the strong belief that skilled and innovative people have, in many cases, left most of the traditional asset management firms”.

Its assets are split into a strategic portfolio - consisting of its stake in affiliate company Intesa Sanpaolo - and a managed portfolio, which contains ‘free assets’ managed by external managers.

The foundation used Cambridge Associates to help devise its investment guidelines, which operate on a four-year term, and which can be revised in line with spending policy.

These guidelines set the investment objectives and allocation among asset classes, manager structure and risk policy. At the end of last year, out of a total asset base of €9.1bn, Compagnia di San Paolo held 58.4% in Sanpaolo stock, 16.6% in fixed income, 9.1% in equities, 7.1% in short-term investments, 4.7% in non-marketable alternatives and 4.1% in absolute return investments.