The Gates Foundation’s reckless risk-taking

By Felix Salmon
July 17, 2009

Why is the Gates Foundation speculating in distressed UK equities? The foundation has received a lot of criticism for the way it invests, but put that to one side — it seems to me that charitable foundations in general should be pretty risk-averse, even when they have tens of billions of dollars. The Gates Foundation is praiseworthy in that it has a mandate to spend down its principal quite quickly. But as a result, its investment arm should be a boring place; it certainly shouldn’t be gravitating towards the riskiest parts of the capital structure of overleveraged retailers in overleveraged economies like the UK.

I suspect that the problem here is one of incentives, and that the people running the foundation’s money will get substantial bonuses if they take big risks which pay off. It’s time to find good fund managers who are dedicated to the stated aims of the Gates Foundation, and just pay them a flat salary (which can be quite large). Philanthropic foundations shouldn’t act like hedge funds, a few exceptions like TCI notwithstanding.

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