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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the gates foundation only hires HBS alumn.. time to follow the smart money

Posted by daniel | Report as abusive

I’ve got to strongly disagree with you about the managers at the Gates Foundation. My experience with the organization is that they’ve always demonstrated a very deliberative investing strategy, emphasizing transparency and disclosure in the managers they hire and avoiding high fee, ‘black box’ hedge fund investing when that was all the rage.

Investing in distressed equities is not necessarily more risky than other asset classes and is just a prudent part of allocation for a large asset portfolio like Gates. Most CIOs will tell you that the most ‘riskless’ assets, Treasuries, are overpriced now and likely to expose you to your greatest losses in the near term.

I don’t believe the Gates investment in distressed equities is driven by compensation structure, just sound investment strategy and the continuous need to diversify a multi-billion dollar portfolio

Posted by Brad Willmore | Report as abusive

The Gates Foundation is another front organization for the global elitist eugenics movement. Bill Gates father was behind planned parenthood. The Gates Foundation has one sole purpose- global sustainability through massive population reduction. His GMO seeds given to African farmers has destroyed entire harvests due to their poor quality. Just one of countless examples

Felix, this is approaching Zero Hedge style conspiracy theory lunacy.

The only positions that Cascade reports are 5% equity stakes in companies. You simply do not know how much is invested in bonds or otherwise. This is maybe a $10m investment from an office that oversees tens of billions.

Posted by bk | Report as abusive

Aren’t just about all equities distressed these days?

Posted by KenG | Report as abusive

The Gates foundation has enormous resources, far-ranging goals, and no particularly strong and immediate requirements that it must meet (I know the Gates foundation has requirements, but not in the same sense that the Harvard endowment must produce enough cashflow to keep Harvard operational). Who better to pick up positive expectancy but highly risky bets?

I don’t know the situation in detail here, but most distressed situations boil down to “This is worth a lot more or it’s worth nothing”. A retail investor might not want this deal because if it’s worth nothing they can’t send their kid to college. The Gates foundation has plenty of assets and could find uses for even more – so why not take these risks with small percentages of those assets? It’s basically a Benjamin Graham type of situation, and we know that if you have enough of those you can do fine.

Posted by cgaros | Report as abusive

I wonder if the article Felix referenced is confusing Gates Foundations investments with Bill Gates own personal investments? Cascade Investment corp is his own private investment company and they definitely invest in risky assets. Looking through the foundation’s 2007 tax form 990 there doesn’t appear to be any references to Cascade Investment corp. See: uments/2007-foundation-form-990-pf-publi c-disclosure.pdf

Posted by Paul | Report as abusive