This blog was originally published by The Alliance Report at www.TheAllianceReport.com]
It’s no secret that many wealthy families have an uncomfortable relationship with their wealth. While this is especially a problem with younger family members – and is hardly ever a problem with the generation that produced the wealth – ambivalence about the value of private capital can undermine a family’s commitment to sound stewardship. It’s for this reason that I began the Stewardship of Wealth with a vigorous defense of private capital and the role it plays in America’s competitive success.
By “private capital” I mean both the original capital produced by the first wealthy generation via entrepreneurship, but also – even especially – the more passive capital stewarded by subsequent generations down through the years.
If we were to list all the countries in the world according to their acceptance of private capital as so defined we would find a perfect correlation between a nation’s competitiveness and the volume of private capital it produces. Over short periods of time many forms of economic organization can produce remarkable results – the Soviet Union, for example – but ultimately the role of private capital will be decisive.
Why should this be so? There are two reasons. First, private capital is the progenitor of all other forms of capital: governments, corporations, endowments, all get their capital at least initially from individuals, and wealthy individuals account for all or (in the case of governments) far more than their pro rata share of this capital.
Second, private capital is the most flexible capital in the world. Once capital is in the hands of someone other than a family, its uses are limited to carrying out the mission of the holder of the capital. But in the hands of a family the uses to which the capital can be put are limited only by the imagination of the family (and, of course, by law).
Let’s review just a few of the many ways private capital improves America’s competitive position.
Supporting entrepreneurship. Since every wealthy family got that way because some ancestor started a successful company, families naturally feel a kinship with entrepreneurs. America, far more than any other nation, nurtures the entrepreneurial instinct, resulting in an astonishing and ongoing explosion of new companies that create jobs, produce tax revenues, and enrich lives. But companies can’t be started or grown without startup capital: no startup capital, no entrepreneurs. Private family capital, in the form of angel investing, early stage investing, and growth capital, provides the rich soil within which entrepreneurs can flourish. This happens almost nowhere else on the planet.
Endowing higher education. Although America has less than 5% of the world’s population, eight of the ten best universities in the world are located here (add Oxford and Cambridge and you have the top ten). And it gets better: America is home to 95% of the top 100 institutions of higher education, giving America a huge competitive advantage over other countries. But how can this be? If we list in one column the one hundred best colleges and universities, and in the next column the 100 best-endowed institutions, we will find that the correlation is almost perfect. But endowment capital comes from only one source: private family capital. Elsewhere in the world higher education depends on government funding, a very weak reed that results in average (or worse) educational quality.
Establishing a charitable foundation. While there are charitable foundations in other countries, no nation has anything remotely like the rich ecosystem of foundations that dot the American landscape. Modern institutional philanthropy was invented here by Andrew Carnegie, and wealthy families have embraced his vision of “giving back.” Foundation giving is best thought of as entrepreneurial capital for nonprofit organizations, especially in human services and the arts – very few foundations simply give annual operating support. As a result, tens of thousands of new and interesting ideas receive funding every year in the US, ideas that never see the light of day in foundation-starved societies.
Transforming the nation’s political conversation. By the late 1950s it was obvious to anyone who cared to look that the Republican Party in the US hadn’t had a new idea since Warren Harding. Over the next decade three men who had never met decided that this would change. The men were Joseph Coors, John Olin and Richard Scaife. Initially working completely independently, they began to fund free market ideas in a variety of ways, including identifying brilliant young scholars early and offering them support, launching new free market-oriented think tanks, and convening conferences at which like-minded thinkers could meet and exchange ideas. They were so successful that (led by Ronald Reagan), the Republican Party was completely revitalized and it was the Democrats who went into opposition.
The crucial bottom line is that ideas are not self-executing, and, indeed, ideas won’t even arise except in an environment that is welcoming to them. Any society that excelled in any one of the areas listed above would have a large competitive advantage over its neighbors. But to excel in all of them, often with little competition from other countries, is what has propelled America into the most dominant society in human history.
Wealthy families should be proud of the role they play in our success as a nation, and they need to realize that successful stewardship isn’t just a compelling family issue – it’s a compelling national and global issue. As advisors to such families, our job is crucial to the continued success of that most precious of American competitive advantages: private capital.
Please note that this article is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.
