The following story appears in the June 25, 2012 Investment Guide issue ofForbes magazine.
Hedge fund manager Mohnish Pabrai: Most nonprofits are run by romantics.
Believe it or not, Wall Streeters and other investment professionals can be a generous bunch when it comes to charitable giving. Taking a lead from Warren Buffett, Wall Streeters give away billions annually.
Checkbook philanthropy has its limits, however, especially when it comes to its effectiveness in producing measurable return on investment—something the investing crowd demands in their professional life but ignores when they give to charity.
Mohnish Pabrai, founder of $500 million Pabrai Investment Funds, wasn’t having any of it.
“The problem most nonprofits have is that they are run by romantics who are great to hang out with, but they have no clue,’’ says Pabrai. “I wanted a strong dose of head in addition to heart and a focus on how to actually get some decent returns.” His own review of charities, he adds, found inefficient fundraising, high overhead and a lack of measurable results were the norm. “I wanted to make the greatest difference in the greatest number of lives in the most efficient manner possible.”
For Pabrai, 48, who moved to the U.S. in 1983 to attend South Carolina’s Clemson University, the question of where to give was a no-brainer. He and his wife would focus their philanthropic efforts in their native India.
Growing up in New Delhi and Mumbai, Pabrai was surrounded by both extreme poverty and wealth. He remembers looking out of the classroom window from the high-rise building that housed his elite private school and seeing and smelling a massive slum with its open sewage system and poor occupants.
“Not once during those three years did any of my teachers ever acknowledge that there was anything outside that window worth looking at. People see poverty all around them in India, but they are desensitized or immune to it,” Pabrai says. “I came to the conclusion that poverty is driven by lack of education.”
Unable to find an organization that met his value-investor’s need for efficiency and ROI, he decided to simply start his own. His Dakshana Foundation (dakshana means “to give or receive a gift” in Sanskrit) would initially be funded in 2006 with $577,000 of his own money (to date he has contributed $5.5 million).
The idea behind Dakshana was to find some of India’s most brilliant and poorest kids and prepare them for the rigorous entrance examination for the Indian Institutes of Technology. The IITs are a group of the nation’s most prestigious engineering and technology universities. Its graduates are virtually guaranteed employment and success.
Its alumni are like a who’s who of successful Indians. Among them are billionaire Vinod Khosla, cofounder of Sun Microsystems, N.R. Narayana Murthy, cofounder and former chairman of Infosys, and Rajat Gupta, the former managing director of McKinsey & Co. Microsoft reports that more than 30% of its employees in India are graduates of IIT.
In 2011, 485,000 students took the IIT Joint Entrance Exam, and just 9,618 were accepted, or less than 2%. By comparison, the acceptance rate at MIT is 8.9%. Students around India study for years in preparation for taking the exam. Pabrai notes that because every parent in India wants his or her kid to attend an IIT a massive test prep industry has flourished, with coaching costs from $3,000 to $7,000 per student.
Pabrai initially figured he would fund disadvantaged students going to established test prep centers in their local regions. But he soon became disillusioned by the bureaucracy and unscrupulous vendors. Eventually he settled on a single provider that is manning Pabrai’s Dakshana Foundation prep centers in places like Hyderabad, Lucknow and Bangalore. Fully loaded cost per Dakshana scholar: $2,154 as of 2010.
Dakshana’s bright but impoverished scholars mostly come from India’s scheduled castes and tribes. This is an official designation given to about 20% of the population that comes from groups—often rural and of lower Hindu caste—that have been discriminated against and disadvantaged for generations. They include those formerly referred to as untouchables who currently benefit from government-mandated affirmative action programs. Pabrai’s Dakshana scholars tend to have a household income of less than $200 a month.
To find the right candidates Dakshana teamed up with a government school system called Jawahar Navodaya Vidyalaya (JNV), a rural network of residential boarding schools across India that are open to the poorest kids. JNV requires fifth graders to take an IQ test for admission. Each year JNV sets aside 33% of its 40,000 slots for girls, 3% for disabled children and another 30% for scheduled castes and tribes.
Dakshana steps in and tests the JNV kids with its own more rigorous examination when they reach tenth grade. Those who pass spend the next two years in the Dakshana-funded program within the JNV schools and receive intense coaching by teachers who are handpicked by the foundation. (Says value investor Pabrai, “I’m leveraging the heck out of the Indian government.”)
Since Dakshana started operations in 2007, a total of 344 out of 824 of its scholars have cracked the IIT exam. The most recent IIT entrance exam results were just released in May. This year 110 Dakshana students took the exam, and 73 were accepted by the IITs. Two of them have severe disabilities, including Shiv Kumar, from Patna in Bihar, a victim of polio who has no lower limbs. His mother is illiterate, and his father is a security guard making less than $200 per month.
Pabrai (black shirt) visits the home and family of Dakshana scholar and IIT junior Poonam Narain (orange salwar kameez) in Jhajjar, a town in the Indian state of Haryana.
IIT junior Poonam Narain is one of Dakshana’s first scholars and early success stories. Narain, 20, comes from a small village in northern India where girls are discouraged from studying past eighth grade. Her father is a laborer, and her mother doesn’t work. She’s one of four children in a home whose monthly income is roughly $50.
According to Narain’s application to Pabrai’s Dakshana program, her family lives in a small flat without a refrigerator, television or computer (though they do have cellphones).
Narain passed the IIT exam in 2009 after training for two years with Dakshana. Today she’s a junior at IIT’s Roorkee campus, working toward an integrated major in computer science and engineering. She’s scheduled to graduate in 2014 but has already completed a summer internship with Deloitte and is in the midst of another summer internship with Syntel, an outsourcing firm in Troy, Mich.
After graduating, Narain says, she would like to be an officer for the Indian Administrative Service, a prestigious civil service division working to make India’s government less bureaucratic. She also mentions that she would happily work for Google or Microsoft if offered a job.
Since most of Dakshana’s scholars are just finishing their IIT educations it’s difficult to measure a solid return on investment.
Here’s how Pabrai estimates his ROI: “We spend under $3,000 on a scholar and raise their annual income from $14,000 per year to over $70,000 per year in six years. And over a lifetime that $70,000 a year grows to maybe $200,000 a year. So, over a 40- to 50-year career, it is an astounding number like over $5 million—a 1,667 times return.”