Impact Investing: Foundations Should Take the Helm

02 Feb

Impact Investing: Foundations Should Take the Helm

Traditional philanthropic techniques are not enough to continue to raise the necessary impact dollars. The majority of non-profits continually remain underfunded. Moreover, the cost of fundraising is expensive. On average, for every $1 raised it costs 20 cents to raise that dollar. Only 80 cents of every dollar raised goes directly to the charity itself — an inefficient use of resources. Additionally, there is 40–50% donor churn year over year.

We need more tools to better channel dollars to deserving causes. This is the very mission with which Elysian Advisers has tasked itself: connecting capital with purpose. Impact investing is one effective tool taking a lead. Impact investing, in today’s form, grew out of socially conscious individuals’ desire to apply economic and business solutions to philanthropic projects. People no longer wanted to have to choose between having a financial return or a social one. A burgeoning industry became formalized, made up of “investments made into companies, organizations and funds with the intention to generate social and environmental impact alongside a financial return.” The global market was $77 billion at the end of 2015 with another $15B committed for 2016. This market is still evolving, though, and, while growing, needs the support and guidance of leaders.

This is an exciting field, but it lacks best practices, formalized structures, a cohesive message and a strong leader group. Foundations are uniquely positioned to take on this pivotal role, because they have:

1. More access to strategic partnerships — Foundations have longstanding community ties and connections with one another. They can leverage existing and develop additional strategic partnerships to revolutionize impact investing, providing it with the structure it needs and leaving a lasting impact on society. Foundations are well situated to partner with other mission-aligned organizations such as the Mission Investors Exchange which “provides a platform for trailblazing and newcomer foundations alike to openly collaborate with each other on how to partner, innovate, and grow the field…”

2. Transparency & Collaboration — Foundations already work collaboratively with one another. Unlike in the private sector, foundations openly and transparently share their results and outcomes. “At their core, foundations are more open, transparent, and collaborative than conventional investors, and in sharing their learnings — from both successes and failures — they allow the field to build on their experience. Some are even publishing their portfolios and investment holdings for all to see.” This result sharing helps to build the impact investing ecosystem and enables other foundations to build off what another has done, ultimately increasing the magnitude of each foundation’s contributions.

3. Foundations have a head start — Most foundations already distribute grant capital and invest in Program Related Investments. Thus, they not only have access to cash, but they also have a robust system in place to conduct due diligence on how to effectively distribute that grant capital to its most effective financial and social use.

4. Foundations have the best access to patient capital — Foundations “can often provide more flexible, risk-tolerant, and patient capital than other types of investors…” required for impact investments. With their track record of investing their grant capital, foundations can more easily raise from additional impact capital sources.

5. Metrics, metrics, metrics — Foundations are usually well endowed. Holding the purse strings means they have more power to hold their grantees accountable. They can impose metrics on a broader scale, while developing best practices around realistic impact measurements. These measurements could be used by their grantees and other impactful organizations — holding groups accountable to ensure the impacts they hope to have are being reached. With better metrics — on impact and financial returns — more investor capital will be attracted into impact investing.

6. Easier than raising an Impact Fund — Raising an Impact Fund is extremely hard. Unless you have endless family resources or access to an Angel with seed capital willing to take a bet on an emerging manager, you need a track record to raise an impact fund. You also need to convince a lot of people; raising a fund for anything less than $20m likely cannot even carry the overhead. Finally, it means competing for capital with top VCs. Having an “impact” brand is nice, but your investors will still want to see returns. They will be evaluating you through the same lens used to evaluate their other asset managers — track record, returns, AUM raised, etc.

7. Foundations are raising the stakes –Foundations such as Rockefeller and Omidyar are pushing themselves to perform at their best to make every dollar invested go the furthest and to expand their impact footprint. For example, “Omidyar Network has built a framework for pursuing investment opportunities that takes into account not only firm-level impact but also market-level impact.

8. The money must be spent every year — A foundations is required to spend at least five percent of its endowment on charitable expenditures (in order to avoid paying excise taxes). Program Related Investments, essentially an impact investment product, qualify as a charitable expenditure. These PRIs also enable foundations to make a return on their invested capital and these proceeds in turn can be reinvested to multiply the impact of the foundation’s first $1 invested.

For all of these reasons and more, foundations can and should lay the tracks, framework, and groundwork that is needed for impact investing to reach its full potential. Some of this is already being done. For example, “foundations are increasingly using their catalytic capital to de-risk individual investments or markets, and attract other types of investors — including those from the private sector and government — who can bring much greater resources to bear.” Yet, foundations shouldn’t stop there when this industry could benefit so much from additional leadership. Foundations can multiple their impact by strengthening their thought leadership and maximizing the reach of their impact dollars. The impact investing space is an exciting and promising one. Foundations should step up to take the helm and navigate through uncharted waters to push the impact boundaries even further.