What would it take to get foundations in on the impact investing game? - Generocity Philly

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Nov. 13, 2015 5:01 pm

What would it take to get foundations in on the impact investing game?

The first order of business is finding a term to differentiate foundations' impact investments from investments made in the venture capital community.

Should foundations distinguish their investments from those made by venture capitalists?

(Photo by Tony Abraham)

Impact investing is still a new concept being pioneered by the venture capital community, but foundations are eager to get into the game. A sector traditionally focused on the act of giving is coming to realize that profit is good. Still, as eager as they may be, there are a lot of questions holding foundations back from making the jump.

There are differences in impact investments made by foundations and those made by the venture capital community. An angel group like Investors’ Circle might invest $130,000 in a social enterprise like New York City-based crowdfunding platform Bloc Power, but foundations are much less likely to make direct one-off investments in an enterprise or nonprofit. Smaller family foundations aren’t eager to dole out that kind of risk capital.

Instead, foundations making impact investments might do so in the form of a program-related investment (PRI), low-interest loans. They’re low-risk, low-yield — much different than impact investments made in the venture capital community.

That’s why foundations want their own term for it: “mission-aligned impact investing.”

That was the term proposed by Nonprofit Finance Fund vice president Bill Pinakiewicz in a breakout room at Philanthropy Network Greater Philadelphia‘s Sparking Solutions 2015 conference.

“‘Impact investing’ is one of those terms you either love or hate,” he said. “This is evolving from the ground up. Let’s step back and say, ‘When we think about impact investing, what are we solving for?'”

In order to maintain their tax status, foundations must pay out at least 5 percent of their total assets each year, leaving 95 percent that can be deployed to advance their mission. What’s the best and most prudent way for them to leverage that 95 percent (as well as the 5 percent that typically goes towards grant-making), given their priorities and constraints?

“We should be putting more of that 95 percent towards mission and [making] social impact,” said Kristina Wahl of the Barra Foundation. “Income inequality is something to think of as a motivator. How can we create more access to capital for communities we’re serving? Impact investing is an opportunity to test new models.”

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Yet, Wahl said the Barra Foundation hasn’t done it yet. The right opportunity just hasn’t come along to propel them into the space.

“The general consensus is there is more mission-aligned investment capital available than there are opportunities,” Pinakiewicz said. The path of least resistance, he said, is finding an intermediary — removing the burden of decision-making by placing capital in the hands of a community development financial institution (CDFI) or a loan fund. It’s the best option, Pinakiewicz said, for foundations that don’t have the capacity to allocate resources towards research and development, rather than making direct one-off investments in organizations — the kind of investment made by venture capitalists.

“The direct one-offs are possible,” said Laura Kind McKenna, trustee manager at the Glenside-based Patricia Kind Family Foundation. McKenna, who voiced her impatience with the foundation community’s hesitance to dive headfirst into investing, said her foundation made a direct investment of $37,000 in a small cleaning company that employed residents of transition houses. “Over the last five years, they have paid back our loan. There was no capacity [needed] to do that. If it went belly up, why is it different from a grant? It’s money back into our asset pool that we can invest or grant again.”

So, what’s holding foundations back? Every concern stems from one primary conflict: a lack of education around impact investing, the spectrum of impact investments and uncertainty about what method works best for differently sized foundations.

“Initially, education and ongoing education will be key. Everyone is coming at this from a different perspective,” said Alex Hokanson, director of Asset Allocation Strategies at Threshold Group, a wealth management firm that works with foundations and nonprofits. “Oftentimes, taking the first step is the most difficult.”

A small group of foundation representatives at the event opined the need to form a resource center where nonprofits and investors can interact and share information directly. It would be a start.

“The biggest problem with foundations is for people running them who do not have this experience, it is overwhelming,” Wahl said. “For us, I needed to educate myself. I needed to get comfortable with some of the concepts so I felt I could intelligently speak with people on my board from investment backgrounds.”

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