Public Sector Initiatives
Perspectives
The Business of Social Change – A Challenge to Philanthropy
By Tim Ferguson, Founder, Chair and Managing Partner
For hundreds of years, people and institutions have been trying to cure the world’s social ills with money.
Economic Empowerment and Job Creation: Microfinance and Enterprise Solutions
Poverty, Justice and Jobs Think Tank, Harvard University
Here’s the problem, as I see it: Our attention – our focus – is not where it should be.
The Merchant Bank: A Classic Business Model for a Contemporary Market
By Tim Ferguson, Founder, Chair and Managing Partner
Lots of entrepreneurs need exposure to critical thinking…The merchant banker who used to say, “I understand your business and what you want to succeed, but I see the vulnerability of your business.
Microfinance and the Domestic “Missing Middle”
By Tim Ferguson, Founder, Chair and Managing Partner
I'm often asked if the Next Street model is a microfinance model.
Old Conflicts: New Opportunities
by Robert Weissbourd, President, RW Ventures, LLC
Public debate on economic development policy often seems trapped in old conflicts.
Re-casting the Supporting Roles to Bring Mission Investing to Scale
By Tim Ferguson, Founder, Chair and Managing Partner
As I discussed in my Perspectives piece on mission investing, a growing number of philanthropies are starting to direct their investments to the missions that are supported by their program dollars.
Search Engine Optimization Demystified
By Ted Papoulas, Director of Digital Development, Next Street Agency
Search Engine Optimization (SEO) has become a hot topic as all website owners seek to increase the visibility of their sites.
Sharpening Strategy and Customizing Finance for High-Performing Small Businesses
A conversation with Ron Walker, Next Street President and Founding Partner, and Jon Aram, Founding Partner
"Businesses come to us, they partner with us, so they can take the next step, move to the next level."
The Future Is Already Here
By Ron Walker, President and Founding Partner
Working on the other guy’s problem is the future for business. Businesses that only work on their own problems don’t innovate.
The Truth About Inner City Small Businesses
By Tim Ferguson, Founder, Chair and Managing Partner
America’s small businesses are being transformed as demographics shift and the financial landscape continues to evolve.
Unleashing the Potential of Metropolitan America
by Bruce Katz, The Brookings Institution
With a little more than a year to go before the 2008 election, the presidential campaign has disappointedly conformed to convention: candidates down on the farm, adopting “aw, shucks” personas, or out at the fair eating deep fried anything and everything on a stick.
Wall Street-Quality Advice: A Missing Piece in the Inner City Small Business Puzzle
By Tim Ferguson, Founder, Chair and Managing Partner
Every effective business leader needs a sounding board: a trusted advisor who provides frank, constructive input and guidance on day-to-day operations and long-term strategy.
Why Is Capital Afraid Of Our Cities?
By Tim Ferguson, Founder, Chair and Managing Partner
Cities are greener, more efficient … and smarter. A lot of a city’s 15% productivity premium, in every area of human endeavor, comes from the proximity and diversity of its people.
The View from Next Street
A sharing of ideas and policy perspectives.
printRe-casting the Supporting Roles to Bring Mission Investing to Scale
By Tim Ferguson, Founder, Chair and Managing Partner
Reference
- Philanthropy’s New Passing Gear: Mission-Related Investing, A Policy and Implementation Guide for Foundation Trusteesby Steven Godeke with Doug Bauer, Rockefeller Philanthropy Advisors, February 2008.
As I discussed in my Perspectives piece on mission investing, a growing number of philanthropies are starting to direct their investments to the missions that are supported by their program dollars. These mission investors, however, face challenges that could thwart even the best of intentions. Foundation staffing is usually weighted toward program expertise, with little if any experience in investing. Very few traditional investment consultants have mission-investing functions. And even for foundations that are able to identify and tap the necessary expertise, there is a dearth of investment vehicles that can bring mission investing to scale.
Fortunately, these challenges are not insurmountable. They require a commitment to creativity and a willingness to accept risk, to look beyond old patterns and the status quo. The outcomes are worth the effort: mission-investing foundations effectively double the impact of their investment dollars. In this Perspectives piece, I’ll look at these challenges and some ideas for addressing them, particularly with promising urban small businesses that hold the potential to generate substantial job growth and wealth creation.
Investment help for philanthropies
The pared-down staffing patterns typical of many philanthropies often lead them to rely on help from outside investment advisors, fund managers, portfolio managers, and the like. These consultants and intermediaries have historically worked with endowments in much the same manner as they work with other clients, a strategy that generated little attention. Recently, however, public interest has been drawn to the fact that little if any effort is made to coordinate foundation investments with their missions. In fact, foundation investments have sometimes worked against the goals supported with grants and programs. As mission investing gains traction, this phenomenon highlights the need for foundations to seek out investment advice that furthers their missions.
Unfortunately, however, such advice is hard to come by. There is an ample supply of consultants and funds-of-funds with strategies and models that work in the current marketplace, a large market with a wide variety of investment vehicles. By definition, they are compensated for relying on their perspective – for viewing the world through the lens of their experience in that market.
But the market for mission investing is new and different. To generate meaningful, sustainable change, mission investments must be well-placed – in the right place at the right time – and they must be ready to scale up. While established mainstream advisors and intermediaries may function very well in a traditional market, they are unfamiliar with markets where mission investing can make a large-scale, sustainable difference, causing them to overestimate risk and bypass opportunity. And non-profit community-based mission investing is rarely done on a scale that will promote economic growth in the form of jobs and wealth.
A closely related hurdle is the paucity of investment vehicles that can support mission investing, particularly in the market of promising urban small businesses, which are sorely underserved with regard to growth capital. And the few vehicles that are functioning in this space usually provide “slivers” – only debt funding, or only equity. A small business that needs both debt and equity funding must seek out at least two investors. This pattern in and of itself is convincing evidence that these vehicles – and the intermediaries that support them – are just not familiar with the market. It demands versatility, since each business has a different range of needs and is best served holistically.
Current thinking and the status quo
Several thought leaders in the field have recently released studies on mission investing, some including a look at intermediaries. In their recent piece, Aggregating Impact: A Funder’s Guide to Mission Investment Intermediaries, Sarah Cooch and Mark Kramer suggest that intermediaries hold great potential for helping mission investors enhance their efficiency and effectiveness. Intermediaries offer “ease of investment, reduced risk, lower transaction costs, specialized expertise, performance reporting, and an expanded deal flow.”1 Despite these advantages, they report, only one-third of U.S. foundations active in mission investing utilize intermediaries.
Another recent exploration of the topic by Anna Steiger, Tessa Hebb, and Lisa Hagerman emphasizes the role of community-based institutions that have special knowledge of and connections with local businesses and organizations that can benefit from funding.2 They describe mission-investing intermediaries as comprising two elements: a for-profit entity that pools funding from several sources, and the “community partner”.
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Both of these studies are fine as far as they go. However, I believe that the non-profit community-development model aims too low for the market that we are considering. These agencies and institutions function well at the level of small, local businesses that are unlikely to pass the million-dollar mark. Their world is structured accordingly, including the skill set, aspirations, and cultures of leadership and staff. They are not built to operate at the scale that’s needed to make sustainable change in our cities. Perhaps this explains the low utilization rate reported by Cooch & Kramer.
What these pieces lack, I believe, is a grasp of the complexity and subtlety that’s needed to operate in this space. The heterogeneity of the market calls for a continuum of intermediaries and vehicles, each one with a sophisticated understanding of the investor’s goals and the opportunities to address them. Since this market is constantly shifting and growing, it’s unlikely that any single advisor, intermediary, or vehicle, no matter how large, can and will serve all these needs.
A recently released document from Rockefeller Philanthropy Advisors (RPA) comes closer to reflecting the reality of mission investing for economic growth. Titled Philanthropy’s New Passing Gear: Mission-Related Investing, A Policy and Implementation Guide for Foundation Trustees3, this thorough, practical volume by Steven Godeke with Doug Bauer addresses head-on the challenges of making a commitment to mission investing. More so than the other pieces, the RPA guide acknowledges the complexity of the mission-investing process and the need for a new breed of advisors, intermediaries, and vehicles.
We need to change the way we think about investing for economic growth. While minuscule amounts of program money are trickling out to small-scaled community-development institutions, billions of dollars are sitting in endowment funds. We need to dig deeper, setting aside the current thinking for a moment, and open up to different perspectives and creative solutions.
Guiding change
Given the picture painted above, foundations and other mission investors cannot abrogate their mission-investing efforts to traditional advisors and intermediaries or to community-development programs. These initiating funders hold the primary responsibility for change in this setting and must be the source of any meaningful initiative for directing funds to vehicles where they can make the most difference. Here is where the most rewarding challenge lies.
In order to make real progress toward their goals, committed mission investors must be clear, first of all, with themselves: staff, board, and management. Internal champions must be provided with support and visibility, and the commitment frequently highlighted. Only then will instructions to outside advisors and intermediaries have the necessary impact. And they must find a way to monitor on a broad basis how their funds are invested in order to ensure that their mandates are accurately addressed. To be sure, there may be substantial barriers related to staffing and other resources, but fiduciary duty requires nothing less.
This need to adapt and learn emerges with the entry into any “new” asset class, and we know that foundations can adjust when needed. They can look to the recent past for guidance on how to proceed. For example, when they recognized the potential benefits of hedge funds, endowments faced much the same challenges as they do with mission investing: a dearth of staff expertise, lack of relationships with qualified advisors, and unfamiliarity with appropriate investment vehicles. The foundations stepped up to the challenge in order to reap the benefits, bringing in the necessary resources and sometimes taking substantial risks. With this learning experience behind them, foundations and their advisors can use the same approach to entering the mission-investing market.
Mission investors seeking to make a difference in our urban centers face a special challenge – and a unique opportunity. The vehicles that can help build this market are likely to be new and unknown to mainstream philanthropies and their advisers. Thus, endowments (and their advisors) must look “outside the box” to work with vehicles that meet their mission-investing needs but may not meet some of their long-established, traditional criteria. For example, familiarity with and expertise in the market are likely to outweigh arbitrary requirements for a five-year track record or a minimum of dollars under management. Leadership, staff, and structure can also be very effective as indicators of strength and quality, among others. The result is an opportunity for mission investors to build new kinds of institutions by seeding and supporting them.
As endowments start this process of learning and transformation – especially well-respected and well-established foundations – their advisors and intermediaries will gradually follow suit. The ultimate result will be a new ecosystem and a new infrastructure that will allow mission investing to build momentum and create real change.
CalPERS: a case in point
The State of California has been proactive in this effort in its work with emerging managers for CalPERS, the nation’s largest public pension fund. Since 1990, CalPERS has invested in private companies primarily through limited partnerships or funds, typically with managers or general partners acting as third parties investing the pension fund’s capital in businesses. The State’s emerging-manager-development programs seek solid investment returns while providing opportunities to new and emerging firms that may not have the long-term track record, assets under management, and marketing clout to compete against institutional giants. As such, the CalPERS approach provides an opportunity for new and innovative funds and intermediaries to grow and thrive, including those that manage CalPERS’ mission investments. And new intermediaries working on urban economic development create and retain the right focus for the market.
With its considerable assets and expertise, CalPERS is forging a truly creative path. While CalPERS is technically not a foundation, and thus not subject to the same mandates, it has made a strong commitment to mission investing by shifting its funds from overseas emerging markets to those at home. This means finding ways to invest public assets in a manner that is fully consistent with the highest fiduciary standards, yielding competitive market returns, while broadening economic opportunity and contributing to long-term economic success in the state. Philanthropies and other large socially responsible investors would be well served to follow this lead.
An opportunity to pioneer
I believe that the fiduciary duty of a foundation goes beyond its own portfolio. In addition to taking great care to preserve and build its assets, every foundation also has the duty to leverage the impact of its investments in the pursuit of its mission. Take, for example, a foundation that is tasked with addressing the needs of underserved markets. When it becomes clear that there are no vehicles doing that effectively, fiduciary duty requires the foundation to carve out the funds to support the growth of an institution that can do so.
Thus, mission investors aspiring to make a scalable, sustainable difference will need to become pioneering “venture capitalists”. To be sure, this process will require commitment, creativity, and a modicum of well-considered risk. But the decision to take this risk is part and parcel of fiduciary duty. In fact, it transforms a foundation into a stronger steward of its endowment while building up an ecosystem and infrastructure that paves the way for others to join it.
Mission investing has the potential to be a much-needed breath of fresh air for today’s philanthropy – but only if we come up with new tools and ideas to support it. We must carefully reconsider the old ideas about investment advisors, intermediaries, and vehicles, just as reexamining old ideas about philanthropy has led to the rise of mission investing.
Sarah Cooch and Mark Kramer. Aggregating Impact: A Funder’s Guide to Mission Investment Intermediaries. November 2007. To download a copy, see http://www.fsg-impact.org/app/content/ideas/item/545.
Anna Steiger, Tessa Hebb and Lisa Hagerman. “Linking Investors to Economic Revitalization”. Bridges, Summer 2007. To download a copy, see http://www.stlouisfed.org/publications/br/2007/b/pages/2-article.html.
Steven Godeke with Doug Bauer. Philanthropy’s New Passing Gear: Mission-Related Investing, A Policy and Implementation Guide for Foundation Trustees. Rockefeller Philanthropy Advisors, February 2008.
