On February 23rd I attended SOE Philly presented by Watershed Capital Group and Delaware Valley Grantmakers. SOE stands for Sustainable Opportunities & Education. The event is a roadshow of investors active in the impact investing space and presenters from investment management firms and funds whose aim is to make money in sustainability and social change. The half day conference was attended by over 70 people from all walks of life interested in the space.
Watershed Capital opened the event with a high level presentation on who Watershed is and the myths associated with the impact investing space. In their words, Watershed Capital advises and assists venture capital, private equity and debt funds raise capital from institutional investors; raises private equity and debt capital for operating companies; advises and executes mergers and acquisitions; and provides corporate financial advisory services. Here are the myths they see as it relates to impact investing:
1. Impact investing sacrifices financial return.
2. Impact investing while interesting won't achieve scale.
3. Impact investing is a new field with no track record.
Antony Bugg-Levine was the morning's keynote speaker. Bugg-Levine is the current CEO of the Nonprofit Finance Fund and author of Impact Investing. Bugg-Levine spoke about the opportunities, challenges and lessons from the impact investing space.
There is a traditional view of the world where it is believed that assets should be/are invested to make money and that social issues are addressed through charities and government. Bugg-Levine hypothesizes, "What if this world is not true?" The investment management function and the grant making function are separate worlds which do not touch. Each camp is suspect. The impact investing world asks the question, "What are all of the assets doing for impact?" What is missing largely is a truly integrated way of managing a foundation.
Bugg-Levinbe says that institutions are overcoming these challenges:
1. Leadership is taking an active role to integrate.
2. Institutions are engaging the whole body in a mind shift.
3. The best investors are collaborating.
4. Intermediaries and advisors are needed to connect institutions to deals which are related to the organization's mission and values.
Bugg-Levine closed with the notion that impact investing is not new. Social Responsible Investing (SRI) and micro finance have been around for quite some time. What is new is the language.
The first panel featured institutions actively engaged in the space of impact investing. Laura Kind McKenna, Managing Trustee of the Patricia Kind Family Foundation, is a strong advocate for all foundations to simply get started and experiment without delay. This was supported by the other panelists who spoke of their individual experiences in the space. Kate Starr from F.B. Heron Foundation talked about her organization's goal to move from their current 40% allocation to 100%. I think what is missing, but what is greatly needed amongst foundations (and in particular small, unstaffed foundations) are advisors who can educate, help create a framework for decision making and source and select opportunities.
The second panel featured representatives from firms managing assets to generate positive financial return and meaningful impact.
The Reinvestment Fund (TRF): TRF finances neighborhood revitalization and has invested over $1 billion in Mid-Atlantic communities since 1985. TRF provides opportunities to lend a minimum of $1,000 up to $5 million for a period of 3 to 30 years. TRF Core Loan Fund has been around since 1986 and currently has $123 million in assets. Investments include housing, supermarkets, businesses and commercial real estate to provide jobs, community facilities like charter schools and social service programs and sustainable energy projects. The Fund has the highest CARS rating of AAA +1.
SJF Ventures: SJF started out as the Sustainable Jobs Fund. The firm recently merged with Investors Circle. SJF is a growth-stage venture capital fund. The funds are 10 year limited partnerships with allocation over a 5 year period. Cash flow is distributed in years 4-10. The minimum is $250,000 for individuals and $1 million for institutions. Representative investment areas include renewable energy and efficiency, organic and healthy consumer products, digital media, and outsourced business services.
Microvest: Microvest manages a family of funds that make debt and equity investments in micro finance institutions and other low-income financial institutions. Microvest assesses the risk of the institutions making the loans. They featured their Short Duration Fund which was launched in September of 2010. They currently have $29 million invested and are seeking to raise $100 million. The fund buys debt instruments and term deposits of low-income finance institutions (LIFIs) which include microfinance institutions (MFIs).
Community Capital Management: Community Capital Management is a fixed income manager which invests in government-related sectors of the bond market. Their goal is to produce above-average, risk-adjusted returns while providing a positive impact on the community and the environment. They typically invest in single family agency mortgage-backed securities (MBS), multi-family agency MBS, Taxable municipal bonds and small business administration (SBA) pools/loans. The CRA Qualified Investment Fund focuses on supporting community development activities like affordable rental housing, home mortgages, neighborhood revitalization and environmental sustainability programs.
There are opportunities out there to get started and to experiment in this space of impact investing. But, I keep thinking about small foundations which do not have staff....how do they get started?
They don’t have staff to investigate;
They don’t have a framework to integrate;
They don’t have access to opportunities;
They don’t have measurement capabilities to monitor impact.
My thoughts also lead me to think about how impact investing can go mainstream. I think what is missing from this discussion is distribution. Mutual funds became the way for individual investors to invest because distributors could be easily compensated. Traditional distributors - Registered Investment Advisors - are largely missing from this business chain. Unless compensation to distributors is figured out, impact investing will remain within Foundations and more specifically those institutions with resources to understand it, to create the framework for decision making and to measure the impact.