IMPACT INVESTING: AN IMPORTANT TOOL IN YOUR PHILANTHROPY TOOLKIT

Transcription

1 IMPACT INVESTING: AN IMPORTANT TOOL IN YOUR PHILANTHROPY TOOLKIT 42 nd Annual Conference, October

2 Impact Investing Continuum Below-Market Rate Investments Higher Risk Lower Risk Lower Risk Higher Risk Market-Rate Investments Mission, social, and impact investing are among the terms used to define philanthropic funds that the grantor would like the grantee to return in some form. Source: F. B. Heron Foundation

3 Types of Philanthropic Capital Grants Meets affordability gap (costs exceed revenue potential) vs. financing gap (capital is needed to produce new or more durable revenue that repays funding) 100% negative return, no repayment Smaller $$ size Project funding vs. enterprise funding, single bottom-line (e.g. mission impact) Program -Related Investments True financing gap Larger $$ size Enterprise funding to meet growth or change, double bottom-line (e.g. mission impact and repayment) -Ability to repay funding -Often at or below market rate return Mission-Related Investments Often market rate or above returns Well-defined financial and social return metrics, high level of risk evaluation Suitable for scaling, product commercialization, mergers & acquisitions Wide range of asset classes to choose from (e.g. private equity, fixed income, guarantees) Triple bottom-line (e.g. mission impact, repayment, and upside return such as dividend or ownership interest)

4 Social Impact Bond (Pay For Success) What is it? A contract (not an actual bond) that: Leverages private capital Monetizes outcomes of social services Realizes costs savings for government Connects performance outcomes to financial return What value does it provide? Exponentially increases the amount of capital that can be brought to bear in the social sector Directs government away from outputs and towards outcomes Places performance measurement and evaluation at center Focus on prevention Extends tax payer dollars Source: McKinsey and Company

5 State of Michigan Pay For Success Michigan Partners for Success is centered on the state government teaming up with service providers and investors from the philanthropic and private communities to fund new approaches to address persistent community health problems. The program focuses on improving health and early childhood development for high-risk mothers and their babies through home-visitation, community programs and better coordination of care throughout pregnancy until the child s second birthday. Michigan was chosen in a national competition to work with Harvard University s Kennedy School on the project. Philanthropic and private sector investors provide upfront funding to expand or replicate proven programs. State covers the costs only if the program successfully meets its goals.

6 Investment Assets Source: Foundation Center, 2013

7 CMF Impact Investing Theory of Change PROBLEM STATEMENT MI requires a financially sustainable social benefit and nonprofit sector to contribute to the quality of life, economic revitalization, and job creation enhancements that make the state a desirable place to live, work, and visit. COMMUNITY NEEDS Many social benefit and nonprofit entities are inappropriately capitalized to maximize social and financial returns. Some entities could benefit from investment capital which is in short supply in spite of the state's significant philanthropic assets. DESIRED OUTCOMES A social benefit and nonprofit sector that is well informed about their capital needs and options Creation of a ready and informed investor network ("supply side") Creation of a ready and informed investment candidate network ("demand side")

8 Investor Profile 56% -of respondents that had no or limited knowledge of impact investing 63% #1 51% 40% -of respondents had not made impact investments -reason why respondents had not made impact investments, lack of information -of respondents felt that board and staff training would be useful in the decision to create, sustain, or expand an impact investing program -of respondents that had made impact investments had done so via loans and loan guarantees (next largest=15%, equity investments in for-profits)

9 Obstacles to Investing Investor responses by rank order: 1. Inadequate information and tools 2. No interest from grantees 3. Doesn t fit with mission 4. Insufficient capital to invest 5. Too financially risky 6. Doesn t comply with by-laws or governance

10 Information Gap Foundation investors want and need more impact investing knowledge and tools Many existing foundation investors are not intentional about investing meaning: 1) no formal investing program, 2) no active solicitation of investment candidates, 3) no explicit investment guidelines, and 4) no ear-marked investment capital Foundation investors consider peer-learning as an important way to gain knowledge about impact investing. The most compelling reason (behind lack of information) that foundations choose not to engage in impact investing is a perceived lack of demand or interest from grantees/investment candidates

11 Demand Gap Bridging Demand Investors may need to do economic gardening and cultivate their own deal flow, consideration of start-ups Promotion Social Media Competitions Prizes Place-making Partnerships Colleges & Universities Pension Funds Financial Institutions Government entities Providers For-profits/hybrids Start-ups Collaborations "What not who" Inclusion of for profit and hybrid entities will expand the demand pool. Focus on the best deliverer of impact vs. legal structure

12 Investee Candidate Profile 80% 75% - of respondents that had no or limited knowledge of impact investing -of respondents had not been approached by a foundation about impact investing 80% -of respondents that have an interest in applying for impact investments A large percentage of Michigan s 30,000 public charities will not be suitable investment candidates because: 1) other types of philanthropic capital better meets their needs, 2) they lack the capacity to manage and utilize investment dollars, 3) they are financially fragile, and or 4) they operate under a business model that can t produce the financial or social returns required by investors.

13 Investee Needs and Wants Capacity Building Needs Use of Funds 65%- Data evaluation 58% - Business Planning 48%- Board and staff development 41%-Legal and IT (tie) #1-Scaling #2-Fixed Asset acquisition #3 R & D #4-Systems improvements

14 Service Provider Gaps Providers centralized around major urban areas Providers often solo practitioners (capacity limitations) Underwriting Fund mgmt Product development Legal Counsel Evaluators Specialists (e.g. production, distribution) Impact investing market too small to for providers to concentrate on Management Support Organizations (MSOs) Accountants Project/Construction management Marketing/Communications

15 Examples of Michigan Impact Investments Porter Hills Foundation Grand Rapids Comm. Fdn W.K. Kellogg Foundation Skillman Foundation Type Impact Investment Program Related Investment Mission Related Investment Program Related Investment Amount $650,000 $600,00 $4,000,000 $50,000 Investee Marywood Health Center Kent County Land Bank Renaissance Venture Capital P3 Enterprises Purpose Expansion of acute care/rehab center Purchase of tax foreclosed properties Increase entrepreneurism and econ. dev Co-investors Dominican Sisters No Banks, corporations, others Start-up, aquaponics produce business No

16 Impact Investing Lessons Culture and practice changes may be needed to adapt to new investment discipline (i.e. different way of engaging with and evaluating grantees ) Clear risk parameters required Need both program and investment staff involvement Every investor has a different entry point Every investor has different definition of impact Education and capacity building needed for board, staff, and partners Mission fit/impact a critical factor Not every idea/organization appropriate for an investment Deals can take time to develop, funders need to cultivate candidates Funder may need to hire for new skills Grant funding often needed to supplement and support investing activity

17 Michigan Women s Foundation Michigan Women s Foundation is a 501(c)3 organization that is committed to creating positive change for Michigan s women and girls. As a statewide foundation, MWF seeks to transform Michigan to achieve equality and empowerment for its women and girls. MWF raises funds to support and collaborate with individuals and organizations to address and eliminate barriers to economic and social equality for Michigan women and girls.

18 Transforming MWF 2008/2009 Problem: MWF s pure Foundation model wasn t working. No significant endowment had been built MWF was essentially a Philanthropic charity what we raised, we granted. Not a sustainable business model in a recession. Large corporate donors went away. We couldn t articulate what problems were we solving for women.

19 2010/2011 Brutal Facts & Strategic Analysis Assets 4000 passionate committed donors who were invested in MWF Donors wanted to Make a Difference for women Wanted MWF to focus on investing, less on grants An innovative risk taking Board & new leadership team with business acumen Liabilities New uncharted territory no one else was doing this Organizational Assets would be at risk No experience in impact investing or micro lending 240 other organizations had added women to their mission crowded field

20 2012 MWF s New Strategic Future - Fill the White Spaces What did women want? What wasn t being done by any other organization? Analytical prioritizing of a women s agenda Help women lead Michigan s Economic Recovery Access to capital Connect and collaborate all the women s organizations Create a support network for women who want to start or grow businesses Create the next generation of women leaders Transform High School leadership program Young Women for Change Create a more substantive Middle School program - Like A Girl

21 Business Discipline to Every Decision Is this a problem MWF, its donors/investors, or grantees can solve or significantly contribute to solving over time? If so, what is our strategy and what milestones will allow us to know we are making an impact? Create a new culture within the Board & a new discipline to decision making Create a new internal infrastructure and staff that will lead to sustainability New brand/image & language

22 MWF Angel Microloan Fund What? A microloan fund for female entrepreneurs that need to obtain financing to start or grow a business in Michigan. Why? To help equip new and emerging business with the tools to be successful (e.g. viable business plan, good market data, realistic financial projections). Who? (Minimum Eligibility:) Women-owned (51% minimum) or led At least 18 years old If a non-profit, started and/or managed by a woman Entity headquartered or operated in Michigan Owner beyond idea stage with personal financial investment made in business Owner attends MWF Angel Micro Loan Fund Orientation The Fund Offers: Low interest loans from $2,500 to $40,000 for both existing and new women-owned businesses and social ventures Repayment terms up to 36 months Access and referrals to coaching, mentoring, education and other resources additional requirements

23 Loan Candidate Selection What do we look for when making a loan? How do we select women to loan money to? o o o o o o o o Can t get financing from traditional lender Women owned/women led business Ability to repay the loan (credit and collateral) Passionate & capable entrepreneur Coachable team Solid business plan Idea that someone will buy Focus on Detroit- more than 90% of MWF s loans in Detroit during this first phase

24 How Did MWF Get Buy-In Original Micro Loan Fund - $100,000 Funded by P100W- Donors/Investors Banks looking for CRA investments Second Phase Microloan Fund $1 Million Huntington commitment to women owned businesses $25 Million State Microloan Fund started in 2013

25 Building the Micro Loan Business Hired expert consultants who had succeeded at starting a women s micro loan fund in California. Brought best in class expertise and standards Created a Board Committee to over see the program Angel Microloan Committee (AMLC) meets monthly to review applicants and approve loans Brought expertise on Staff and Board Entrepreneurs Investment Bankers who had always wanted to change the world Passionate Risk Takers

26 Loan Impact Year 1 ($100,000) 2 loans 6 investments grants to winners of Women s Business Plan and Pitch Competition 2013/14 - Year 2 ($190,000) 7 loans 9 investments grants to winners of Women s Business Plan and Pitch Competition 2014/15 - Year 3 ($350,000) 20 loans 6 investments grants to winners of Women s Business Plan and Pitch Competition 12 partnerships Impact Year women came to MWF with business ideas 300 women in programs from women owned/led businesses 100 new business by 2017 Economic Security/ Generate wealth for women entrepreneurs

27 What We Are Learning We ve re-energized the Michigan Women s Foundation. Donors are giving more, donor base is growing Donors/supporters do not understand or have experience with investments but support the concept. Much education and support is needed We do have the knowledge & skills (both Board and Staff) to do this work Need expertise & an expanded infrastructure It s a much bigger issue than we thought It s more than access to capital Need is greater than we understood It s about a new way of thinking about money and how we use it. Each year leads us closer to understanding how to solve this problem. It s a critical social experiment but it s a 10 year project not a three year!

28 Scale and Growth Fully sustainable Microloan Fund minimum of $10 million What s next on the horizon? How will existing work leverage new opportunities? Individual Investors grow from over the next five years A Grameen like fund for women to learn business skills and financing Significantly increase MWF s endowment assets over the next ten years Create women s spaces to try new businesses and learn