Launching an Impact First Fund

Challenge: The Catholic Church is the largest private provider of healthcare, education and other social services for much of Sub-Saharan Africa.  Grant funding has not kept pace with population growth, climate change and economic challenges.

Solution: Missio Invest, a new impact investing organization launched a debt fund to expand farms and social enterprises connected with Catholic schools, hospitals and clinics. Combining loans, with technical assistance and capacity building, Missio Invest converts underutilized assets such as farmland into sustainable sources of funding to support the broader mission. Projects are able to make meaningful investments that will generate returns for years, not only repaying the loans but generating local sources of capital.

Results: $32 million blended capital fund combining equity from catalytic investors and debt from large organizations such as the United States Development Finance Corporation (USDFC)

· Over $9 million in loans to 45 projects in eight countries$

· 5  million people served by investee-operated health, education, and social service institutions

· 20,000 jobs created and maintained

· 17,000 smallholder farmers trained in sustainable agriculture

· 91,000 trees planted annually

Keys to Missio Invest’s success:

· Hyperlocal investments that meet investees where they are to develop community-based solutions

· Supporting local networks for training, technical assistance, markets, and other support

· Cooperative and innovative ways to most effectively share risk to ensure project success for all stakeholders

· Word-of-mouth and trust created a groundswell of opportunities from entrepreneurs that had dreams for their projects but saw no means of supporting them

· Blended capital structure supported by catalytic investors and donors secured $20M investment from USDFC

Power of Impact Investing: Missio Invest is an example of the power of impact investing to drive social change beyond what is possible through grants alone:

· Sustainability: Unlike grants, investments in social enterprises generate income that can be used to fund future operations.

· Access to funding: - Social enterprises’ ability to repay their investors can open doors closed to grant-driven projects; Foundations invest 100% of the endowment and typical allocate only 5% for grants

· Multiplier effect: $1 catalytic equity can attract $4 in additional investment and generate $10 of total impact. Routine in the commercial world – very rare in the non-profit world

· Self-Reliance/Agency: – Investees are true partners here, protagonists of their own development in ways difficult under a donor/grantee relationship

Opportunity: Impact-first investments can be a powerful way for family offices and foundations to drive sustainable mission impact beyond what is possible through grants alone. Social enterprises can be found or catalyzed in a wide range of locations across multiple categories. Underutilized real estate, talent and creativity sit waiting to be transformed by social entrepreneurs who simply need encouragement, support and the right investors.

“Give” vs “Invest”

Philanthropy has historically operated under the “95/5 rule.” A foundation invests 100% of its assets to generate income so that it can give away at least 5% of its assets each year. This reflects the historical origins of most private foundations which were created through wealth built by commerce and/or investment. The foundation was established to distribute that wealth via philanthropy. It is also how private foundations in the US are governed by federal regulation. For over a century, this contributed to a “invest vs give” dichotomy.

In the last decade-plus, private foundations are increasingly realizing that they need not be limited by this false choice of invest vs give. They can in fact use far more than 5% of their assets each year to advance their mission and charitable purpose. By being more intentional with how they invest their endowments, foundations can put some and even all their assets to work in support of their mission.

Impact investing

We have all heard the old proverb, 

“Give a man a fish, feed him for a day. Teach a man to fish, feed him for a lifetime.”

It has been a maxim for enlightened philanthropy forever. A more proactive approach would add

“Lend him the money to buy a fishing boat and he can feed a family.
Re-lend the proceeds to a second, third and fourth fisherman, and they can feed a village.”

This is the promise of impact investing– deploying capital where markets can help deliver sustainable social and environmental impact not possible through traditional philanthropy alone

Impact investing is a spectrum of investment practices intended to generate positive and measurable social and/or environmental impact alongside financial return. Two critical aspects of this definition are measurement and intention.  

Measurement: The impact achieved needs to be measurable. The science of measuring financial returns has been practiced for centuries and is well established today, making it straightforward to assess the financial impact of an individual investment or a whole portfolio. This has not historically been true for social or environmental impact. In the past decade, the impact investing community has been making strides to improve the science of measuring impact. The more focused and direct the investment, the easier it is to measure the specific impact.

Intention: For an impact investment, achieving social or environmental impact is not a secondary effect or secondary priority – it is the rationale for the investment. This does not preclude an intention to receive a return on investment. Impact investments blend a desire for both impact and financial return. Without impact, it is simply a financial investment. Without return, it is simply a grant. 

While impact investments balance impact and return, there is not an adverse relationship between them. Returns do not go necessarily go down as impact goes up and vice versa.  Investments made without regard for positive social impact may generate positive or negative returns. Similarly, impact investments where positive impact was a criterion for selection may generate positive or negative returns, even market and above-market rate returns. 

The Special Role of Foundations in the Impact Investing Universe

While forms of impact investing have existed for decades, it became a term of art only in the 21st century. Institutions and individuals are increasingly seeking something beyond a financial return. Almost every day, new alternatives emerge that promise both positive impact and market-rate investment returns – the magic middle of the spectrum. By offering investors the potential to do well by doing good, it is no surprise impact investing is now its own aisle in the trillion-dollar asset/wealth management supermarket. As one would expect, there are heated discussions about whether investments or funds truly deliver intentional and measurable impact or are simply claiming “impact’ as a feature after-the-fact, for an investment created solely for financial purposes.  Without choosing a dog in that fight, most would agree that the most impactful investments are often those where the desire to achieve social impact is the deciding factor. Investments that deliver market or above-market returns should attract investors on their financial merits alone. Investors seeking incremental additional impact can add more to the equation by investing in projects that would not otherwise attract funding based solely on their financial return profile. Foundations are ideally suited to supply this.

Foundations have an added responsibility beyond what is expected of socially conscious individual investors. They exist to advance a charitable purpose, to solve problems not solved by government programs or free markets. Many of these problems require grants – outlays made with no expectation of financial return – the absolute right side of our spectrum above. But to their left on the spectrum are investments that deliver high impact but may not have the potential to match the market rate returns available in the traditional investing market. These investments may deliver lower returns to accommodate the economics of high-impact projects. They may support businesses that are profitable but not profit-maximizing, whether due to an early stage of business development, tough markets, or a focus on impoverished populations– such as a school farm in Uganda. 

These investments share the positive faith-based attributes of impact investments: solidarity, subsidiarity, common good, dignity of work and especially, the preferential option for the poor. But they are unlikely to deliver market-rate returns and may in fact deliver negative returns. Unlike a grant which has a financial return of negative 100% - no money is returned - this category of impact investments will return capital to the foundation, but it may be less than 100% of what was invested. 

Program Related Investments

These investments exist in a no man’s land between investments intended to preserve or grow an endowment and grants designed to advance the charitable purpose of the foundation. They are ideal candidates for Program Related Investments, a special category created by US regulation to allow private foundations to make investments whose primary purpose is to advance their charitable purpose. While they may generate positive returns, even market rate returns, their primary intent is to advance the charitable mission of the foundation. 

PRIs open up new opportunities for foundations. While they are investments, not grants, they still count towards the mandatory distribution of 5% of foundation assets. They are not subject to the test for jeopardizing investments, enabling a foundation to support worthwhile projects that may be too risky for traditional investment. The investment returns from PRIs are recycled into new grants and investments.

Catalytic Capital

One of the most powerful ways foundations can use PRIs is as a catalyst to attract a larger pool of capital. Catalytic capital is patient, flexible, risk-tolerant financing that catalyzes the participation of a larger pool of investors that otherwise would not participate. While a large pool of investors, especially institutional investors, will be attracted to investments that deliver returns and social impact, many high-impact projects will not be suitable for them without the assistance that catalytic capital can provide. By absorbing risks and supporting initiatives or projects before they reach scale, catalytic capital can mobilize 3, 5 or even 10 times as much investment from other investors, delivering an outsized impact. Foundations can play a critical role in making a broader range of impact investing suitable to these investors.