One of the sessions of the RISE Social Entrepreneurship track was a panel of investors who fund social entrepreneurs (both nonprofit and for-profit). One of the panelists was Scott Collier, Managing Director of Triton Ventures. Scott has been a venture capital investor since 1991, serves on the board of the Entrepreneurs Foundation of Central Texas, and is working to engage Austin’s funding community in social innovation. In the RISE panel Scott was on, a conversation began around mission-related investing, the missed opportunity currently facing foundations, and how a new move by the Gates Foundation may be opening up a whole new pool of funds to social entrepreneurs. I asked him to write a post on this. It follows here.
I was recently fortunate to be on a RISE panel with a great mix of entrepreneurs and venture investors turned philanthropists, private foundation founders and social investors, all talking about investment in social enterprises. The discussion emphasized the grant-making functions of the foundations represented on the panel and the exciting ventures that these grants were supporting. However, as often happens, there was no discussion about the potential for social impact investing by the investment functions of these organizations if they were to allocate a portion of their investment capital to activities that could produce both a financial return and a social impact.
I mentioned that this seemed to be a missed opportunity since the investment function of U.S. foundations manages about $550 billion whereas the grant-making function manages a much smaller amount: about $45 billion a year. This would seem to imply that small program-related or mission-related investment allocations out of the $550 billion under management could represent much greater impact investing potential than would similar allocations of grant funds. I also mentioned a cautionary tale as revealed in an LA Times article in 2007, where it was pointed out that the Gates Foundation, the world’s largest private foundation, was investing for a financial return in companies whose business practices were causing harm to individuals that were at the same time receiving benefits from NGOs supported by Gates Foundation grant funding. Given that investment dollars comprise such a much larger sum, such returns-only investment practices could be undermining the value of grants, resulting in questionable net positive impact if viewed holistically.
What I failed to add to this conundrum is that the Gates Foundation has now recognized the opportunity to be a thought leader in making social enterprise investments out of their investment capital. Below is an excerpt from the Gates Foundation website explaining features of their pilot $400 million PRI initiative.
Q. What is the [Gates] foundation’s new approach to Program-Related Investments?
A. We are working with a range of partners to use Program-Related Investments (PRIs) to deepen the impact of our work. We believe that investments are the right instruments to use in situations in which our program strategies are best served by partnering with revenue-generating enterprises, such as NGOs, financial institutions or companies. These entities may not be able to access investment capital from the private markets because the markets or entities that serve the poor may be perceived as too risky or costly to serve, or investors don’t have good information to assess the opportunities. By providing investment capital directly or by reducing risk to investors, we can help our partners access the capital they need to grow and demonstrate to the market that financially viable opportunities exist that serve the needs of poor or otherwise disadvantaged persons. We know we can’t solve all problems with these types of investments – grant-making remains critical for those sectors that can never generate revenues or be addressed by market forces.
We have established a pilot program with an envelope of $400 million to invest in a range of investment opportunities. The capital for PRI investments or guarantees will be provided by this special $400M pool which will be managed by the CFO’s office of the foundation. Out of this pool, we will invest in PRIs that directly and meaningfully contribute to the achievement of the foundation’s charitable purposes.
Q. What types of investments will the foundation do?
A. We will evaluate a full range of investment opportunities that could include:
- Debt investments such as loans to NGOs, financial institutions or companies;
- Equity investments such as investments in venture capital funds or (less commonly) purchases of shares in companies;
- Guaranty investments such as bond back-stops, credit guarantees, or insurance.
- Any PRI opportunity must closely align with our program strategies, from increasing financing for agricultural smallholders in Africa, to supporting charter school facilities expansion, to increasing investment in global health technologies.
I spoke with a colleague who is close to Gates Foundation CFO Alex Friedman, who launched this PRI program, and he told me that a key part of the pilot launch was to organize a new group whose financial returns would not impact the performance objectives of the office of the CIO. This was intended to free the new PRI group to focus more on social return than on financial return.
It is certainly exciting news that this $400 million, representing roughly 1% of the Gates Foundation’s capital under management, is now available for both financial and social return when invested in partnership with social entrepreneurs. However, what may be even more exciting is that the intention of the move is to encourage other private foundations to do likewise and for Gates to thus be a catalyst for multiples of the $400 million to show up in the market as risk capital for social enterprises. Could this be the beginning of large pools of capital available for direct impact investing, social venture funds and private equity funds, and the creation of a true continuum of capital availability in what is today a very nascent social capital market?