Category Archives: Philanthropic Investment Strategy

Good Capital

February 2, 2007 – 10:13 am

One of the main themes of Tactical Philanthropy is that the money in your “investor’s pocket” and the money in your “philanthropist’s pocket” is really one and the same. People artificially segment these assets because doing so helps them make decisions. People create lots of artificial concepts to help them live their life. Many of them are helpful, but they often stunt our ability to think creatively. I talked about this concept in a post last year titled “Wealth Management of Philanthropic Capital”.

The discussion around The Gates Foundation investment policy can be seen as a discussion about whether viewing the grant making as separate from the investment management of the asset base of a foundation is appropriate. I think you need to view the two groups of money simultaneously. However, I think that “socially responsible investing” is only a small step in that direction. The “philanthropic capital markets” are still developing. But one step in the right direction is Good Capital. Spend a morning with founder Tim Freundlich, as I did, and you’ll be treated to a mind spinning trek through the landscape of Social Investing. Rather than give my own take on the field, I’m going to quote directly from Good Capital:

The Opportunity

Social enterprises – businesses that combine an ability to be profitable, with the power to deliver on a social mission – are creating new and exciting solutions to society’s problems; from poverty to health, education to the environment. Sometimes they hire and train at-risk groups; other times they target financially challenged markets like literacy or low-income housing. They represent something new and important. They are able to create effective and sustainable societal change through the efficiency of a market-based approach.

Good Capital has researched more than 70 prospects from around the country. We have culled that list down to around 20, and we like what we see; the ones still on our radar are successfully making a difference and could offer investors a financial return in exchange for expansion capital. We are confident we will be able to choose a dozen to build the Fund around. Here are a few examples:

  • Commonwealth Care Alliance, a nonprofit that provides a virtual HMO to marginalized individuals like those with disabilities, at risk elders, people with AIDs or mental health issues. Huge potential growth opportunity, but traditional investors would want them to target a more profitable customer base.
  • Evergreen Lodge, a for profit Yosemite resort, has a five-year record of training and transforming the lives of at risk young people in the hospitality industry. It’s on target to deliver 15% dividends to its investors, and is ready to duplicate its model elsewhere.
  • First Book Marketplace is a nonprofit that aggregates demand from literacy programs to lower the cost of printing books for a nationwide network of agencies; market power resulting in more books at lower cost to low income kids.  The list goes on and on.

The Problem

Despite growing maturation and success, these social-purpose businesses, both nonprofit and for profit, are starving for the risk-taking expansion capital they need to grow. When it comes to critical capital needs, social enterprises fall through a massive gap. Their entrepreneurial approaches often don’t meet the grant guidelines of foundations. They usually lack the mature assets to tap the debt markets. And, though the best social enterprises have top-flight management teams and proven approaches to their market opportunities, they are locked out of traditional equity investment channels simply because they incorporate the cost of doing good directly into their business models or are nonprofits.

The vast majority of the most compelling social enterprises don’t qualify when investors think only about financial return (the money they keep in their investment pocket). And revenue generating mission-focused social enterprises confound those same investors when they think about giving (money from their philanthropy pocket). The result is that these enterprises are forced to rely on slow organic growth or time consuming one-by-one sales to investors and philanthropists. The capital gap limits their ability to realize the full opportunity of their business model and create positive impact in the world.

Good Capital may be a solution to this problem. I think we’ll be seeing a lot more solutions “coming to market” in the future.

By Sean Stannard-Stockton | Also posted in New Philanthropy, Philanthropy | Comments (0)

Quick Link

January 26, 2007 – 7:14 am

The Agitator has a well-written post up regarding The Gates Foundation investment policy.

By Sean Stannard-Stockton | Also posted in Giving Blogs, Philanthropy, The Giving Carnival | Comments (0)

The Discomfort Zone

January 25, 2007 – 8:08 am

The author of The Discomfort Zone, which blogs about Sustainable Enterprise, Emerging Markets, and Governance: Perspectives on International Development, left a comment on my post about private foundation investment strategy:

Your example of a foundation invested in a fossil fuel company, but supporting alternative energy has two flaws. In saying that success in grantmaking may undermine its asset returns, and hence its existence you presumes that the foundation needs to exist for eternity. Why, if the foundation has indeed achieved a paradigm shift and its goal?

It is also realistically unlikely that the impact of grantmaking would be so drastic as to threaten the profits of a fossil fuel company. The assets of a foundation are more than an order of magnitude higher than its grants.

While I accept that foundations should do some asset analysis, it should probably be restricted to examples such as you give (invest in diametrically opposite sectors). The Gates Foundation is correct in saying SRI isn’t their core competence. More important, SRI raises far too many ethical questions of its own, to be embraced without pause.

You should take some time to read their complete post on the subject. I don’t agree with all of it, by far, but it is a compelling argument.

I admit that most foundation’s grants will not undermine a whole industry, but the simplified example was suppose to allow us to see the impact of investments on grant making, even if the effect is small.

I continue to wonder how buying shares in a company from another investor really does much to “support” that company’s actions. The main thrust of why I  think that SRI investing is fine, but certainly not required of foundations is that I fail to see how not avoiding certain companies does much if anything to “support” those companies’ business practices. When you buy a product from a company, you are directly supporting them. But buying their stock in the publicly traded markets does not help them one way or another. Although I admit, it might make the foundation board members feel good about themselves.

By Sean Stannard-Stockton | Also posted in Giving Blogs, Philanthropy | Comments (0)

Private Foundation Investment Strategy

January 23, 2007 – 6:25 am

The LA Times article on The Gates Foundation investment policy makes a big assumption. It assumes that The Gates Foundation, by owning shares in certain companies, is encouraging whatever misdeeds those companies might be committing. This seems logical at first glance, but I don’t believe it is really that simple.

Phil Cubeta ran a nice post last week where he asked:

If you were able to control a foundation with $1 billion in assets, and your goal was to promote a more diverse array of public-spirited media, what tools might you use to achieve that end? And which might be most effective?

  1. Grants at 5% a year of corpus to start up alternative media
  2. Buying stock in big media companies and voting the proxies
  3. Selling stock in big media companies and shunning them
  4. Studies that might influence regulatory policy
  5. Lobbying (within legal limits) regulatory officials
  6. Honors and prizes for good reporting
  7. Funding education for journalists
  8. Investing corpus itself via loan and equity in alternative media.

Phil ends by saying:

Buying or selling Viacom, say, or ClearChannel, by contrast seems pretty trivial, or ameliorative at best.

I agree. Let’s create a simplified case study to examine the situation further. Let’s assume that you are operating a private foundation with the mission of encouraging alternative energy use. Let’s further assume that there are only three assets for you to invest in:

  • The stock of a fossil fuel company
  • The stock of an alternative energy company
  • The stock in a neutral company

When you buy stock in a company, you are not paying the company for that stock. Instead, you are buying the stock from another investor. The ownership of the stock only determines who receives the profits of the company, not how much profit the company produces. If you were invested 100% in the stock of the neutral company, the profits of the company (in the form of dividends and higher shares prices) would flow into your foundation and be available for you to use to encourage alternative energy use.

However, if the foundation owned fossil fuel company stock, they would effectively be recycling the profits of the fossil fuel stock into encouraging alternative energy. This seems like an interesting strategy. Except, what happens if some of the foundation’s actions actually undermine the fossil fuel company’s ability to make a profit? What if the foundation helps make alternative fuels more competitive from a cost standpoint and hurts the fossil fuel company’s profit margin? Perversely, the success of the foundation would undermine its ability to continue its work (ie. success=lower profits from fossil fuel=less assets to pursue foundation’s mission).

Investing in the alternative energy stock presents the same problem in reverse. Lack of success by the foundation would lead to less alternative energy use, lower profits for alternative energy companies and lower assets for the foundation (ie. lack of success=lower profits from alternative energy=less assets to pursue foundation’s mission).

In this simplified world, if the foundation invests in a fossil fuel company, then any temporary setbacks to the foundation is met with additional resources provided by the fossil fuel company. Likewise, if the foundation invests in an alternative energy stock, it will only receive additional assets if it succeeds in its mission and any setbacks will be amplified by less and less assets flowing into the foundation.

In addition to receiving the profits, ownership in a stock also gives the owner voting rights over the company’s decisions. If I were running a foundation like the one in our example, I might prefer to obtain voting rights over the conduct of the fossil fuel company than over the alternative energy company with the idea that the alternative energy company are already being run by people who agree with my worldview.

So what’s the right decision? I don’t know. I don’t think there is a right answer. I think that just as every foundation makes grant-making decisions based on what they believe will be most effective in advancing their mission, each foundation should examine their investment policy in the same light.

I think that the mistake The Gates Foundation has made is found in what appears to be their lack of understanding of the impact of their investment policy. I would think that a foundation of their size would realize that the investment decisions they make have ramifications beyond simple risk adjusted return analysis. I agree with the critics who have argued that The Gates Foundation’s suggestion that they don’t have the expertise to evaluate which companies to invest in or avoid doesn’t make sense. The investment of a foundation’s endowment and the disbursement of grants are the core competency of every foundation.

I don’t think that simple “socially responsible investment screens” should be applied to every foundation. SRI investing without any kind of thoughtful strategy by the foundation does more to make the board feel warm and fuzzy than it does to support the foundation’s mission. But I do think that foundations need to realize that their investment policy (both as it relates to company selection and risk/return decisions) is an integral issues that affects their ability to achieve their mission.

By Sean Stannard-Stockton | Also posted in Media, Philanthropy | Comments (2)