Exponent Philanthropy, together with partners Mission Investors Exchange and Arabella Advisors, is pleased to announce the release of Essentials of Impact Investing: A Guide for Small-Staffed Foundations.
Below is an excerpt from the actionable guide—a Q&A with Luther M. Ragin Jr., former president and chief executive officer of the Global Impact Investing Network (GIIN) who helped accelerate the development of the impact investing industry. He speaks to opportunities for small-staffed foundations that want to invest for impact.
Q: How does impact investing from small-staffed foundations help create impact?
A: The same way it would from foundations with large staffs or from other philanthropically minded organizations. But small foundations are unique in two noteworthy areas:
- Flexibility. Their small size makes for nimble structures that can adapt or respond more readily than larger foundations. This nimbleness leads to clear signals on the part of funders and allows asset managers and social entrepreneurs to make sharp decisions based on these signals. It’s better to get a “no” in a matter of weeks than after a process of several months.
- Specialized knowledge. Small-staffed foundations have unique understanding and expertise in particular geographic or program areas, or both. This can be leveraged to attract other outside investors who can capitalize on the foundation’s connections to the community.
Q: What are some of the specific strategies leaders in small-staffed foundations can use to play a role in moving capital in markets including or beyond their traditional grant-making activities?
A: Typically, there are two constraints perceived by small-staffed foundations in regards to impact investing. The first is the concern over the size of their investment and whether it is able to be meaningful to the project. The second is if there exists the requisite in-house knowledge and expertise to effectively carry out the investments.
One successful strategy to answer both these concerns is participation in a note program, sponsored by well-known and often well-capitalized nonprofits. The Calvert Foundation Community Investment Note program, for example, allows foundations with $100,000 or more to participate in community investment projects that vary by geography and program areas. Both the capital and the risk are pooled to provide opportunities that without this aggregation function would otherwise be less accessible. So foundations that may not have considered, say, microlending in Africa, or affordable housing on the West Coast, now have an opportunity to undertake these activities. In exchange, they receive access to a diversified portfolio, and a simplified and strategic way to do so. This is a way for foundations to directly address the two perceived constraints with shared learning and pooled due diligence. Other note programs include Enterprise Community Impact Notes (affordable housing), Coastal Enterprises—CEI Investment Notes (economic development and real estate in Maine), and Nature Conservancy Conservation Notes (land and water conservation).
Q: How can small-staffed foundations engage in impact investing in ways that other foundations may not?
A: One way that small-staffed foundations can engage is working with community development financial institutions (CDFIs). This is an area that larger foundations do not typically explore, and one where small-staffed foundation are well positioned because they know the participants, understand the value, and can see the effects of their investment firsthand. When foundations work or invest with local community development banks, they are partnering with institutions that have a specific mandate for that community. There are more than four dozen CDFIs throughout the country that are commercial banks. Investing in the Certificate of Deposit Account Registry Service (CDARS), for example, is a convenient way for dollars to have impact with low risk. CDARS provides an FDIC guarantee on traditional certificates of deposit in amounts in excess of the usual $250,000 limit.
Finding investment opportunities across issue areas, geographies, and asset classes is often a challenge for the small-staffed foundation. For this reason, the Global Impact Investing Network (GIIN) has developed ImpactBase, an online directory of impact investment funds and vehicles. It is an invaluable tool for foundations beginning an impact investing program, or looking to expand into new asset classes, geographies, or issue areas. Once an opportunity is identified, foundations can bring it forward to their board or consultant and take the next steps.
Q: What is one thing about impact investing that tends to surprise small-staffed foundation leaders? What are some of the most common questions you field from these funders?
A: The first is usually “Where do we originate transactions and find investment opportunities?” This is a common question because beginning an impact investing program can be daunting after a long tradition of grant making. The GIIN’s ImpactBase is an effort to address this uncertainty, and scale the work of many by aggregating resources and sharing information.
They also ask about where they can go for help with support and due diligence once they find an opportunity. The answer to this question depends, of course, on each foundation’s investment strategy. Sometimes support can be found through the traditional channels of financial advisors, and others call for the help of a consultant with experience in a particular area. The solution here is really individual to the foundation’s internal protocols and strategic plan.
Others ask, “If $500,000 is a large investment for my foundation, are we frozen out of this marketplace?” The answer is no. Cash equivalents and note programs, as mentioned above, are good examples of ways to engage at any funding level. Resources such as ImpactBase are searchable by a number of variables, including funding amount. Small-staffed foundations will benefit from knowing the breadth and variety of current opportunities and will be empowered by envisioning their impact at any level.
Download Essentials of Impact Investing: A Guide for Small-Staffed Foundations >>
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