The “big tent” of impact investing is bigger and more crowded than ever. As the market matures, more investors are analyzing better data and making big decisions. In the midst of this revolution, we worked with the David and Lucile Packard Foundation to help the Foundation learn from their 35 years of mission investing. The maturation of the impact investing field presents longstanding incumbents and committed innovators like the Packard Foundation new opportunities – sophisticated new partners, groundbreaking investments, and a rich marketplace of ideas.
Late last year, we released a report that summarizes conclusions drawn from our work with the Foundation. It offers five ideas that have shaped the evolution of Packard’s mission investing approach, and considers the implications that remain for the Foundation and the field.
First, designing loan and investment tools alongside grants can create myriad benefits for mission investments, grantmaking, and for overall strategy. Such was the case when the Foundation provided a program-related investment to Afaxys to serve as growth capital for its pharmaceuticals business, neatly complementing the Foundation’s grantmaking in reproductive health. Afaxys Pharmaceuticals has since grown to serve 15 percent of the institutional US contraceptives market, and reduced costs for community health centers around the country.
Next, mission investments can be an effective way to support nonpartisan, nonprofit advocacy. The Foundation’s 2013 loan to The Nature Conservancy (TNC) enabled the purchase of Mexican water rights that gave TNC a voice in bilateral US-Mexico water treaty negotiations, which ultimately resulted in a historic purchase of water rights for restoration of the Colorado River Delta watershed.
Mission investing deals in some cases can be highly complex, especially when there are both profit-driven and impact-driven investors involved. As CEO of Acelero Learning Aaron Lieberman commented: “Investors like to pretend there aren’t tradeoffs [between impact and returns], but that’s not the case.” Investors may be able to design deals with greater social impact if they accept these tradeoffs and plan accordingly.
Further, mission investors can often be more flexible and patient than market-rate investors. They are thus in a position to help creatively structure deals that strike the right balance of risk and return and unlock larger investments from others.
Finally, while most mission investments are made to nonprofit organizations, investors should look beyond an organization’s tax status to assess its impact. Although rarer than non-profits, mission-driven for-profits can deliver robust results while earning profits to fuel re-investment, sustainability, and scale.
In an effort to identify ways to make progress, the report concludes with four steps identified by Redstone Strategy Group that can help coalesce a rapidly growing and maturing field into a powerful force for social good.
- Be transparent about risk, return, and impact tradeoffs. By their very nature, impactful mission investments entail tradeoffs – greater financial risk, or complex negotiations that increase transaction costs. Openly sharing the ways that an investment’s terms influence impact can make tradeoffs clear. Additionally, collecting and sharing best practices about how previous deals have been structured and negotiated may help point the way to capabilities or institutions the field should invest in together. Crucially, the impact of strategically important mission investments should be rigorously monitored and evaluated, just like grants.
- Create and communicate clear risk management guidelines. It is important for mission investors to define levels of risk, and set policies about what share of their portfolios should be “high risk,” the organization’s stance on replenishment should the portfolio lose money for a period, and what risk mitigation tactics should be enacted. By explicitly stating these policies, they can be adjusted over time to maximize the impact of mission investing portfolios.
- Increase investment literacy among foundation staff. Program staff sometimes lack comfort or experience with financial and business models – a barrier that can thwart mission investments even when deeply integrated into programs. Program officers with an appreciation for and willingness to experiment with mission investments can prove essential to successful integration with programs. Some of Packard’s recent programs have been building mission investments into emerging strategies from the start. Through these pilots, the Foundation is hoping to integrate mission investments earlier into strategic planning and increase their impact.
- Effectively collaborate to bring significant capital into high-impact deals. Mission investors have sometimes pursued parallel investments without much coordination. In some cases, this lack of coordination has duplicated efforts in deal sourcing and due diligence. When co-investment has occurred, lack of coordination in reporting has sometimes increased the burden on investees. Finally, coordination can break down or lead to sub-optimal deals due to mismatches in incentives among funders, from risk tolerances to impact goals. Collaboration with peers to create and possibly expand investor working groups for high-priority program areas can forge relationships that reduce transaction costs and increase success rates in the long run.
It remains to be seen whether the impact investing field can deliver the enchanting combination of stability and innovation that mature markets deliver. But we are hopeful that it can.