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In New Brand of Philanthropy, Nonprofits Invest in For-Profits –

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IMPACT INVESTING A private school in Hyderabad, India, is financed by a company set up by Gray Ghost Ventures.IMPACT INVESTING A private school in Hyderabad, India, is financed by a company set up by Gray Ghost Ventures.

When the W. K. Kellogg Foundation set aside $100 million in 2007 to invest in companies that could produce both social and financial benefits, it was considered revolutionary. Historically, major foundations had used mainly stocks, bonds, real estate and other traditional asset classes to build their endowments.

Now, such investments are increasingly common — and profitable.

In 2010, the Kellogg Foundation invested $5 million in Wireless Generation, a tiny educational software maker working to improve public education in New York City. Just 219 days later, it made a 25.9 percent return after Rupert Murdoch’sNews Corporation bought Wireless Generation for $360 million.

“The customer and market insights that the private companies we’ve invested in have, whether it be in food, health care, financial institutions or education, sharpened our ability to target our grant making and public policy efforts,” said Sterling K. Speirn, the foundation’s chief executive. “Similarly, I think the companies we have invested in are able to leverage not only our patient capital but the different kind of knowledge assets we bring to the relationship.”

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Philanthropy is taking its cues from Wall Street and Silicon Valley. The language of finance is so common that it is sometimes hard to tell the difference between an investment conference and a fund-raiser. Grants are referred to as investments, and public-private partnerships as innovations. Money used to buy vans, computers and buildings is called growth capital.

“It’s not just the language that is changing,” said Antony Bugg-Levine, chief executive of the Nonprofit Finance Fund. “The actual distinction between the two sectors, for-profit and nonprofit, is starting to collapse.”

The shift stems from a new generation of philanthropists, like Bill and Melinda Gates, Pierre and Pam Omidyar and Steve and Jean Case, hoping to stretch their dollars. As they see it, the pool of philanthropic assets — even at a whopping $4 trillion-plus — is too small to make a dent in seemingly intractable social problems like malnutrition, chronic homelessness, water quality and sanitation. So they are trying to find ways to reuse existing financing and to attract new types of capital.

“If we really want to produce transformational change, change in a disruptive, exponential kind of way, there is going to have to be more than philanthropic dollars involved,” said Steve Goldberg, a social investment adviser at Caffeinated Capital, which advises investors, governments and nonprofits.

In essence, the philanthropists want to enlist the capitalists — and they are making small inroads.

Last year, Morgan Stanley made a $12.5 million investment in the Bay Area Transit-Oriented Affordable Housing Fund, alongside foundations and government organizations. The housing group has financed a project in San Francisco’s Tenderloin district that will include 153 housing units and a development in San Jose that will provide 64 affordable housing units for older people.

Goldman Sachs has garnered attention for investing $9.6 million in the country’s first “social impact bond,” an emerging mechanism for harnessing private capital to underwrite social programs. The money helps finance a four-year program aimed at reducing the recidivism rate of male prisoners at Rikers Island. If recidivism declines by more than 10 percent, Goldman stands to make a $2.1 million profit. In the worst case, it loses at most $2.4 million.

Skeptics worry that some social services will be forgotten by deep-pocketed investors looking for financial returns. Programs that focus on feeding the hungry or on education may be particularly vulnerable amid cutbacks in government spending.

“Part of the problem with using the language of Wall Street in philanthropy — social impact bonds, impact investing — is the implication that there are market solutions to everything,” said Phil Buchanan, president of the Center for Effective Philanthropy, which generates data and research to help foundations. “In fact, many of the problems being addressed by nonprofits are a result of market failures.”

It is also too early to tell whether this is a philanthropy fad or a sea change in charity. Matthew Bishop, co-author of “Philanthrocapitalism,” said that while the movement had grown significantly since the book was published in 2008, it had not necessarily led to big changes in charitable giving and investing.

Impact investing, still a relatively small portion of philanthropy, could also face growing pains. Mr. Bishop pointed, in part, to the problems with microfinance, where pension funds, banks and other financial firms poured money into tiny loans meant to improve the lives of impoverished entrepreneurs.

As microfinance institutions began to act more like mainstream investors, they suffered from declining credit quality, rising competition and weak regulations. “If you just focus on the business model and don’t work on building the marketplace in which that business is to function — the regulatory infrastructure and so on — you can produce some pretty bad outcomes,” Mr. Bishop said.

The Gates Foundation, the world’s largest, is taking a blended approach, combining grants with targeted investments. It has a $1 billion pool for investments and loans that further its philanthropic goals, and it spends more than $3 billion a year on traditional giving. It recently made equity investments in biotech companies like Visterra and Genocea, which are working on technologies that complement the foundation’s work in global health.

The foundation has also made several deals aimed at reducing the price of vaccines. This year, it created a sort of purchase guarantee, effectively promising to buy aGlaxoSmithKline product. The deal gave GlaxoSmithKline the security it needed to invest in manufacturing a less expensive rotavirus vaccine.

“There’s a lot of potential for working with pharmaceutical companies and others to create access to products for the poor,” said Julie Sunderland, senior program investment officer at the Gates Foundation.

Other philanthropic ventures are also trying to leverage existing resources.

Gray Ghost Ventures, an investment firm established by Bob Pattillo, a real estate developer, provides capital for projects that address the needs of low-income communities around the world. It has invested in companies that cater to the poor, like D.light Design, which is developing low-cost lighting products for people without reliable electricity, and Babajob, a Web- and mobile-based job search and placement business aimed largely at India’s maids, gardeners and other household workers.

Gray Ghost has also set up the Indian School Finance Company to lend money to private schools, which serve more than 60 percent of the country’s students. Such schools find it hard to obtain financing for improvements and upgrades. The company is trying to fill that gap with midsize, market rate loans. “Making those investments can help them attract more students, so they generate income to pay off the loan and more kids get an education,” said Jennifer McReynolds, head of investor relations at Gray Ghost.

Mr. Pattillo’s private foundation, Gray Matters Capital, supports the project philanthropically. For example, it offers fellowships to recent college graduates to work on the administrative side of the private schools.

“We need to harness the best of both the capital markets and the social sector to address problems we cannot solve inside the two silos,” Mr. Bugg-Levine, the Nonprofit Finance Fund chief, said. “The ensuing confusion is a small price to pay if what it ends up in is adaptations that bring some sustainability to our social endeavors.”

The State and Future of Impact Investing – Forbes

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Photo: Jai Catalano

In a recent interview with Antony Bugg-Levine, CEO of Nonprofit Finance Fund, we discussed his new book about the impact investing sector, emerging trends and ideas in this space, challenges and opportunities moving forward, what the world would look like if the potential of impact investing were to be realized, and advice to traditional investors interested in becoming an impact investor.

Antony Bugg-Levine is the CEO of Nonprofit Finance Fund, a national nonprofit and financial intermediary dedicated to mobilizing and deploying capital effectively to build a just and vibrant society.  In this role, Mr. Bugg-Levine oversees more than $225 million of capital under management and a national consulting practice, and works with a range of philanthropic, private sector and government partners to develop and implement innovative approaches to financing social change.  He is the co-author of the newly released Impact Investing: Transforming How We Make Money While Making a Difference (Wiley, 2011).

Most recently a Managing Director at the Rockefeller Foundation, Mr. Bugg-Levine designed and led the Rockefeller Foundation’s Impact Investing initiative. He convened the 2007 meeting that coined the phrase “impact investing” and is the Board chair of the Global Impact Investing Network. A former consultant with McKinsey & Co., he also teaches at Columbia Business School. A native of South Africa, he served in the late 1990s as the acting communications director at the South African Human Rights Commission.

Rahim Kanani: Describe a little bit about the motivation and inspiration behind writing your new book, Impact Investing: Transforming How We Make Money While Making a Difference.

Antony Bugg-Levine: In the book we describe the “bifurcated world” that most people inhabit, in which they assume that the only way to solve social challenges is through government and charity and that the only purpose of business and investing is to make money. Impact investors reject that worldview. We recognize that for-profit investment can be both a morally legitimate and economically effective way to address social and environmental challenges.

I certainly come from that bifurcated world. I began my career working in politics and human rights and assuming that investors had sold out their principles to get rich. But working for the South African Human Rights Commission in the late 1990s, I saw how economic power and business dominance allowed people to perpetuate oppressive practices even when official policies had changed. On the other side, working at McKinsey and with TechnoServe, a business-focused nonprofit in East Africa, I came to see that business can be a creative force for empowerment and upliftment.

So with the support of the Rockefeller Foundation, starting in 2007 I began helping to bring together people around the world who share an excitement about the positive role that investment can play in addressing social and environmental challenges. As interest in this concept exploded, my co-author Jed Emerson and I thought it timely to write a book that could both serve as an introduction to this concept and also identify the systemic challenges we must overcome to enable impact investing to reach its potential.

Rahim Kanani: As you assess the current landscape of impact investing, what are some of the recent trends we should be both mindful of, and be paying special attention to?

Antony Bugg-Levine: Many of the initiatives that were being planned when we were finalizing the book are now starting to bear fruit.  In the four months since the book came out, banks in the US and Europe have launched impact investing products for their clients. RBC, the biggest bank in Canada, has announced an impact investing fund, and Big Society Capital, the UK’s public-private partnership to form a major impact investing intermediary has secured more than $500 million in initial capital. Impact investing is also gaining traction among leading business schools. Some private foundations are also starting to be bolder in their embrace of impact investing and the idea that all their assets should contribute to the social mission they were set up to fulfill. And governments from the US to Australia are getting involved, most noticeably through strong interest in the social impact bond and other tools to harness private investors to fund organizations that can prove the positive social outcomes of their work.

Rahim Kanani: What are some of the critical challenges that lay ahead of this sector?

Antony Bugg-Levine: Our book makes the case that impact investing is transitioning from its initial phase of proving the concept through deals to a more mature phase in which we will have to muster a social movement to build new systems. These include new regulations and policies, new approaches to leadership that celebrate collaboration and execution— not just vision and charisma— new philanthropic leadership that puts all foundation assets to work for mission, and new capital markets products and services. We also have to overcome the stubbornness of the bifurcated mindset.

Beyond these systemic challenges, we also need to put impact investing in its rightful place. Impact investing is a tool, not an end in itself. If you approach the world asking “where can I make an impact investment?” you will end up doing far less interesting work then if you ask “what social challenges do I want to address, and how can impact investing be one of the tools I use to address them?”

This may sound like just semantics, but we have seen in our work at Nonprofit Finance Fund that this approach opens up great opportunities. In New York City in 2009, we set up a window to provide working capital loans to frontline agencies such as soup kitchens and homeless shelters. But we found them too financially shaky to take on debt. If we were only looking for places to invest, we would have moved on to find other less risky borrowers. But because preserving New York’s safety net is crucial, we have structured a new initiative, the Community Resilience Fund, to support 100 agencies seeking to transition to a more sustainable business model. This Fund would not be possible without impact investors offering millions of dollars of loans. But it also requires credit enhancement from the city government and substantial grant support from private donors. No one piece would work alone. Each is necessary.

I believe the most interesting impact investing in the next few years will involve similar collaboration, as impact investors work with governments and donors to tackle challenges that cannot be addressed with any one tool.

Rahim Kanani: At the same time, what are some of the key opportunities?

Antony Bugg-Levine: The growing awareness that business-as-usual approaches are not working for our societies or our planet are a powerful prod for people to reexamine their assumptions. That’s crucial to level the playing field to make the case for impact investing. In the last few months, the sensibilities around the Occupy movement also spurred more people to reconsider their relationship with mainstream financial services institutions.

In the US, the “move your money” campaign led a reported 5.6 million people to open up accounts at community banks and cooperatives. We need to figure out how to harness this energy of critical reexamination to create space for impact investors. At the same time we need to fight the growing skepticism that any investment can be socially useful.

Rahim Kanani: If impact investing were to be fully realized, what would the world look like?

Antony Bugg-Levine: We would live in more just, vibrant and sustainable communities because we would organize integrated solutions to the problems we face. Impact investing would work alongside philanthropic and government support, with each part playing a more powerful role because of its complementarity. At Nonprofit Finance Fund, we call this approach Complete Capital. After decades of experimenting with the different components of this integrated approach we now know how to fit together financial capital (grants and impact investments), intellectual capital (the ideas about what we need to do and how to do it), human capital (the ability to support organizations to implement bold strategies) and social capital (that allows people and institutions unused to working together to collaborate). Most of the easy problems that can be solved with siloed approaches are already being tackled. The increasingly complex and accelerating challenges that remain are going to require Complete Capital approaches to solve them.

Rahim Kanani: And in that vein, what steps do we need to take as a society to place impact investing on precisely this path?

Antony Bugg-Levine: I worry that too many impact investing conversations are ahistorical and acontextual. Impact investing must become more than just a few investors dabbling in new ways to fund charismatic entrepreneurs. Instead we need to take stock of the times we live in: at least in the West, government retreat from their traditional role as the funders of social services is threatening the viability of many organizations that communities rely on.

How will impact investing help solve this crisis and create and preserve just and vibrant communities? If impact investors are not asking that question, and coming up with creative answers, then the whole impact investing movement could prove to be a bit of a sideshow.

If impact investors do take up this question, they will find themselves having to push beyond business-as-usual thinking. Instead of waiting for investment prospects to come across their desks that look and feel like the deals they’re used to, they will proactively go out to forge collaboration with donors and governments. And they will seek out partners who can put these types of coalitions together instead of trying to go it alone.

Rahim Kanani: What advice would you give traditional investors interested in making not only financial returns, but social and environmental returns as well. Where should he or she start?

Antony Bugg-Levine: First, don’t believe your bankers or advisors or trustees or professors when they tell you that impact investing is impossible or imprudent. Now that conservative, government-regulated pension funds and foundation endowment managers on one end and retail investors on the other have figured out how to become impact investors there’s really no reason you can’t as well.

Second, arm yourself with the facts. Take advantage of the rapidly expanding evidence about impact investing on the Global Impact Investing Network’s website’s Resources section. If you’re an investment advisor check out the resources available from ImpactAssets . If you’re interested in how impact investing can fund social service delivery go the Pay for Success learning hub(and send me other helpful resources you find—I’m always on the lookout!)

Third, don’t try and do it alone. Tap into existing expertise. You will need to be a prudent investor and make your own assessments of your investment options. But if you are a retail investor check out Calvert Foundation who has been offering impact investing products for years, or RSF Social Finance who are pioneering radical impact investing practices. Or contact an organization like Nonprofit Finance Fund that has existing investing capabilities and is eager to partner with new investors.

But as you do this, be realistic about what impact investing can achieve. There are many social challenges and organizations that require donations, not investment. Remember that impact investing is an exciting tool but not a silver bullet.

Rahim Kanani is a writer, advocate, strategist and entrepreneur for global social change. His articles, opinions, and interviews with global leaders can be found at Follow him on Twitter @rahimkananiand on Facebook.

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