Q: How did mission investing get started at the Robert Wood Johnson Foundation?
Barrand: We had been doing program-related investing since the 1980s, but it was ad hoc, and we did not have a strategy for what it was or when to use it. With our Vulnerable Populations portfolio, our goal was to identify promising community-based models and take them to scale, and we saw impact investing as a way to use the market to do just that. At the same time, under our Pioneer portfolio, we were exploring new ways to access private capital for social entrepreneurs with Ashoka, the largest social entrepreneur network in the world. But until our Impact Capital Initiative, we had not determined how to best use the program-related investment (PRI) tool in a systematic way that was integrated with our program strategies.
Ghisu: In more recent years, management went through a strategic planning process and assessment to think about different ways to achieve impact. Program-related investment became an area of focus. We did a lot of research and had a lot of conversations with other organizations to understand how they were using these tools in conjunction with their grantmaking programs.
We went to our board in April 2010 with the suggestion from our CEO that we set aside a budget of $100 million in addition to the normal program budget, and use this money in 2011-2013 for (1) PRIs and (2) strategic collaborations. This pot of money was perceived as a way to use assets differently and to find new funding partners and organizations to work with.
The PRI work we've done so far has largely been with existing grantees — it's another phase of our support. We are helping organizations and projects grow differently.
We are going to the board in July to talk about how this work will continue. There is pretty uniform agreement that if we're going to keep using these tools, and devoting time and resources to them since they are more labor-intensive than grants, then we should tie them even more closely to program strategies to ensure that we are targeting programmatic bull's-eyes.
Q: Do you invest through intermediaries, or do you make direct investments?
Ghisu: We've done both. When we started, our goal was to do most of our investments through intermediaries. We understood from others' experiences that with direct transactions, the work was harder and the default rate higher. Still, we ended up doing half of our investments directly and half through intermediaries. We found out for ourselves that direct investments are a lot more work.
In the next go around, until we add more resources, we will make our investments through experienced intermediaries. For example, we now have a program team with a workgroup that is focused on community development. That workgroup, given its focus, will be working with the community development financial institution (CDFI) world, and opportunities to use PRIs to work with those CDFIs will be strong.
Barrand: While we have made both types of investments, for each, we have taken the lead on due diligence, legal and financial work, and also on program development. In the cases when we've worked with CDFIs, we've set up the fund or have been the key investor. With direct investments, these are also projects that we have developed as the lead investor, such that our transaction is not part of a larger fund of investment capital.
Q: What are your focus areas?
Ghisu: For these last three years of experimentation, we were open to any of the foundation's teams coming forward with ideas for PRI funding — although certain teams, given their strategies, had more opportunities than others. Our Vulnerable Populations team, for example, came to us with an idea for financing a national supportive housing loan. The foundation's Healthy Weight for All Children team wanted to finance a project to bring fresh food to underserved communities in New Jersey. Many teams had long histories with grantees to which we could provide PRI dollars.
Barrand: We created the Housing Solutions Fund with a longstanding grantee, the Corporation for Supportive Housing (CSH). CSH is a CDFI that had done lending for a number of years, but their loans were geographically limited. This was an opportunity to develop a larger, national fund with which they could move into new areas. CSH was able to leverage our money to influence the quality of supportive housing that is being developed with those funds.
Q: Describe how your work differs from and complements traditional investors.
Ghisu: We're coming in at interest rates that traditional funders would never be able or willing to provide. We are helping to get something started. Without our investment, the projects probably wouldn't be able to launch, at least not within a reasonable timeframe. We're looking to fill a void with our PRIs.
In a lot of deals, particularly ones with banks, we're taking the subordinate position to make the transaction more attractive. We're taking the first or second loss, which gives the bank the comfort that they won't lose money on the deal. Without that security, maybe the bank wouldn't participate. That's a key role our money can play. For other foundation or philanthropic lenders, it's the size of our commitment and the statement it makes by being there that helps attract their funding to a project.
Barrand: I think about our role as distinct from that of a traditional investor: the charitable contribution of our loan. We need to understand how our money produces more of a charitable purpose than would otherwise occur with just commercial funds.
Q: Do you allow for partnering in investments?
Ghisu: Before we started the Impact Capital Initiative, the couple of PRIs we made were co-investments where we participated with other funders who took the lead on the transactions. Under the Impact Capital Initiative, we have taken the lead on the PRIs we've funded. We want to do this more often so we can have closer relationships with other funders doing work in spaces that matter to us. In none of our PRIs are we the only funder.
Barrand: In almost all of our PRIs, we do have commercial lenders alongside us, as well as foundations. In the Supportive Housing Solutions Fund, for example, we partnered with a number of banks as well as with the Conrad N. Hilton Foundation, to create this national loan fund for supportive housing.
Q: How do you measure impact?
Barrand: We measure impact in both programmatic and financial terms. For example, Green House homes are 10-unit homes in the community serving elderly and disabled people in need of skilled nursing care. They are a higher-quality alternative to larger institutional facilities. Our PRI will be used to develop six to eight new Green House homes in low-income areas with higher percentages of residents who are eligible for Medicaid. That's the first level of impact: increasing the number of these units. The second order of impact is providing evidence that this is an investible concern, and that others should think about investing in Green House homes for this population as a financial as well as a social investment.
For the New Jersey Food Access initiative managed by The Reinvestment Fund, programmatic impact will be measured in terms of increasing access to fresh food in New Jersey by developing more supermarkets in underserved areas. This is the first order of impact. The second level, similar to the Green House Fund, would be the amount of investments made by other partners. If we can prove that capital can flow to these types of projects that are important for the community and show that they deliver an appropriate level of return, others will want to invest. There is also a third level of impact with longer-term perspective. What difference have these projects made in communities? With the Reinvestment Fund, supermarkets are built. That also means jobs and the opportunity for healthier lifestyles for those community members.
Ghisu: We'll also look at our investments purely from the financial side. Did we leverage the funds the way we had hoped? For the Green House Fund, for example, we wanted our $10 million PRI to be part of a $60 million fund to finance $300 million in projects. Did that happen? And did we get paid back on the terms that we set out?
See more articles in this ongoing Mission Investing Q&A Series that accompanies the 2013 California Health Care Foundation report On a Mission: How Foundations Are Leveraging Investment Dollars to Impact Health.