Mission investing, or impact investing, enables foundations and other mission-driven organizations to invest in for-profit and nonprofit organizations whose work has a positive social impact. We asked leaders from the field of philanthropy to talk about how this work got started at their organizations.
As managing director of The Kresge Foundation’s Social Investment Practice, Kimberlee Cornett works with the foundation’s program teams to make capital and financing available to organizations working on key priorities of the foundation.
Q: How did mission investing get started at your organization?
A: A Kresge board member encouraged the foundation to consider how to use other forms of capital. We made our first experimental loans in 2008, and I was hired in 2010 to figure out how to build a programmatic and operational framework around our mission investing activities.
We’re still learning how our investing fits with our grantmaking. We’re spending time with program staff to figure out how to connect grants to future investment opportunities. We want to understand the capital market that we are working in, and to articulate how our grants will be sustained over time, knowing that most grants have a limited shelf life.
Q: Do you invest through intermediaries, or do you make direct investments?
A: Kresge does both. We look for intermediaries that bring significant content knowledge and deployment expertise, and that are able and willing to take some risk with us. As an investor, we have built systems for portfolio management, but that is not our day-to-day business. We benefit from the aggregation of information that others bring to us.
Our community health center investments are all made through intermediaries. We make a guarantee or a loan to an intermediary, which then makes the direct loans to health centers. In most situations, the foundation needs to work through an intermediary, as we don’t have the back office operations to support servicing multiple individual loans.
In a minority of cases, we will invest directly when we want to be closer to investees, or when there is not an intermediary well positioned to make the investment. Last year, we made a $3 million enterprise-level loan directly to the Colorado Coalition for the Homeless (CCH) to help expand health services. CCH was a past grantee, and we knew them well. We are actively investigating and investing in pay-for-performance models like the one we funded with CCH, so we wanted to stay particularly close to that investment.
Q: What are your focus areas?
A: Kresge’s work with community health centers has two dimensions. Early on, we focused on building and expanding health centers. Since then, our investments have moved “in the box” to influence what happens inside those community health centers — making sure long-term operations and patient care systems are efficient and stable.
We have significant investments in a real estate fund we raised in Detroit to finance development of market-rate housing.
An initiative that is just getting started with our human services team is the development of new financing strategies for social services for vulnerable populations, with a focus on families in affordable housing. Our pay-for-performance work is part of this effort.
A fourth bucket of work is building the infrastructure that can make the overall impact investing market go faster and deliver more capital on the ground. This requires us to look beyond our programmatic target areas and to help build the structure and scaffolding so that others can invest more easily.
Kresge’s CIO, health director, and I worked with consultants to create an overall organizational investment thesis around health investments, and then triaged the landscape of possible targets for what would be appropriate for grant funding, what would be appropriate for subsidized investments out of our social investment portfolio, and what would be most appropriate potentially for our corpus investing. Part of the objective is to move capital, and part of our objective is to figure out ways to connect the expertise that we have inside the building. I call it our “BIO Project” — how to become a “better investor overall.”
Q: Besides money, what do you contribute to investees?
A: In Detroit, where we have a very deep local knowledge, a base of expertise, and strong opinions about the needs of the market, we are an active investor and thought partner. For example, in the case of the Woodward Corridor Investment Fund, a very local revitalization effort, we worked side by side with the intermediary managing the fund, Capital Impact Partners, to structure the fund, find investors, and raise capital.
In other sectors we are not as hands-on because we don’t have the deep content expertise. In these cases, we work closely with experts to connect borrowers and investees with other borrowers and investees, putting together new combinations of partnerships.
And in some places where the investment is in raw infrastructure work, we’re working closely with a small cohort of philanthropic investors who share our goals of a robust capital market for social investments in many sectors. One example is our investment in the Opportunity Finance Network’s NEXT Award, where we partnered with OFN and Wells Fargo to provide grant and loan capital to community development finance institutions moving into new geographic markets. The foundation has also been supportive of the capital absorption work developed by the philanthropic collaborative Living Cities, which is working to understand the conditions that have to be present in a community for all forms of capital to find traction.
Q: Describe how your work differs from and complements that of traditional investors.
A: Kresge makes investments where there is a capital gap in the market and where traditional investors are unwilling to take on the risk. We don’t want to do something that a bank is going to do — we don’t want to handle demand that someone else should be financing.
Several foundations are significantly ahead of us in their development of new capital tools and experience using nongrant forms of capital. These foundations are “teenagers,” whereas we are very much at the toddler stage of development: learning, making mistakes, not yet set in our ways. Our standard of what we will and won’t do is still flexible. We’re trying to figure out what the market needs from us. We’re willing to experiment because it helps us institutionally to learn.
Q: Do you allow for partnering in investments?
A: We’ve made co-investments with Ford, Casey, MacArthur, and CHCF. Sometimes we need more capital, and sometimes we want to learn from another investor with related goals. Every time we make a co-investment with a foundation, we are developing organizational memory about how to do it well.
Co-investing is important in the social sector. Traditionally, it has been difficult for foundations to collaborate because we’re often working in very specific program areas. I’m hopeful that increasingly, we can find room to venture outside our program areas and simply provide capital to good partners and important deals, becoming, in part, agnostic to content area. To be singularly focused on one particular issue thread leaves a lot of vacant space.
Q: How do you measure impact?
A: We have a very crude way of charting risk versus impact to get a sense of the impact of our social investments. We have a 2×2 grid with high risk / high impact at the upper left, and low risk / low impact at the lower right. We make sure to have a dispersion of deals across that spectrum.
The discussion about actual outcomes is more difficult — the data we receive from investees are often qualitative and in narratives, and it takes work to extract and aggregate that information in a way that is uniform so that we can measure impact. We can have long conversations about how much reserves we should be holding on this deal or that deal, but not nearly as much about whether we really got what we thought we were buying.
We also need to be clear about how we are defining impact. For example, we invested in a group that developed a technology that ended up being challenged in court. The group had to pivot and is now working in a different state under a different business model. The organization is nimble, has very good management, and will figure out how to make money to pay back its lenders. So even though we can count them as a financial success, it was a programmatic failure. We don’t yet have a good way to measure both types of impact.