DOU­BLE-DUTY DOL­LARS

SO­CIALLY RE­SPON­SI­BLE IN­VEST­ING UN­DER THE NEW RUBRIC OF “IM­PACT IN­VEST­ING” IS FI­NALLY AT­TRACT­ING BIG NAMES AND DEEP POCK­ETS. PRO­PO­NENTS PRE­DICT IT WILL GO MAIN­STREAM—BE­CAUSE MIL­LEN­NI­ALS DE­MAND IT. JUST DON’T EX­PECT MAR­KET-BEAT­ING RE­TURNS.

Forbes - - Contents - By Lau­ren Gensler

Im­pact in­vest­ing is fnally at­tract­ing big names and deep pock­ets. Pro­po­nents pre­dict it will go main­stream—be­cause Mil­len­ni­als de­mand it. Just don’t ex­pect mar­ket-beat­ing re­turns.

In 2001, af­ter 29 years cul­ti­vat­ing Napa’s Sil­ver Oaks Cel­lars and its iconic caber­net sauvi­gnon, Justin and Bonny Meyer sold their 50% stake to part­ner Ray Dun­can for $110 mil­lion. With Justin’s health ify, they hoped it would give them more time to­gether for phi­lan­thropy and to build their newer win­ery, Meyer Fam­ily Cel­lars. But just eight months later Justin died of a heart at­tack at 63, leav­ing Bonny, then 52, to man­age the money and their shared char­i­ta­ble mis­sion.

For starters she sold the fam­ily home to cre­ate a $5 mil­lion char­i­ta­ble kitty. But it seemed like a pit­tance when, at the 2004 Global Phi­lan­thropy Fo­rum at Stan­ford, she rubbed el­bows with bil­lion­aires who had hun­dreds of times that amount to give away. “I’m think­ing, how in the heck am I ever go­ing to come close to do­ing what they’re do­ing?”

Meyer found an an­swer in her siz­able non­char­i­ta­ble port­fo­lio, then a con­ven­tional mix of stocks and bonds. “It oc­curred to me that I could do a lot more good in the world and en­joy it more by in­vest­ing [that port­fo­lio] in so­cial en­trepreneurs,’’ she says. While the term “im­pact in­vest­ing” wouldn’t be coined for another three years, she threw her­self into it.

For decades so­cially re­spon­si­ble in­vest­ing meant keep­ing busi­nesses you dis­ap­proved of—say, to­bacco or weapons pro­duc­ers or pol­luters—out of your port­fo­lio. The Fo­rum for Sus­tain­able & Re­spon­si­ble In­vest­ment es­ti­mates that more than one out of ev­ery six dol­lars in­vested in the public stock mar­ket is now so­cially screened in some way. A good many so­cially re­spon­si­ble mu­tual funds are lit­tle more than in­dex funds mi­nus the screened-out stocks.

By con­trast, im­pact in­vest­ing is more tar­geted, fun­nel­ing money into busi­nesses (of­ten star­tups) likely to do good. In some ways it’s more like tra­di­tional pri­vate eq­uity or ven­ture cap­i­tal in­vest­ing: It is avail­able pri­mar­ily to the well-of, it’s riskier than the tra­di­tional stock-screen­ing ap­proach, and it has a po­ten­tially higher change-the-world payof. Fi­nan­cial re­turns? They’re all over the lot, with some im­pact in­vestors con­sciously sac­ri­fc­ing profts and oth­ers dream­ing of ven­ture-cap­i­tal-like re­turns.

Re­gard­less of re­turn, more in­vestors are clam­or­ing for this type of proac­tive do-gooder ac­tion. At the end of 2014, $60 bil­lion was com­mit­ted to im­pact in­vest­ments world­wide, up 25% from year-end 2013, a study by Jpmor­gan and the Global Im­pact In­vest­ing Net­work fnds. It pre­dicts 16% growth in 2015. Ge­o­graph­i­cally, the most im­pact money is in­vested in North Amer­ica and Sub-sa­ha­ran Africa; ev­ery­thing from an Uber-like app for auto rick­shaws in In­dia to early child­hood ed­u­ca­tion in Utah has at­tracted im­pact dol­lars.

To be sure, some very smart in­vestors—most no­tably Berk­shire Hath­away CEO War­ren Bufett—ques­tion the wis­dom of chas­ing both proft and so­cial good with the same buck. “I think you should make the most money you can and then use that for what­ever phil­an­thropic goals that you have,” Bufett said at The Forbes 400 Sum­mit on Phi­lan­thropy ear­lier this month in New York City.

But other bil­lion­aires who once shared Bufett’s skep­ti­cism have changed their minds. “I al­ways had this naive no­tion that cap­i­tal­ism was about mak­ing money and phi­lan­thropy was about do­ing good,” Per­sh­ing Square Cap­i­tal Man­age­ment founder Bill Ack­man said at the same sum­mit. But then, true to the ac­tivist in­vestor he is, Ack­man got im­pa­tient with how tra­di­tional char­i­ties op­er­ate. He once baited Bufett by de­scrib­ing a char­ity as a com­pany where “the CEO spends pretty much all his time rais­ing money to pay of debt, only half of the board of di­rec­tors show up at the meet­ings, and there are ten other com­pa­nies in the space.”

Ack­man thinks that phi­lan­thropists shouldn’t fund a non­proft if there’s a for-proft try­ing to solve the same prob­lem, since the for-profts should be bet­ter able to sus­tain them­selves long term. While he and his wife, Karen, as sign­ers of the Giv­ing Pledge, plan to give more than half their wealth to

char­ity, Ack­man likes the idea of get­ting a re­turn on his im­pact in­vest­ments and re­cy­cling the money into new ones.

In March Ack­man put $5.8 mil­lion into Bridge In­ter­na­tional Academies, a for-proft that has built a chain of more than 400 pri­vate nurs­ery and pri­mary schools in Kenya and Uganda that rely on tech­nol­ogy and a stan­dard­ized “schoolin-a-box” ap­proach to de­liver qual­ity ed­u­ca­tion for just $6 a child a month. “It’s a vol­ume busi­ness. You need to keep prices so low that some­one liv­ing on $1.25 per day can aford your ser­vice,’’ says Bridge co­founder Shan­non May. “If you can fgure out how to drop prices on any­thing for some­one liv­ing in poverty, there’s an un­be­liev­ably mas­sive mar­ket.”

Bridge now has nearly 119,000 stu­dents, is open­ing a new school ev­ery two and a half days and plans to ex­pand to Nige­ria and In­dia by early next year. It ex­pects to be­come proftable at 500,000 stu­dents. Mean­while, an ac­qui­si­tion or an ini­tial public ofer­ing is a pos­si­bil­ity, May says.

Ack­man isn’t the only bil­lion­aire bet­ting on Bridge. Face­book co­founder Mark Zucker­berg in­vested $10 mil­lion in the same March round. Bill Gates put in an undis­closed amount in 2013 af­ter sit­ting next to Bridge co­founder Jay Kim­mel­man (May’s hus­band) at a din­ner. The frst bil­lion­aire to back Bridge, with $1.8 mil­lion in De­cem­ber 2009, was ebay founder Pierre Omid­yar, who set up his Omid­yar Net­work in 2004 with the then un­ortho­dox no­tion of mix­ing phi­lan­thropy and proft.

Be­fore them all was lit­tle Bonny Meyer, who in­vested $150,000 of her wine money in 2008, when Kim­mel­man came to her ofce to present the con­cept be­fore the frst school opened. He was only one in a pa­rade of so­cial en­trepreneurs who wore a path to her door once word of her in­ter­est got out. “Meyer Fam­ily En­ter­prises be­came a mag­net,” she says. “We never had to go look­ing for in­vest­ments.”

Meyer’s story shows just how far im­pact in­vest­ing has come in the last decade, as sea­soned money man­agers, bil­lion­aires and fnally the big in­vest­ment houses have started to get in­volved. But the sec­tor is still young, with only lim­ited op­por­tu­ni­ties for less-wealthy in­vestors. The op­por­tu­ni­ties should grow as fnan­cial ser­vice com­pa­nies make a play for the nest eggs Mil­len­ni­als will cre­ate on their own and with the $30 tril­lion they’re pro­jected to in­herit in North Amer­ica alone.

In a U.S. Trust sur­vey last year of in­vestors with at least $3 mil­lion in in­vestable as­sets, 67% of Mil­len­ni­als, com­pared to 36% of Baby Boomers, said they viewed their in­vest­ment de­ci­sions as “a way to ex­press my so­cial, po­lit­i­cal or en­vi­ron­men­tal val­ues.” Spec­trem Group found a sim­i­lar gen­er­a­tional di­vide in a May sur­vey of folks with in­vestable as­sets of $100,000 or more; young in­vestors were not only more likely to al­ready own so­cially re­spon­si­ble mu­tual funds but also more fa­mil­iar with the con­cept of im­pact in­vest­ments.

Sens­ing the po­ten­tial for a new river of fees, the big in­vest­ment banks are fnally mov­ing in. “The big­gest de­vel­op­ment in the last two years has been very vis­i­ble en­gage­ment by main­stream as­set man­agers and bro­kers,’’ says Antony Bugg-levine, who pi­o­neered im­pact in­vest­ing while at the Rock­e­feller Foun­da­tion and now runs the Non­proft Fi­nance Fund. He re­ports that UBS, Mor­gan Stan­ley, Mer­rill Lynch and Black­rock are all com­ing up with pro­grams to meet ris­ing client de­mand.

Jpmor­gan, for its part, is test­ing the wa­ters by al­lo­cat­ing $100 mil­lion of its own cap­i­tal to im­pact in­vest­ing funds. “The ques­tion to­day is not whether it will go any­where but how quickly is it go­ing to go,” says Amy Bell, the bank exec in charge of that experiment.

Meyer, for her part, was forced to forge her own path. At frst she made all her im­pact in­vest­ments di­rectly, even tak­ing re­fer­rals from her wide cir­cle of friends in­ter­ested in sus­tain­able prac­tices. One such rec­om­men­da­tion, she says, led to her frst and worst in­vest­ment. She sunk $500,000 into a com­pany with a new tech­nol­ogy for re­mov­ing con­tam­i­nants such as oil from dirt. She doesn’t ex­pect to get any of her money back.

She’s had big hits, too. She quin­tu­pled her money when a so­lar startup she had in­vested in was bought out by bil­lion­aire Elon Musk’s So­larcity in 2013. She earned 8% in­ter­est on a loan to Im­pact Hub, an ofce and events space for so­cially and en­vi­ron­men­tally fo­cused star­tups.

But like all pioneers she’s taken her share of ar­rows in the back. She ended up fring a string of con­ven­tional fnan­cial ad­vi­sors who were ei­ther op­posed to or of no help in pick­ing im­pact in­vest­ments. With lit­tle in­fra­struc­ture to sup­port her, for a time she em­ployed her own staf of two to eval­u­ate deals and man­age her money.

Even with a staf, vet­ting all those po­ten­tial star­tups was a chal­lenge. Life got eas­ier when pri­vate eq­uity and pri­vate debt funds for high-net-worth im­pact in­vestors be­gan to sprout. Nearly 70% of the 300-plus im­pact funds listed in Im­pact­base were launched af­ter 2009. These funds are open only to what the SEC calls “ac­cred­ited in­vestors”—those with at least $1 mil­lion in in­vestable as­sets or in­come of $200,000 a year for an in­di­vid­ual or $300,000 for a cou­ple. Min­i­mum

in­vest­ments typ­i­cally range from $250,000 to north of $1 mil­lion. Man­age­ment fees can be hefty, av­er­ag­ing 2.4% of as­sets for pri­vate eq­uity funds, ac­cord­ing to one study.

As pri­vate im­pact funds have pro­lif­er­ated, so have fnan­cial ad­vi­sory frms to help in­vestors vet them. Meyer now uses as her main ad­vi­sor Im­print Cap­i­tal, a San Fran­cis­cobased im­pact-in­vest­ing-only reg­is­tered in­vest­ment ad­vi­sor formed in 2007. “They get it,” she says with au­di­ble re­lief.

Yet even a true be­liever like Meyer, who aims to have 100% of her port­fo­lio in im­pact in­vest­ments by 2020—she’s at 70% now—ad­mits it wouldn’t be pru­dent to just fund pri­vate con­cerns. Of her im­pact port­fo­lio, 23% is in public com­pa­nies se­lected through do-gooder funds like Par­nas­sus Core Eq­uity Fund and Gen­er­a­tion Global Eq­uity Fund, run by a Lon­don­based in­vest­ment frm founded in 2004 by for­mer Vice Pres­i­dent Al Gore and ex-gold­man Sachs ex­ec­u­tive David Blood. (It’s closed to new in­vestors.) Another 23% is in fxed in­come through funds like TIAA-CREF So­cial Choice Bond Fund and Breck­in­ridge Sus­tain­able Bond Strate­gies. These funds buy bonds that back clean energy and aford­able hous­ing.

Meyer be­lieves she’ll even­tu­ally reach her goal of av­er­ag­ing a mar­ket rate on her im­pact port­fo­lio—but she hasn’t yet. Which raises the ques­tion: What qual­ifes as an im­pact in­vest­ment—and what should it earn? “Just like there’s a thou­sand difer­ent kinds of peo­ple, there’s a thou­sand kinds of im­pact in­vest­ments,” she an­swers. “Some have very low re­turns and higher so­cial benefts. Some have a very solid, healthy re­turn but not as high a so­cial im­pact.”

Con­sider Uni­tus Seed Fund, which raised $23 mil­lion from the likes of Gates, Con­cur CEO Steve Singh and bil­lion­aire ven­ture cap­i­tal­ist Vinod Khosla to in­vest in star­tups serv­ing the mass mar­ket in In­dia. Its in­vest­ments so far in­clude that auto rick­shaw app and a por­ta­ble breast can­cer screen­ing de­vice. Uni­tus is aim­ing to earn a mar­ket rate of re­turn, but will in­vest only in ven­tures that have a pos­i­tive so­cial im­pact. “A low-cost liquor dis­trib­u­tor would not be an im­pact in­vest­ment,” ex­plains co­founder and man­ag­ing part­ner Will Poole, an e-com­merce pi­o­neer who spent 13 years as a Mi­crosoft ex­ec­u­tive.

At the low end of the proft-mo­tive spec­trum is a new con­coc­tion known as so­cial-im­pact bonds. These are es­sen­tially a way for those with lots of money and strong ideas about public pol­icy to put their money where their mouths are. In­vestors fund a specifc new idea they feel will make gov­ern­ment work bet­ter. If it’s suc­cess­ful, the gov­ern­ment agency pays for it and the in­vestors make a proft. If it’s not, the gov­ern­ment got a free experiment. Among other things, this forces the par­ties to agree in ad­vance on what con­sti­tutes suc­cess.

For in­stance, bil­lion­aire Jay Robert “J.B.” Pritzker has com­mit­ted $6.4 mil­lion to two bond is­sues, one in Utah and one in his Chicago base, to pro­vide early child­hood ed­u­ca­tion to low-in­come chil­dren—one of his big causes. Pritzker’s payof in Utah will come only if the pro­gram re­duces the num­ber of low-in­come kids need­ing ex­pen­sive spe­cial ed­u­ca­tion ser­vices later.

At the high end of the proft-mo­tive spec­trum are some B Corps. So far 31 states have au­tho­rized a new form of for­proft cor­po­ra­tion—known as a Beneft or B Corp—that com­mits to serv­ing the public good. In April online crafts mar­ket­place Etsy be­came the sec­ond B Corp to go public. It will use $300,000 of its IPO pro­ceeds to start a foun­da­tion ded­i­cated to ed­u­cat­ing women and mi­nori­ties on how to build sus­tain­able busi­nesses. But VC Jim Breyer and his frm, Ac­cel Part­ners, are even big­ger win­ners. The 27% stake that they ac­quired for less than $60 mil­lion was worth $424 mil­lion at the time of the IPO. “Great cul­ture can greatly in­flu­ence longterm share­holder value,” a sat­is­fed Breyer ob­served at The Forbes 400 Sum­mit.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.