As foundations seek to bolster economic growth in the regions where they make their grants, some of them are channeling money from their investment portfolios into projects that strive to improve the quality of life for local residents.
In 2004, the Northwest Area Foundation took $10-million, roughly 2 percent of its $463.6-million endowment, to start Invest Northwest, a professionally managed venture-capital fund that finances established companies in need of money to grow. The foundation hopes that its investment will help create high-quality jobs and build wealth in the eight-state region where it makes grants’and earn a 15-percent return.
Whether the grant maker has met that last goal remains to be seen. Venture-capital funds earn most of their money when they exit a company, often when that company goes public, is sold to another corporation, or the founder is able to buy back the fund’s ownership stake’so they typically don’t achieve significant returns for five years or more.
Yet initial signs are encouraging. Last summer, the founders of SFH, a cloud-seeding company in Fargo, N.D., bought back the ownership stake Invest America had taken two years earlier, earning the fund a 25-percent return on its investment.
Despite the uncertain financial climate, the foundation remains committed to the fund, says Millie Acamovic, the foundation’s chief financial officer. In some ways, she says, the fund’s investment dollars might actually go further’and have a bigger impact’than they did before the downturn.
A year ago the venture-capital market was hot, which often meant that multiple funds were competing to invest in the same companies, driving up the price, explains Ms. Acamovic. The market, she says, has since cooled, so if the cost of buying a 20-percent ownership stake in a company cost $100,000 last year, it might only cost $70,000 today.
“At the same time, your $70,000 investment right now is probably going to make a much larger difference to the ongoing operation and profitability of that company than the $100,000 a year ago because things are in such a critical state,” says Ms. Acamovic.
Seeking Fast Action
The sagging economy is prompting some other foundations to adjust their approaches to mission investing.
A little more than a year ago, the Kellogg Foundation announced that it planned to invest $100-million’more than 1 percent of its $7.5-billion endowment’in ventures that will help improve the lives of poor children and families.
The foundation plans to use $25-million for mission investments in southern Africa and $75-million for mission investments in the United States, giving priority to locations where Kellogg’s grant making is focused, including Michigan and the Delta and Gulf Coast regions of the South.
The investments will be made across asset classes, and the foundation’s goal is to earn an overall rate of return of 4 percent to 6 percent.
But when foundation officials began analyzing investment opportunities, they realized that identifying and vetting potential deals was going to take longer than they had expected. At the same time, the nation’s housing and credit crises were growing.
So, as an interim strategy, Kellogg has deposited $22.4-million of the money with community banks and credit unions that provide loans and other banking services in low-income neighborhoods. The deposits will earn roughly the same interest rate that they would in similar accounts in commercial banks.
“We didn’t want to lose out on the opportunity of putting that money to work in ways that would still serve those communities,” says Karen Whalen, a program director at Kellogg.
