Impact-Investing Pioneers Take Stock

Heron Foundation

The Ford Foundation’s plan to invest $1 billion of its $12 billion endowment to advance its mission of reducing inequality has raised hopes that more foundations will follow suit. But a small group of pioneers decided to invest for both financial and social returns more than a decade ago — before the term “impact investing” existed. Today, they’re taking stock and adjusting course.

The F.B. Heron Foundation started looking in the late 1990s for ways its investment portfolio could bolster economic development and create wealth in low-income areas. At the end of last year, the New York foundation had invested its entire $280 million endowment for mission.

When Heron decided to go all in, it reorganized staff so the same employees would propose both grants and investments. Most foundations maintain separate grant-making and investment operations.

Clara Miller, Heron’s president, says it’s getting easier to find people who have financial skills and subject-matter expertise. Temperament, however, is even more important, she says. People need to be comfortable with uncertainty and willing to make mistakes.

The transition was difficult for some employees, and several left.

Investing for Good

Innovative nonprofits and foundations are turning to impact investing to attract commercial capital to their causes. But some observers worry the investments that blend social and financial returns could change the way donors think about charitable giving.

• More Foundations and Charities See Impact Investing as Key to Social Change
• Will the Rise of Impact Investing Leave Less for Gifts and Grants?
• Nonprofits Innovate to Build Market for Mission Investing

“At one point, I had a very nice guy who I’ve known for years come up to me and say, ‘Look, Clara, I just want to work at a normal foundation,’ " Ms. Miller says.

One of the biggest questions Heron and the other pioneers face is whether they must sacrifice financial performance to generate meaningful social and environmental change. Ms. Miller doesn’t think so. Over the past five years, Heron has earned an average rate of return of 8.5 percent, which she says puts it in the top quartile of similar-size foundations.

Still, Heron is tweaking its approach. One key change: It’s making fewer direct investments in individual companies.

Heron’s ambitions are large, but picking promising companies requires more expertise than a foundation its size can assemble in-house, she says. “If we aren’t using other managers, intermediaries, friends, allies to help us place our capital where it will have the most impact and do the most good, then we’re kidding ourselves.”

Hard-Won Lessons

The Northwest Area Foundation made a bold move when it started investing for impact: It created a private-equity fund. The experiment didn’t turn out as expected, but the lessons Northwest learned are shaping a new strategy.

In 2004, the St. Paul, Minn., foundation took $10 million from its endowment to start a professionally managed fund that provided financing to companies to expand and create high-quality jobs in the eight-state region where the foundation works. Northwest had hoped that the fund would attract $40 million from other investors and earn a 15 percent return. But the fund, which is winding down, raised far less than expected — just an additional $5 million — and it’s on course only to break even.

Yet the foundation kept its faith in impact investing. In 2014, the board called for 10 percent of its endowment to be invested for mission.

The foundation stayed the course in part because its careful measurement of the fund’s social returns showed good results, says Amy Jensen, Northwest’s investment director. It helped support more than 1,700 jobs. Companies in the portfolio also outpaced national benchmarks in employment growth and the provision of health and retirement benefits.

“If we hadn’t done that impact assessment, who can say if the board would have decided to recommit to that strategy?” Ms. Jensen says.

Looking back, she thinks it was difficult to raise additional capital because of the eight-state focus. Other investors weren’t wedded to the same region. Now the foundation works with managers who invest in low- to moderate-income communities in the western part of the country. The goal of improving livelihoods is nonnegotiable, but the foundation is more flexible on geography, Ms. Jensen says. “That’s where we’re willing to give.”

Northwest wouldn’t create a fund again, she adds. “We are really focused on buying, not building.” The foundation is looking for established managers who have a process that can be repeated and whose track record it can study.

Of course, that’s a lot easier in 2017, as there are more social-purpose investments available. Ms. Jensen says other investors are her best source of leads on good investments but that she also meets with a lot of financial professionals promoting new products to keep up with the latest offerings. “At this stage, you have to kiss a lot of frogs.”