5.3 Role of Philanthropists and Foundations

Philanthropists and foundations play a unique and critical role in ensuring that impact investing moves from the margin into the mainstream. This section outlines three key recommendations for philanthropists and foundations; some of these recommendations have already been implemented by leading foundations.

Recommendation 1: Help to lower investment risk by providing grants to early-stage impact enterprises and by providing anchor investments to impact investment products and funds. Philanthropists and foundations are leaders in helping to build capacity among impact enterprises; for enterprises that serve the destitute and working poor in sectors where commercial capital is largely absent, early-stage risk capital is required for the business model to scale and be better positioned for larger investments. In these instances, the enterprises are pioneering new commercial approaches to social or environmental challenges, and thus they often struggle to gain commercial capital. Philanthropists and foundations are rightly positioned to fill this pioneer gap.⁸⁸ However, knowing when to exit is a key challenge when providing grant capital. Philanthropy can play a role to kick-start the investment, but it can also distort the real performance of the company; in such cases, philanthropy can risk subsidizing business that should fail, and thus is best spent on sector-level investments as opposed to artificially propping up winners.⁸⁹ In addition to provision of grants to early-stage impact enterprises and sectors, philanthropists and foundations can play a role in providing anchor investments for new impact investment products and funds. They can help de-risk the impact investment ecosystem through guarantees or layered structures. For example, the Rikers Island Social Impact Bond was structured such that Goldman Sach’s US$ 9.6 million loan was guaranteed by a US$ 7.2 million grant provided by Bloomberg Philanthropies (75% guarantee).⁹⁰ This guarantee helped significantly to reduce Goldman Sachs’ investment risk.

Recommendation 2: Break down the silos that exist between the investment and programme teams. Foundations are uniquely positioned as mission-driven organizations; however, a barrier often exists between those individuals driving the mission forward and those individuals financing the mission. Even some of the foundations that advocate the most for impact investing are not allocating more than 5% to 10% of endowment capital towards the sector. While there are many reasons why this is the case, the barrier between the investment and programme teams is one that foundations can control. Through leveraging programme-related investments and mission-related investments, foundations have an opportunity to align more assets with mission achievement. The Bill & Melinda Gates Foundation has a history of creatively leveraging its balance sheet to fund initiatives that support its mission. For example, the Gates Foundation backed charter school facility bonds by helping Knowledge Is Power Program (KIPP) obtain favourable borrowing terms. In the event that KIPP defaults on its loans, the Gates Foundation would provide the safety-net financing.⁹¹ This guarantee creatively leveraged the Gates Foundation’s balance sheet as opposed to its grant capital. Mission Investors Exchange is an organization helping foundations better align their balance sheet with their mission. Launched in May 2012, Mission Investors Exchange brings together over 200 foundations and mission investing organizations to better understand how programme-related and mission-related investment strategies could be leveraged to accomplish philanthropic objectives.⁹²

Recommendation 3: Promote greater collaboration among foundations to help lower due diligence costs. As discussed in Section 4.2, impact investing involves small deal sizes and thus high due diligence costs. Foundations making investments into impact enterprises and sectors where commercial capital is absent often play the role of due diligence organizations. By leveraging industry networks (e.g. GIIN, ANDE, Toniic, etc.) to share their information, key learnings and best practices (for investments made and considered), foundations leading the charge in impact investing can realize synergies and lower due diligence expenses for the entire sector.