Optimizing Assets for Mission

“Should a private foundation be more than a private investment company that uses some of its excess cash flow for charitable purposes?”

This was a central question pondered by the Heron Foundation’s Board of Directors nearly 30 years ago as they considered how best to use the Foundation’s assets to promote its mission of helping people and communities help themselves.

At the time, their question was a provocative one. It challenged a then-prevailing orthodoxy of organized philanthropy–the belief that mission is best served by keeping program and investment management separate, with the latter seeking to maximize financial return (without consideration of mission) and the former dispensing grants for mission. Our Board envisioned a different paradigm, where the endowment could be leveraged for more than just financial returns and could, in fact, work in service to our mission.

In our earliest days, this meant expanding our philanthropic toolbox; growing it from grants alone to tools across asset classes and return characteristics, as reflected in the much-cited “Heron spectrum.” (pictured above) Over time and with much, sometimes painful, lived experience, we began to realize that not only should program and investment not exist separately but sometimes there were important learnings to be achieved when they were contemplated together. We learned that multiple tools could be deployed with a single partner. For example, with vertically integrated nonprofit affordable housing developers, we could utilize grants (operating support, pre-purchase counseling, and down payment assistance), program-related investment (acquisition and predevelopment capital), and market-rate capital (to purchase mortgage-backed securities or AAA-rated taxable municipal bonds that provided “soft second mortgages” for low-income, first-time homebuyers).

However, when seeking to incorporate mission into our investments, what we found was not always what we expected. For instance, when we set a narrow focus on job creation, a job-laden real estate investment trust turned out to be the biggest private prison operator in the United States. In another case, we became aware of the potential social costs of a green investment in our portfolio. At first, it appeared as an attractive investment because of both the energy efficiency outcomes it provided to homeowners and the low-risk financial returns it produced for investors. However, despite all the positive aspects of this generally compelling investment, we learned that homeowners often bore a disproportionate degree of risk, with the green investment sometimes cascading them into foreclosure.

Now, nearly 10 years after declaring our intention to invest 100 percent of our assets for our mission, this moment offers an opportunity not only to reflect, but to provoke, explore, and inspire what may come next.

As we optimize our portfolio for mission, we are often stymied by a handful of perplexing challenges.

(In the interest of space, we will highlight only one such scenario here.) Given our way of working (no division between investment and program), we had a tightly held desire to reflect the voice and priorities of our community-based partners in our fixed income portfolio. We released a fixed income letter of intent and met with more than a dozen potential managers to discuss our intentions, including the desire to invest outside of high-credit quality communities and instead in those communities similar to the ones where we often worked. This was motivated not because we wanted to add uncompensated risk to our portfolio. Rather, we believed that from the vantage point of a forward-looking perspective, the risk may be mispriced. Furthermore, we viewed financial repayment as one type of risk among many others; we also planned to consider who is involved in the deal, the consequences to the community, and ultimately who bears the burden at the end of the day. No surprise, we immediately saw a pattern. Managers repeatedly explained the same obstacles to implementing the expectations in the LOI — it would force them to break from convention — primarily decoupling from benchmarks, and this was no-go territory for them. In the end, we decided to manage $45 million of our fixed income portfolio in-house so that it can better reflect the wisdom of our community partners and be completely untethered from indices.

In doing so and reflecting on our past work in communities since our inception, we point to the performance of the mission-driven investments during the 2008 financial crisis and during COVID as evidence of the importance of implementing feedback loops from our community and capital markets partners. As we continue to deepen our work in communities, ensuring and nurturing these feedback loops will remain important.

Recently, for example, our team was in conversation with some of our community-based partners and discussed two bonds from their region that we were considering for our portfolio, having identified them as likely to be impactful through our data-driven, top-down lens. People in the room responded passionately as they informed our team that one of the bonds was creating a positive impact, while the other one was heightening sprawl in the region.

As we came to better understand experiences like these over time, we often find ourselves working to reweave communities and capital markets, as the two have seemingly become disconnected.

Our efforts are increasingly more focused on reminding our community-based partners of the presence and magnitude of capital markets, like municipal debt, in their everyday lives. We also find that we are working more with development finance authorities and other issuers to encourage them to stay attuned to community priorities and to leverage our role as an institutional investor to signal demand within the market more broadly.

In today’s cultural context, building muscles like these — getting things done by working across relationships, each contributing unique knowledge and context, and operating in trust — guide much of our work. As we continue to contemplate with it means to truly deliver on our mission of helping people and communities help themselves, we typically arrive at the same conclusion — we must shift decision-making authority to those we seek to serve. As Heron continues to find our path forward, walking into, growing with, and exploring the emergent — namely, what it is exactly to shift power and transfer decision making–we will no doubt suffer additional humbling failures. Still, we believe that thriving is only possible by nurturing strong bonds with, and among, our partners. As our colleague, Farhad Ibrahimi of Chorus Foundation so aptly stated, we must be on the journey from “stewarding power accountably to sharing power equitably, so that we may cede power permanently.”

Whatever its eventual form, Heron recognizes that this is generational work; that an essential way to lay the foundation for a just, sustainable, and equitable future is to strengthen and support the growth of community members’ capacity to self-organize in a sustained way for positive change. This is to ensure that, even as new generations of leaders come forward and conditions within the community, the markets, and the larger society evolve, change efforts will continue to be rooted in the needs and aspirations of people with lived experience. We recognize that interlocking networks of individuals, investors, and enterprises will be needed for this type of organizing for change and that building and strengthening relationships characterized by trust within and across groups is essential; as Robin Wall Kimmerer teaches, the economy we seek “nurtures the community bonds which enhance mutual wellbeing; the economic unit is ‘we’ rather than ‘I,’ as all flourishing is mutual.”

 

Article by Dana K. Bezerra, president of Heron Foundation. Bezerra began her career in agriculture in California. Her family owned a dairy farm in the San Joaquin Valley, where she bore witness to the bankruptcy of a local creamery, the formation of an independent milk producers’ cooperative, and the provision of a local tax abatement package to a multinational food company. Those experiences left Bezerra with a lasting impression about the importance of social cohesion within a community — and the complicated relationship between communities and capital markets.

Bezerra proceeded to work at Merrill Lynch in the Private Banking & Investment Group, where she specialized in Philanthropy and Nonprofit Management. For the next decade, Bezerra managed client money, where she earned an appreciation for the nuances of intergenerational wealth and learned to navigate complex financial transactions and markets.

In 2006, Bezerra joined Heron. As a program officer, Bezerra engaged with nonprofit and community leaders who were operationalizing Heron’s mission on the ground in communities that had been waylaid by globalization, mechanization, and disintermediation. It became clear in that role that Heron’s responsibility was to feed the agency of local leaders by supporting them and their enterprises.

Over the next 10 years, Bezerra played a key role in rotating Heron’s entire portfolio (including debt, equity, and grants) to better reflect Heron’s mission. Bezerra became responsible for sourcing deals, identifying and developing relationships across a spectrum of investors, syndicating capital when possible, and cultivating opportunities to deploy the full range of Heron’s philanthropic and market-rate toolkit. As president, Bezerra hopes to build on Heron’s history and leverage the lessons it has learned over the past 25 years — both on the ground in communities and within the capital markets.

In addition to her role at Heron, Dana has been active in the leadership of several national and local philanthropic organizations over the last two decades, including the Board of Capital Impact Partners, the Steering Committee for Mission Investors’ Exchange, the Innovation and Selection Committee for the Nature Conservancy, and as a reviewer for the Bill & Melinda Gates Foundation as part of its Grand Challenge Exploration Program. Bezerra also participates actively in the Weantinoge Land Trust.

Bezerra has a Bachelor of Science in Agricultural Business and Public Policy from Cal Poly, San Luis Obispo.