The Capacities Foundations Need to Embark on Place-Based Impact Investing

By Teri Lovelace, President, LOCUS Impact Investing

Place-based impact investing is a burgeoning strategy to spark community development projects, create more just, equitable local economies, and build prosperous, vibrant communities. Place-focused foundations, like community foundations, family foundations and healthcare conversion foundations, are exploring ways to complement their traditional grant making with local investments that can catalyze positive community change. The LOCUS Impact Investing team has partnered with nearly 30 place-focused foundations – large and small – as they explore their role in community economic development, unlock more of their assets, and deploy dollars to amplify their impact and catalyze economic development in their communities. In many ways, their journey has become our journey, and we are learning along the way.

Through this work, we’ve observed a pattern to this place-based impact investing journey that we have incorporated into our fundamentals for designing and implementing an effective place-based impact investment strategy. These fundamentals include exploring a foundation’s place, opportunities and capacities for local impact investing; unlocking a foundation’s assets for this type of investing, ensuring the right ecosystem partners are aligned and the internal policies and processes are in place; and smartly deploying investment dollars to enhance mission while also mitigating risk. While this seems like a linear path, it is really an iterative journey.

Foundations step into local impact investing for many different reasons – a leadership change, an opportunistic investment, a donor push, encouragement from peers, or an endowment assessment. Whatever the genesis, exploring local impact investing requires education and learning with board, staff and community partners. Often that includes learning what others have done and connecting with like-minded foundations through peer learnings like the BALLE Local Economy Foundation Circle or through Mission Investors Exchange bootcamps. Regional area grantmakers may be a resource; both the Council of Michigan Foundations and the Minnesota Council on Foundations have internal resources dedicated to impact investing that are available to members. Place-focused foundations can also learn from the experiences of private foundations like the Surdna Foundation, Russell Family Foundation and the KL Felicitas Foundation, many of whom have documented their journeys and lessons learned.

An important step in this exploration phase is to understand the local impact investing ecosystem and build relationships with community investment partners, like community development financial institutions CDFIs, affordable housing organizations and developers, Community Development Corporations CDCs, microlenders, accelerators and incubators. LOCUS has helped several foundations and regional funders explore local impact investing, including the Greenville Partnership for Philanthropy, to broaden awareness of the area’s investment landscape and possibilities. We are also partnering with The Aspen Institute Community Strategies Group, with support from the Kansas Health Foundation, to facilitate a statewide peer learning cohort of Kansas community foundations to explore together how they can strengthen their role in economic development, including use of place-based impact investing.

A few years ago, the predominant question foundations asked about place-based impact investing was “why?” Today, the question is how?” Once a foundation asks this question, there’s both internal and external work needed to unlock more of their assets. Internally, investment policies and processes need to be crafted, resources need to be allocated, and internal capacities built. Often, a foundation will engage an impact investment advisor, as Surdna did, to help them look introspectively and answer some tough questions:

  • What community impact are we seeking?
  • What are our expectations about investment type (debt, equity, guarantee), risk, liquidity and return?
  • From where will these investment funds come?
  • What will we do if the investment goes bad?
  • How will we communicate about this new direction with partners, donors, and the community?

While this internal work is critical, relationships with capital providers and other intermediaries must be strengthened. As noted by the Urban Institute and the Center for Community Investment, foundations must understand their investment ecosystem – the partners, capital flows and capital gaps. Willing and able community partners help to create a pipeline of mission-aligned investment opportunities. Foundations also need to scan the landscape for possible co-investors, such as other foundations, anchor institutions, donors, community banks and credit unions.

As foundations seek to unlock their capital in this new way, more community development finance and investment skills (e.g., underwriting, portfolio management) are often necessary. Working with a trusted impact investment advisor, foundations can access these capabilities while also building internal capacity for this emerging work. For example, LOCUS is working with a large community foundation to build staff capacity for sourcing and pipeline development of mission-aligned investment opportunities.

Once a foundation has identified their strategy and a potential pipeline of investments, it’s time to get the money out the door. Often foundations again turn to outside help from professional advisors to deploy and minimize risk. Unlike traditional investing, impact investment transactions are evaluated for both community impact and financial return, with the clear intention of earning both a social return and the repayment of principal plus some financial return. A foundation’s investment may be a small but critical piece of a larger capital stack in a community revitalization project. Regardless of the size of investment, community development finance or other investment skills are needed to conduct due diligence and structure the transaction in ways that mitigate risk and amplify desired social impact. A foundation may choose to build those skills internally or turn to an outside advisor or community partner. For example, LOCUS has helped foundations evaluate solar energy companies, health care start-ups, alternatives to payday lenders and intermediaries like CDFIs – all in support of philanthropic investments that address capital gaps and enable community development projects to move forward.

Once the dollars have been deployed, foundation staff, typically the finance team, needs to consider the ongoing servicing, monitoring and reporting for these investments (e.g., financial and social impact review, loan covenant tracking and annual portfolio assessments.) Proper portfolio administration helps mitigate a foundation’s risk and better safeguard community impact. In 2015, The Kresge Foundation committed to deploy by 2020 a $350 million pool of social investments (loans, guarantees and equity) to strengthen opportunities for low-income people in America’s cities. A social investment portfolio of this size had significant implications on the foundation’s back office operations. In a recent blog, Kresge’s CFO shares four key take-aways about how they manage operations when it comes to impact. Kresge partnered with LOCUS to provide outsourced servicing, monitoring and reporting for this social investment portfolio.

Conclusion

Experience suggests that local mission-aligned investing can be transformational for communities by enabling foundations to use more of their tools to catalyze positive community change. While creating an opportunity for greater impact, the journey toward community investing requires new skills and capacities. Fortunately, foundations don’t have to go it alone. They can learn from their peers and tap the expertise of partners to help build internal capacity to explore, unlock and deploy assets for these critical community investments. Later this year, LOCUS is launching a tool to help foundations assess their starting point on this journey and identify possible capacity gaps and ideas for addressing them. Yes, place-based impact investing is a new and different way of using philanthropic assets. Yes, it requires different skills not traditionally found at foundations. And yes, in the long run, setting out on this journey provides an opportunity for greater, more equitable impact in your communities.

 

Article by Teri Lovelace, President of LOCUS Impact Investing, a social enterprise empowering place-focused institutions to invest their assets locally to build vibrant and prosperous communities. LOCUS is a nonprofit consulting firm and a registered investment advisory firm helping clients engage in local impact investing. Teri has over 27 years in the philanthropic, mission investing and the nonprofit sector. She served as Chief Impact Officer for Virginia Community Capital (VCC), the parent company of LOCUS. At LOCUS, Teri is responsible for all aspects of mission impact consulting and capital deployment. Prior to joining VCC and LOCUS, Teri served in senior leadership role at the Community Foundation serving a greater Richmond working with high net worth donors on their complex charitable giving portfolios.

Teri has a law degree from the University of Richmond, her undergraduate degree from the University of Virginia and an MBA from Virginia Commonwealth University. She is also a member of the Virginia State Bar and holds her Series 65 license.

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