Lessons from the Mission Investors Exchange

I recently traveled to Chicago for a two-day event hosted by the Mission Investors Exchange. The “institute” was a crash course on impact investing, and it was attended by representatives from a spectrum of foundations:  In addition to significant geographic diversity, the foundations represented ran the gamut from those only beginning to consider engagement with impact investing to those with a robust history, and pipeline, of impact investments.

“Impact investing,” despite its growing cachet, remains a nebulous concept. In the foundation world, impact investing takes a few different forms, which vary between private foundations and public charities. For private foundations – nongovernmental, nonprofit organizations with a fund managed by its own board of directors or trustees – impact investments can take one of two forms: Mission-Related Investments (MRIs) and Program-Related Investments (PRIs).

An MRI derives from a foundation’s endowment and has a positive social or environmental impact while also contributing to the foundation’s long-term financial stability and growth. The main distinguishing factor with MRIs is that they aim to earn a market return. PRIs, on the other hand, are structured to achieve specific program objectives in such a way that may earn a below-market financial return. The way I keep MRIs and PRIs straight in my head is to remember MRI = market rate. For a more detailed explanation of the difference between MRIs and PRIs, visit this page on the Mission Investors Exchange website.

One legal quirk of the private foundation designation is the 5% payout rule, which requires foundations to spend an amount equal to 5% of their net investment assets on charitable and administrative purposes each year. For example, if a private foundation has a $1,000,000 endowment, it is legally required to spend $50,000 each year to advance its mission. Typically the remaining $950,000 (95%), or the “corpus,” is invested across various asset classes in order to maintain the endowment’s health. PRIs, because of their explicit mission-furthering purpose and below-market expectations, are eligible to be counted against the 5% payout alongside grants. MRIs, however, because of the intent to earn a competitive return, are not.

Public charities – whose funding comes primarily through the general public in the form of grants from individuals, government, and private foundations – can similarly make both market return investments and below-market return investments. But, public charities are not beholden to the 5% payout rule applicable to private foundations. So although many public charities will refer to their below-market return investments as PRIs for the sake of being understood, technically speaking they are not. The High Meadows Fund, as a public charity, refers to such investments as “mission impact investments.”

With the different forms of impact investing clarified, I’ll note a few of my biggest take-aways from the two-day institute.

  • It’s rare for a private foundation to exceed the 5% legally required payout. To use the example above, at first blush it almost seems absurd to presume any appreciable progress can be made on an important issue by allocating just $50,000 of $1,000,000. A relative pittance! Indeed, some foundations, such as The John Merck Fund, have decided their missions’ urgencies merit a more concentrated injection of capital, and have thus decided to spend down all of their assets, or “sunset,” in an agreed-upon timeframe. For other foundations focused on issues that will require longer-term engagement, however, careful endowment stewardship is a more judicious strategy. As I learned in Chicago: If you know one foundation, you know one foundation. With all of this in mind, I found myself newly encouraged by High Meadows’ recent decision to increase its target allocation of “mission dollars” from 7.5% of our endowment’s value to 15%, even if we’re not legally required to even think about it.
     
  • Evaluating the impact of a mission-related investment is hard. Although we attendees weren’t blessed with any silver bullets or hallowed secrets, I did leave with more clarity about how to think about evaluating impact. Although obvious in hindsight, an investment’s success can be gauged in two ways: Quantitatively and qualitatively. The more concrete one, unsurprisingly, is quantitative. For example, with equity: What was the investment’s financial return? With debt: Were you paid back?

    More challenging is determining an investment’s qualitative impact. Each investment will be different, of course, but some helpful guiding questions for foundations to consider at every step in the process include: What is the social, environmental, and economic context of the project that would be impacted by the investment? How can the investment be restructured if/when circumstances change to best meet the needs of all involved parties? How will the investment affect the ultimate beneficiaries? On the surface these queries are admittedly soft, but their emphasis on thinking about the qualitative side of investments holistically – through planning, monitoring, and evaluation – resonated deeply with me.

    And that brings me to the last point on this topic: Evaluating impact should not create undue burden for grantees/investees/borrowers. Although impact evaluation is an important accountability mechanism for foundations, it is worth questioning whether data really needs to be collected on a quarterly basis, for example. Similarly, it’s worth speaking with comparable funders about their reporting requirements to determine the potential for reporting synergies. And finally, if a foundation board needs to know something, could they consider a grant to the organization to cover those costs?
     
  • In some foundations, there is often tension between program officers, who frequently home in on the qualitative potential of investments, and investment teams, which are more focused on investments’ financial prudence. This disparity is particularly pronounced in larger foundations, where the program and finance teams operate more independently from one another than in smaller shops. The point, though, is the importance of cultivating skills and perspectives beyond one’s ordinary job responsibilities. For those on the program side of things, this could mean gaining a better understanding of what goes into transaction origination, portfolio management, and monitoring. For those on the investment side of things, this could mean working to develop one’s “EQ” (Emotional Quotient) to be able to better understand the qualitative potential of investments.

Ultimately, impact investing can be an effective, if complicated, way to advance a foundation’s mission. It’s an ever-evolving field, however, and one with a lot of room to grow.

Stu Fram
May 2015